UNIT I Financial Accounting and Reporting Fundamentals Chapter 1 The Environment of Financial Accounting and Reporting 2 Conceptual Framework and Theoretical Structure of Financial Accounting 3 Review of the Accounting Process 4 Financial Statements: An Overview 5 Financial Instruments FrameworkChapter The Environment of Financial Accounting and Reporting Learning Objectives After studying this chapter, you should be able to: 1. Explain the impact of accounting on the decisions of the various users of financial information at all levels of the economy. 2. Understand the basic objective of financial statements. 3. Distinguish between external and internal users of accounting information. 4, Identify the major financial statements and other means of financial reporting. 5. Explain the development and sources of financial reporting standards. 6. Identify sources of accounting standards and other organizations that influence PFRS. 7. Familiarize yourself with the Philippine Financial Reporting Standards (PFRSs) applicable to annual period up until January 1, 2015. 8. Explain the issues related to ethics as well as creative and critical thinking in accounting. QUgsCHAPTER 1 The Environment of Financial Accounting and Reporting Introduction Accounting is an information system, designed to identify, collect, measure, and communicate economic information about a business entity (firm) to those having interest in the financial affairs of the entity. Accounting is a social science, developed in a world of scarce resources. It is influenced by, and interacts with economic, social and political environments. Business is conducted by investor-owned enterprises, managed and controlled by professional managers, who are held responsible for providing reports to absentee owners, creditors and other external interested parties. The process of developing general-purpose financial statements and reporting general-purpose accounting information to various external users is called financial accounting. In this environment, financial accounting and reporting communicate information about the economic effects of accounting transactions and other events on a business entity to these external user groups. Accountants are communicators; Accountancy is the art of communicating financial information about a business entity to users such as shareholders, creditors and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of the management. The art lies in selecting the information that is relevant to the users and is reliable. Most accounting systems are designed to generate information for both . internal and external reporting. The external information is much more highly summarized than the information reported internally. Understandably, a company does not want to disclose every detail of its internal financial dealings to outsiders. For this reason, external financial reporting is governed by an established body of standards or principles that are designed to carefully define what information a firm must disclose to outsiders. Financial accounting standards also establish a uniform method of presentingChaprer 1 information so that financial reports for different companies can be more easily compared, Objective of F pancinl Statements: The objective of financial statements is to provide information about the financial position, performancs that is: us and changes in financial position of an entity s in making economic decisions (¢.¢., ful tow wide range of u: whether to sell or hold an investinent in the entity). Users include present and + potential investors, employees, lenders, suppliers and other trade creditors, customers, government s and their agencies, and the public. Because investors are providers of risk capital, it is presumed that financial statements that meet their needs will also mect most of the needs of other users. Accou The bi ternal and internal decision makers (users) as explained below: ¢ a, ing Information Users and Their Needs s role of accountants is to provide useful economic information to sternal decision makers include present and potential stockholders, investors, creditors, suppliers, customers, legislators, trade associations and others, who lack direct access to the information generated by the internal operations of the business and must rely on general-purpose financial statements to make their investment, credit and public policy deci ions, 1) Iwestors. ‘The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by their investments. Shareholders require periodic information that the managers are accounting properly for the resources under their control. This information helps the shareholders to evaluate the performance of the managers. The performance measured by the accountant shows the extent to which the economic resources of the business have grown or diminished during the year. Shareholders are ‘also interested in information such as the enterprise’s ability to generate cash and the timing and certainly of its generation. They also need information to help them control the business and make investment decisions.The Environment of Finuncial Accounting and Reporting _S 2) Employees. Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities. 3) Lenders. Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them will be paid when due. 4) Suppliers and other trade creditors. Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested’in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer. 5) Customers. Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise. 6) Governments and their agencies. Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics. 7) Public. Enterprises affect members of the public ina variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways, including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. * Internal decision makers are the managers of a business entity, responsible for managing efficiently and effectively, and who have the power and authority to obtain whatever economic information they need. The process of providing accounting information to internal decision makers is called management accounting.6 Chapter | Financial Statements Financial statements are the principal means through which a company communicates its financial information to those outside it. These statements provide a company’s history quantified in money terms. Some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements, Examples include the president’s letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and social or environmental impact statements. Companies may need to provide such information because of authoritative pronouncements, regulatory rule, or custom. Or they may supply it because management wishes to disclose it voluntarily. Although there are other ways to communicate external financial information such as the prospectus, news releases, the president’s letter and other supplementary schedules, the complete set of financial statements are primary. This includes the following: : a. The statement of financial position as at a certain point in time. This statement shows the resources of a company (the assets), the company’s obligations (the liabilities), and the net difference between its assets and liabilities, which represents the equity of the owners. The statement of financial position addresses these fundamental questions: What does a ‘company own? What does it owe? : b. The statement of profit or loss and other comprehensive income for the period or for a certain interval. This reflects the net assets generated through business operations (revenues), the net assets consumed (expenses), and the difference, which is called ner income as well as other comprehensive income. ¢. The statement of cash flows reports, for a certain interval, the amount of cash generated and consumed by a company through the following three types of activities: operating, investing, and financing. The statement of cash flows is the most objective of the financial statements because it is somewhat insulated from the accounting estimates and judgments needed to prepare a statement of financial position and statement of profit or loss.The Environment of Financial Accounting and Reporting 7 d. The statement of changes in equity which summarizes the changes in each item of equity for a period of time. ce. The notes to the financial statements, The notes contain supplemental information as well as information about items not included in the financial statements such as accounting estimates. Each financial statement routinely carries the following warning printed at the bottom of the statement. “The notes to the financial statements are an integral part of this statement.” Auditors, working independently of a company’s management and internal accountants, examine the financial statements and issue an auditor's opinion about the fairness of the statements and their adherence to proper accounting principles. The opinion is based on evidence gathered by the auditor from the detailed records and documents maintained by the company and from a review of the controls over the accounting system. In compliance with statutory requirements, financial statements and accompanying notes presented to external users (particularly corporations as well as registered partnerships) are audited by an independent certified ° public accountant (CPA). Development and Sources of Financial Reporting Standards To a large extent, accounting is a product of its environment; that is, it is shaped by, reflects, and reinforces particular characteristics unique to its national environment. Like business in general, corporate accounting and information disclosure practices are influenced by a variety of economic, social and even political factors. While there are many differences in national environments, with corresponding varying effects on accounting systems and reporting, there are also many similarities. Because business is increasingly conducted across national borders, companies must be able to use their financial statements to communicate with external users all over the world. As a result, divergent national accounting practices are now converging to an overall global standard.8 Chapter 1 Sources of Accounting Standards Setting financial reporting standards is a complex process occurring within a political environment that influences both what reporting is required and when. Businesses, trade and consumer associations, courts, public accounting firms, individual users, and government can and do influence reporting practice, The following provides the authoritative support for these accounting standards: a. International Accounting Standards Board (IASB) {Formerly International Accounting Standards Council (IASC)}. In an attempt to harmonize conflicting standards, the International Accounting Standards Council was formed in 1973 to develop worldwide accounting standards. The original IASC was founded by representatives of professional bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, Ireland, and the United States. By 2012, out of 196 countries, over 120 countries have either fully or partially adopted and permitted the use of International Financial Reporting Standards. The accounting standards produced by the IASB are referred to as International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs). The difference between these two sets of standards is merely one of timing; the IASB standards issued before 2001 are called IAS and those issued since 2001 are called IFRS. In practice, the entire body of IASB standards is referred to simply as IFRS. The International Financial Reporting Interpretations Committee (IFRIC) which was called the Standing Interpretations Committee (SIC) before 2002 provides technical assistance and support to the IASB in the implementation of the standards. Rationale for the Adoption of International Financial Reporting Standards (IFRSs) In view of the greatly magnified emphasis on international commerce and capital flows over the past thirty years, the need for global accounting standards has been increasingly recognized, Multinational companies have grown dramatically in both size and importance over this period, assuming very important and dominant roles. in many market segments andThe Environment of Financial Accounting and Reporting 9 affecting almost every country, every government, and every person. From a financial reporting perspective, both individual accountants and the professional bodies that establish accounting and auditing standards, face a daunting challenge and difficulty because of the complexity of conducting international business operations across borders each with a different set of business regulations and often different accounting methods. Differences in applicable accounting, auditing and tax standards and regulations may negatively impact, the ability of the enterprise to prepare reliable financial information and for the evaluation of investment opportunities vital to their further expansion or growth. Hence, it was envisioned that IFRSs which should be capable of Worldwide acceptance can contribute to a significant mprovement in the quantity and comparability of corporate financial reports. They are the set of standards that can be used by all companies regardless of where they are based. In fact, IFRSs may eventually supplement or even replace standards set by national standard setters. Standard-Setting Due Process ‘As part of its due process in developing new or revised Standards, the Board publishes an Exposure Draft of the proposed Standard for public comment in order to obtain the views of all interested parties. It also publishes a “Basis for Conclusions” to its Exposure Drafis and Standards to explain how it reached its conclusions and to give background information, When one or more Board members disagree with a Standard, the Board publishes those dissenting opinions with the Standard. To obtain advice on major projects, the Board often forms advisory committees or other specialist groups and may also hold public hearings and conduct field tests on proposed Standards.10 Chapter I b. Financial Reporting Standards Council (FRSC) {Formerly Accounting Standards Council (ASC)}. The Professional Regulation Commission (PRC) of the Republic of the Philippines upon the recommendation of the Board of Accountancy created an accounting standard setting body known as the Financial Reporting Standards Council (FRSC) to assist the Board in carrying out its powers and functions provided for in Article II, Section 9 (g) of the Philippine Accountancy Act of 2004 (R.A. 9298) and Section 9 (a) of the Implementing Rules and Regulations of the said law. The FRSC is composed of fifteen (15) members with a Chairman, who had been or presently a senior accounting practitioner in any of the scope of accounting practice and fourteen (14) representatives from the following: (a) Board of Accountancy (b) Securities and Exchange Commission (c) Bangko Sentral ng Pilipinas (d) Bureau of Internal Revenue (e) A major organization composed of preparers and users of financial statements 1 (f) Commission on Audit 1 (g) Accredited National Professional Organization of CPAs. Public Practice Commerce and Industry Academe/Education Government fastens | = The FRSC actively participates in the evaluation and deliberation of proposed IFRSs forwarded by the IASB to the country’s standard setting body and submits to the Board of Accountancy its recommendation for the adoption of the proposed IFRS. Once approved, the IFRS is designated as Philippine Financial Reporting Standard (PFRS).The Environment of Financial Accounting and Reporting Other Organizations Influencing Financial and Reporting Accounting Standards ce. Securities and Exchange Commission (SEC). The Securities and Exchange Commission has the legal authority to prescribe accounting principles and practices for usually all companies issuing publicly traded securities. To date, the SEC has participated in the formulation of accounting principles. In addition, the SEC administers the extensive disclosure requirements of the Securities Act. 4. Philippine Institute of Certified Public Accountants (PICPA). The Philippine Institute of Certified Public Accountants, the PRC accredited professional organization is in the forefront in the standard setting activities in the country. Representatives from the four sectors of the organization (public practice, commerce and industry, education and government) are appointed to FRSC. e. Other professional associations also influence the development of accounting standards. The Financial Executives Institute (FINEX) is composed mainly of high-level financial executives. The Institute of Management Accountants (IMA) emphasizes managerial and cost accountancy, Each of these organizations provides input to the Philippine Financial Reporting Standards (PFRS) through representation in the FRSC. Technical papers and publications of accounting educators are also included as sources of accounting standards. f. Bureau of Internal Revenue (BIR). The Bureau of Internal Revenue administers the provisions of the Internal Revenue Code. These provisions do not always reflect the goals of financial accounting, However, they do at times influence the choice of accounting methods and procedures.12 Chapter 1 Summary of Philippine Financial Reporting Standards and Interpretations Approved by the Board of Accountancy Applicable to Annual Period on or Before January 1, 2014. Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics - 2010 PFRSs Practice Statement Management Commentary Philippine Financlal Reporting Standards (PFRSs) Fitstime Adoption of Philippine Financial Reporting Standards ‘Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate ‘Amendments to PFRS 1: Additional Exemptions for First-fime Adopters ‘Amendment to PERS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters ‘Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Dale for Fist-fime Adopters [Amendments to PERS 1: Government Loans PRS 1 (Revised) PERS 2 \Share-based Payment ‘Amendments to PFRS 2: Vesting Conditions and Cancellations ‘Amendments to PFRS 2: Group Cash-settlled Share-based Payment Transactions PERS 3 (Revised) | Business Combinations PERS 4 Insurance Contracts ‘Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts PERS 5 Non-current Assets Held for Sale and Discontinued Operations PERS 6 Exploration for and Evaluation of Mineral ResourcesThe Environment of Financial Accounting and Reporting 13 PERS 7 Financial Instruments: Disclosures Amendments to PFRS 7: Transition ‘Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets ‘Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assels - Effective Date and Transition ‘Amendments to PFRS 7: Improving Disclosures about Financial Instruments Amendments fo PFRS 7: Disclosures - Transfers of Financial Assets ‘Amendments to PFRS 7: Disclosures - Orfsetting Financial Assets ‘nd Financial Liabilities ‘Amendments to PFRS 7: Transition Disclosures jandatory Effective Date of PFRS 9 and PERS 8 Operating Segments PRs 9 Financial instruments ‘Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures PERS 10 ‘Consolidated Financial Statements PFRS 11 Joint Arrangements PERS 12 Disclosure of Interests in Other Entities PERS 13 Foir Value Measurement Applicable to Annual Period Beginning On or After January 1, 2015MM Chapter) Philippine Accounting Standards (PAS) PAS 1 (Revised) Presentation of Financial Statements [Amendment to PAS 1: Copital Disclosures [Amendments to PAS 32 ond PAS 1: Puttable Financial Instruments [and Objigations Arising on Liquidation [Amendments to PAS |: Presentation of Items of Other [Comprehensive Income PAS2 inventories PAST. ‘Statement of Cash Flows PASS ‘Accounting Policies, Changes in Accounting Estimates and Errors PAS 10 Events after the Balance Sheet Date PAS 11 Construction Contracts PAS 12 Income Taxes ‘Amendment to PAS 12- Deferted Tax: Recovery of Underlying Assets PAS 16 Property, Plant and Equipment PASI7 Leases PAS 18 Revenue PAS 19 (Revised) Employee Benefits PAS 20 ‘Accounting for Government Grants and Disclosure of Government Assislonce (Amended) PAS21 The Effects of Changes in Foreign Exchange Rates [Amendment: Net Investment ino Foreign Operation PAS 23 (Revised) | Borrowing Costs PAS 24 (Revised) |Reloted Party Disclosures PAS 26 [Accounting and Reporting by Relitement Benefit Plans PAS 27 [Separate Financial Statements (Amended) PAS 28 Investments in Associates ond Joint VenturesThe Environment of Financial Accounting and Reporting 15 PAS 29 PAS 31 Financial Repotting in Hypetintlalionary Economies Interests in Join! Ventures PAS 32 Financial Instruments: Disclosure and Presentation ‘Amendments to PAS 32 and PAS 1: Pultable Financial Instruments and Obligations Arising on Liquidation ‘Amendment to PAS 32: Classification of Rights Issues ‘Amendments to PAS 32: Olfselting Financial Assels and Financial Liabilities PAS 33 Earnings per Share PAS 34 PAS 36 Impairment of Assets PAS 37 Provisions, Contingent Liabiities and Contingent Assets PAS 38 Intangible Assets pas 39 Financial Instruments: Recognition and Measurement ‘Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities ‘Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions Amendments to PAS 39: The Fair Value Option Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts ‘Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assels ‘Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assels ~ Effective Date and Transition ‘Amendments to Philippine Interpretation IFRIC-9 and PAS 39: Embedded Derivatives Amendment fo PAS 39: Eligible Hedged Items PAS 40 Investment Property PAS 41 Agriculture To be Superseded by PFRS 9 effective January 1, 201516 Chapter 1 International Financial Reporting Interpretations Commitiee (IFRIC) Issuances RIC 1 Changes in Existing Decommisioning, Restoration and Similar Uobiities IFRIC 2 ‘Members’ Share in Co-operative Entities and Similar Instruments IFRIC 4 Determining Whelher an Anangement Contains a Lease TFRIC 5 Rights to interests arising from Decommissioning, Restoration and Environmental Rehabiiilation Funds TFRIC 8 Liobilties arising from Porticipating in a Specific Market - Wasle Electrical and Electronic Equipment WFRIC 7 ‘Applying the Restatement Approach under PAS 29 Financial Reporting in Hypetinflationary Economies IFRIC 8 [Scope of PFRS 2 IFRIC 10 Interim Financial Reporting and Impairment TFRIC 11 PERS 2- Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes: IFRIC 14 The Limit on a Defined Beneft Asset, Minimum Funding Requirements ond their interaction /Amendmenis fo PhippineInlerpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfers of Assets from Customers IFRIC 19 Extinguishing Financial Liabiities with Equity instruments IFRIC 20 Stripping Costs in the Production Phase of a Surface MineThe Environment of Financial Accounting and Reporting. 17 Standards Interpretation Committee (SIC) Issuances sic-7 Introduction of the Euro SIC-10 Government Assistance - No Specific Relation fo Operating Activities SIC-15 Operating Leases - Incentives siC-25 Income Taxes - Changes in the Tax Status of an Enlily or ils Shareholders sic-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease SIC-29 Service Concession Arrangements: Disclosures. Ssic-31 Revenue - Barler Transactions Involving Advertising Services SIC-32 Intangible Asseis - Web Site Costs With the issuance of amended and revised standards, the following standards and interpretations have been withdrawn: Title Comment PAS 19 Employee Benefits Superseded by PAS 19 (Revised) Amendments to PAS 19: Actuarial Gains ‘and Losses, Group Plans and Disclosures IRIC 9 Reassessment of Embedded Derivatives | Incorporated in PFRS 9 ‘Amendments to Philippine Interpretation IFRIC 9 and PAS 39: Embedded Derivatives 1FRIC 14 _| The Limit on a Defined Benefit Asset, Superseded by PAS 19 Minimum Funding Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement : SIC 12 | Consolidation- Special Purpose Enlities | Incorporated in PFRS 10 ‘Amendment to SIC 12: Scope of SIC 12 SIC 13 | Jointly Controlled Entities - Non-Monetary | Incorporated in PAS 28 and Contributions by Ventures PFRS 11 SIC 21 | Income Taxes - Recovery of Revalued Incorporated in Revised Non-depreciable Assets PAS 12A8__Chapter | Ethics in the Accounting Environment Ethics is a term that refers to a code or moral system that provides criteria for evaluating right and wrong. One of the clements that many believe distinguishes a profession from other occupations is the acceptance by its members of a responsibility for the interests of those it serves. Because of the important role of accounting in society, accountants must maintain high ethical standards. Facing pressures and influence of numerous groups with conflicting interests, the accountant should always be alert about ethical behavior. The Code of Ethics promulgated by the Board of Accountancy provides guidelines for practicing accountants. However, the code does not present a structured approach to resolving ethical dilemmas and conflicts. In general, the accountant should be able to recognize and understand ethical issues to identify and evaluate the possible consequences of each of the alternative solutions and to select the best altemative which will ensure relevant, reliable, comparable and consistent financial information to serve the best of the users’ interests as a whole. CPAs as well as other accountants are expected to make unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. Creative and Critical Thinking in Accounting The global business environment is continually becdming more complex, with new products, services, and methods of production, distribution, and communication. Globalization is occurring, with more and more companies becoming international in their operating activities by buying, producing and selling products in foreign countries. Government regulations are increasing. ‘as more concern and attention are given to such issues as worker safety and pollution control. To establish and maintain accounting systems which meet the needs of users, accountants must be both creative and critical thinkers. Creative thinking involves the use of imagination and insight to solve problems by finding new relationships (ideas) among items of information. Terms that are used to describe a creative thinker include insightful, intuitive, imaginative, sensitive, flexible, original, adaptable, and tolerant of ambiguity. CriticalThe Environment of Financial Accounting and Reporting _19 thinking involves the logical analysis of issues, using inductive or deductive asoning to test new relationships (ideas) to determine their effectiveness. It also involves using inductive or deductive reasoning to analyze an issue logically. A. critical thinker is described as one who is objective, independent, analytical, logical, rational, consistent, organized, and able to synthesize, In financial accounting, accountants tend to be problem solvers. solving generally involves the following steps: Problem (1) Recognizing a problem, (2) Identifying alternative solutions, (3) Evaluating the alternatives, (4) Selecting a solution from among the alternatives, and (5) Implementing the solution, In problem solving, creative thinking is most important in the identification ‘of alternative solutions while critical thinking is most important in the evaluation of the alternative solution.REVIEW QUESTIONS AND EXE! Questions Qi-1. What is the function and primary focus of financial accounting? 1-2. What is meant by the phrase efficient allocation of resources? 1-3, What is the economic and political environment in which standard setting occurs? Qt, What are the two categories of financial statements users? Differentiate their decision-making needs. 1-5. Describe financial reporting and how may a company’s financial information be reported? Q1-6. What is the International Accounting Standards Board and what is its role? Q1-7, What five items make up the general- purpose financial statements? ai-8. Why are differing national accounting standards converging to a common global standards? Q1-9. List the steps a person should follow to determine whether an action is ethical. Q1-10. — What is critical thinking? How would you describe a creative thinker? Q1-11, What is creative thinking? How would you describe a creative thinker? Exercises Et. For each of the following independent situation, identify the relevant objective(s) of financial reporting that the company could be overlooking. Discuss each of these objectives. 1. The president of Daughters Inc. believes that the financial statements should be prepared for use by management only because they are the primary decision makers. 2. Sparkling Tiles Co., believes that the financial statements should reflect only the present financial standing and cash position of the firm and should not provide any future-oriented data.E1-2. €1-3. The Environment of Financial Accounting and Reporting 2. 3. The vice president of Greed Enterprise, Inc., believes that the financial statements are to present only current -year revenues and expenses, not to disclose assets, liabilities and owners’ equity 4. Lohan Co. has a policy of providing disclosures only of its assets, liabilities and owners’ equity. 5. Bob Building Inc., always discloses the assets, liabilities, and owners’ equity of the firm along with the revenues and expenses. Bob's management believes that these items provide all of the information relevant to investing decisions. Emilio Valdez worked for several years as a loan analyst for a large bank. He recently left the bank and took a management position with Positron, a high-tech manufacturing firm. Emilio prepared for his first. management meeting by extensively analyzing Positron’s financial statements. However in the meeting, the other managers referred to lots of information that Emilio had not found in the financial statements. In addition to using the financial statements, the other managers were using computer printouts and reports unlike anything Emilio had seen in his years at the bank. After the meeting, Monique Vo., one of Emilio’s associates offered the following advice: “Emilio, you have to remember that you are an internal user now, not an external user’. What does Monique mean? Accounting standards place limits on the set of allowable alternative accounting treatments, but the. accountant must. still exercise judgment to choose among the remaining alternatives. In making those choices, which of the following should the accountant seek to do? 1. Maximize reported income. 2. Minimize reported income. 3. Ignore the impact of the accounting choice on income and just focus on the most conceptually correct opiion. Would your answer change if this where a tax accounting class? Why or why not?22__Chapter | \ Multiple Choice Questions MC1-1, MC1-2. MC1-3, Choose the correct statement: ‘a. Financial accounting is a social science and cannot be influenced by changes in legal, political, business and social environments. b. Financial accounting is an information system designed to provide information primarily to internal users. c. General-purpose financial statements must be prepared by a certified public accountant. The preparation of general-purpose financial statements is usually based on the assumption that the primary users of the information are external decision makers. Which of the following statements is false? a. Financial-reporting should provide information which is relevant to investment, credit and public policy decisions. b. Generally speaking, Philippine Financial Reporting Standards (PFRSs) are those standards with substantial authoritative support, c. (PFRSs) are established to ensure the relevancy of the general- purpose financial statements to the widespread uses of the information by external decision makers. d? Once established, PFRS should never be changed. Which of the following statements is true? _a’ Managers of an entity are considered to be internal decision makers. b. External decision makers can obtain whatever financial data they need whenever they need it. c. Accounting information is prepared for and useful to only outside decision makers. : d. The members of the Board of Directors are not “external users” of financial information, but are “internal users” only.MC1-4, MC1-5. MC1-6. MC1-7. The Environment of Financial Accounting and Reporting _23 Choose the incorrect statement. a. d. The objective of external financial statements is to communicate the economic effects of completed transactions and other events on the entity. The practice of accounting requires considerable professional judgment. Security analysts use information from financial statements and other sources to project future earnings. The assessment of earnings quality has become an exact science. Which of the following statements is correct? a. Certified Public Accountants are not independent for the benefit of the users of the financial statements, because they are paid by the client. Accounting concepts, principles and standards are just as broad and general today as they were sixty years ago. Due to the excellent work of the FRSC, there are very few choices among alternative accounting policies today. Disclosure notes are an integral part of the financial statements. Choose the incorrect statement. a. Benefits provided by accounting procedures should exceed their cost. The Securities and Exchange Commission (SEC) exerts influence on the development of accounting standards. The primary function of the Financial Reporting Standards Council is to develop and enforce auditing standards. The double-entry system of accounting has been used for centuries. External decision makers include all of the following except: a, b. « 4. managers. owners. creditors. financial press.24 Chapter | MC1-8. MC1-9, MCt1-10. MC1-11. General-purpose financial statements report financial information relevant to: a. investors only. b. creditors only. fe. government users only. d._ investors, creditors and government users. Which of the following best states the purpose of general-purpose financial statements? a. To disclose the market value of the firm’s assets and liabilities. b. To determine compliance with tax laws. c. To identify shareholders. d. To help users make decisions. Which of the following statements about International Accounting Standards is true? a. International standards are enforceable world-wide, in order to allow for judgments regarding intemational investments. b. Legal and psychological hurdles to achieving common reporting standards have largely been overcome. c. The Intemational Accounting Standards Board (IASB) was established with the purpose of narrowing the range of divergence in accounting standards used throughout the world. d. The IASC is able to enforce its standards by prohibiting the listing of companies which do not comply on stock exchanges which sell internationally. Which of the following is an infernal user of a company’s financial information? a. company treasurer b. stockholder in the company c. bank lending to the company d. union representativeMC1-12, MC1-13, MC1-14, MC1-15. The Environment of Financial Accouming and Reporting _ 25 Which of the following is not a decision that external users of a company’s financial information would make? a, whether or not to extend credit to the company, b. whether or not to hold the company's stock c. whether or not the company should add a new product line d. whether or not to ask for an increase in employees’ benefits during union contract negotiations Critical thinking is most important in which of the following problem- solving steps? recognizing a problem identifying alternative solutions evaluating the alternatives |. selecting a solution from among the alternatives sess Which of the following areas within the accounting field has as its main purpose serving the information needs of parties outside the reporting firm? a. Financial accounting. : b. Tax accounting. c. Managerial accounting. d. Auditing. External financial statements, according to FRSC Presentation of Financial Statements, should provide all of the following information except: a. information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and other decisions. b. information that is comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. information for planning the future of the entity, implementing those plans, and for controlling daily operations. d. information to help present and potential investors and creditors and other users in assessing the amounts, timing and uncertainty of prospective cash receipts. °