Define Financial Statements.

 Are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users.
 Are a structured financial representation of the financial position and financial performance of
an entity.

Explain general purpose financial statements.

 Are those statements intended to meet the needs of users who are not in position to
require an entity to prepare reports tailored to their particular information needs.

What are the components of financial statements?

Components of financial statements:

 Statement of financial position

 Income Statement
 Statement of comprehensive income
 Statement of changes in equity
 Statement of cash flows
 Notes, comprising a summary of significant accounting policies and other explanatory
information

Explain the objective of financial statements.

 The objective of general purpose financial statements is to provide information about financial
position, financial performance and cash flows of an entity that is useful to a wide range of users
in making economic decisions.

To meet the objective of financial statements, what information is necessary?

 Assets
 Liability
 Equity
 Income and expenses, including gains and losses
 Contributions by and distributions to owners in their capacity as owners
 Cash Flows

Explain financial position, financial performance and cash flows of an entity.

 Financial Position, comprises of ASSETS, LIABILITIES, and EQUITY.

 Financial Position pertains to the liquidity, solvency, and the need of the entity for additional
financing.
 Financial performance comprises the REVENUE, EXPENSES, and NET INCOME OR LOSS
 Performance is the level of income earned by the entity through the efficient and effective use of
its resources.
 Cash Flows are cash receipts and cash payments arising from the OPERATING, INVESTING and
FINANCING ACTIVITIES.
  Cash flow information is useful in assessing the ability if the entity to generate cash and cash
equivalents.

Explain financial reporting.

 Financial reporting is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of entity's
management.

Explain the target users of financial reporting.

 General purpose financial reporting is directed primarily to the existing and potential investors,
lenders and other creditors which compose the primary user group.

What is the objective of financial reporting under the Conceptual Framework for Financial Reporting?

 Under the Revised Conceptual Framework for Financial Reporting, the objective of financial
reporting is to provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decisions about providing
resources to the entity.

What are the specific objectives of financial reporting?

The following Specific Objectives:

 To provide information useful in making investing and credit decision about providing resources
to the entity.
 To provide information useful in assessing the cash flow prospects of the entity.
 To provide information about entity resources, claims and changes in resources and claims.

What are the limitations of financial reporting?

 General purpose financial reports do not and cannot provide all of the information that existing
and potential investors, lenders ,and other creditors need.
 General purpose financial reports are not designed to show the value of a reporting entity but
these reports provide information to help the primary users estimate the value of the entity.
 General purpose financial reports are intended to provide common information to users and
cannot accommodate every specific request for information.
 To a large extent, financial reports are based on estimate and judgment rather than exact
depiction.

Explain the responsibility for the presentation and presentation of financial statements.

 The Board of Directors in discharging its responsibilities reviews and authorizes the financial
statements for issue before these are submitted to the shareholders of the entity.
 Management is accountable for the safekeeping of the resources and their proper, efficient and
profitable use.
 Shareholders are interested in information that helps them assess how effectively management
has fulfilled this role as this is relevant to the decision concerning their investment and the
reappointment or replacement of management.
What are the general features of financial statements.

 Fair presentation and compliance with PFR$

 Going concern
 Accrual basis
 Materiality and aggregation
 Offsetting
 Frequency of reporting
 Comparative information
 Consistency of presentation

Explain fair presentation of financial statements.

 Fair presentation is defined as faithful representation of the effects of transactions and other
events in accordance with the definitions and recognition criteria for assets, liabilities, income
and expenses laid down in the Conceptual Framework.

Specifically, what are the requirements of fair presentation?

 To select and apply accounting policies in accordance with PFRS.

 To present information, including accounting policies, in a manner that provides relevant and
faithfully represented financial information.
 To provide additional disclosures necessary for the users to understand the entity's financial
statements

Explain the requirements when there is a departure from an accounting standard.

 In extremely rare circumstances.

 When management concludes that compliance with the standard would be misleading
 When the departure from the standard is necessary to achieve fair presentation.
 When the regulatory Conceptual Framework requires or otherwise does not prohibit such
departure

Explain going concern.

 Going concern means that the accounting entity is viewed as continuing in operation indefinitely
in the absence of evidence to the contrary.
 In other words, financial statements are prepared normally on the assumption that the entity
shall continue in operation for the foreseeable future.

Explain accrual basis of accounting

 Accrual accounting means that income is recognized when earned regardless of when received
and expense is recognized when incurred regardless of when paid.

Explain materiality and aggregation.

 An entity shall present separately each material class of similar items.

 An entity shall present separately items of dissimilar nature or function unless they are
immaterial.
What is the new definition of materiality

The IASB provided the following new definition of materiality.

 If omitting, misstating or obscuring it could reasonably be expected to influence the

economic decisions that primary users of general purpose financial statements make on
the basis of those statements which provide financial information about a specific
reporting entity.

What are the factors in determining materiality?

 Relative size of the items in relation to the total of the group to which the item belongs.
For example, the amount of advertising in relation to total distribution costs, the amount
of office salaries to total administrative expenses, the amount of prepaid expenses to
total current assets and the amount of leasehold improvements to total property, plant
and equipment.
 Nature of the item - An item may be inherently material because by its very nature it
affects economic decision.

For example, the discovery of a P20,000 bribe is a material event for a very large entity.

Explain the rule on offsetting.

 Assets and liabilities, and income and expenses, when material, shall not be offset
against each other.
 Offsetting may be done when it is required or permitted by another PFRS.

Explain the frequency of reporting financial statements.

 An entity shall present a complete set of financial statements at least annually.

What are the necessary disclosures when an entity presents financial statements for a period longer or
shorter than one year?

 The period covered by the financial statements.

 The reason for using a longer or shorter period.
 The fact that amounts presented in the financial statements are not entirely comparable.

What are the circumstances when three statements of financial position are required?

 The end of the current period

 The end of the previous period
 The beginning of the earliest comparable period

What is consistency of presentation?

 The principle of consistency requires that the accounting methods and practices shall be applied
on a uniform basis from period to period.

When is a change in the presentation and classification of items in the financial statements allowed?

 When it is required by another Standard.

  When a significant change in the nature of the operations of the entity will demonstrate a more
appropriate revised presentation and classification.

What is identification of financial statements?

 Financial statements shall be clearly identified and distinguished from other information in the
same published documents.
 Each component of the financial statements shall be clearly identified.

What information shall be prominently displayed in identifying financial statements?

 The name of the reporting entity.

 Whether the financial statements cover the individual entity or a group of entities.
 The end of the reporting period or the period covered by the financial statements or notes.
 The presentation currency.
 The level of rounding used in the amounts in the financial statements.