ACC 103: Conceptual Framework & Accounting Standards

Module #3-4 Student Activity Sheet

Lesson title: Overview of Accounting Materials:

Learning Targets: Calculator, Reviewer Notebook,
At the end of the module, students will be able to: Textbook
1. Define accounting and state its basic purpose.
2. Explain the basic concepts applied in References:
accounting. Millan, Zeus Vernon B.; Intermediate
3. State the branches of accounting and the Accounting 1
sectors in the practice of accountancy.
4. Explain the importance of a uniform set of
financial reporting standards.

A. LESSON PREVIEW/REVIEW
Introduction

Hello there! Before we begin our discussion on the Overview of Accounting, let us have a quick
overview on some concepts of the previous module by answering the questions below.

Multiple Choice: Encircle the letter of your answer. Erasure of any kind is strictly prohibited.
1. It is the first process used in accounting. It refers to the identification of events as to whether
they are recognized or not in the financial statements.
A. Identifying
B. Measuring
C. Communicating
D. Auditing

2. Events involving an entity and an external party.

A. External events
B. Non-reciprocal transfers
C. External events other than transfers
D. Internal events

3. Financial accounting applies to which of the following:

A. Businesses
B. Non-profit organizations
C. Government
D. All of these

4. The function of measuring and reporting information to absentee investors is called the:
A. Accounting function
B. Stewardship function
C. Auditing function
D. Management function

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

5. The primary objective of financial reporting is to provide information:

A. About a firm’s financing and investing activities
B. About a firm’s economic resources and obligations
C. About a firm’s products and services
D. Useful in predicting cash flows

6. In the conceptual framework for financial reporting, what provides "the why"--the purpose of
accounting?
A. Recognition, measurement, and disclosure concepts such as assumptions, principles, and
constraints
B. Qualitative characteristics of accounting information
C. Elements of financial statements
D. Objective of financial reporting

7. The underlying theme of the conceptual framework is

A. Decision usefulness.
B. Understandability.
C. Faithful representation.
D. Comparability.

8. The objective of general-purpose financial reporting is to provide financial information about a

reporting entity to each of the following except
A. Potential equity investors.
B. Potential lenders.
C. Present investors.
D. All of these answers are correct.

9. The objective of general-purpose financial reporting is?

A. To provide financial information about the reporting entity that is useful to present and potential
equity investors, lenders, and other creditors in making decisions in their capacity as capital
providers
B. To provide companies with the option to select information that favours one set of interested
parties over another
C. To provide users with financial information that implies total freedom from error.
D. To provide a metric for financial information used to determine when the boundary between two
or more entities should be disregarded and the entities considered to be a licensing
arrangement.

10. Which of the following is a characteristic describing the fundamental quality of relevance?
A. Predictive value.
B. Neutrality.
C. Verifiability.
D. Understandability.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

B. MAIN LESSON

Lesson Content
Make sure to highlight or underline the important parts!

Definition of Accounting
 Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.
AAA(American Association of Accountants)

Three important activities included in the definition of accounting

 Identifying-the process of analysing events and transactions to determine whether or not
they will be recognized in the books.
 Measuring- involves assigning numbers, normally in monetary terms, to the economic
transactions and events
 Communicating- the process of transforming economic data into useful accounting
information, such as financial statements and other accounting reports, for dissemination to
users.

Types of events:
 External Events-events which involve an entity and an external party.
a. Exchange (reciprocal transfer)-reciprocal giving and receiving.
b. Non-reciprocal transfer-“one-way” transaction
c. External event other than transfer- an event that involves changes in economic
resources or obligations of an entity caused by an external party or an external
source but does not involve transfers or resources or obligations.
 Internal Events-events which do not involve an external party.
a. Production- the process by which resources are transformed into finished goods.
b. Casualty- an unanticipated loss from disasters or other similar events.

Measurement Bases
 Historical Cost-price based on past exchange
 Current Cost–price based on current exchange
 Realizable (settlement) value–net cash that could currently be obtained by selling the asset
in an orderly disposal.
 Present value- price based on future exchange
 Fair value - the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
 Fair value less costs to sell - Costs to sell are the incremental costs directly attributable to
the disposal of an asset excluding finance costs and income tax expense.
 Revalued amount- is the asset’s fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.
 Inflation-adjusted costs- amounts adjusted to the measuring unit current at the reporting
date.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

Basic Purpose of accounting

 the basic purpose of accounting is to provide information about economic activities intended
to be useful in making economic decisions.

Types of accounting information classified as to users’ needs:

 General purpose accounting information - designed to meet the common needs of most
statement users. This information governed by the Philippine Financial Reporting Standards
(PFRSs)
 Special purpose accounting information - designed to meet the specific needs of particular
statement users. This information is provided by other types of accounting, e.g., managerial
accounting, tax basis accounting, etc.

Basic Accounting Concepts

a. Going concern assumption - the entity is assumed to carry on its operations for an indefinite
period of time.
b. Separate entity- the entity is treated separately from its owners.
c. Stable monetary unit - amounts in financial statements are stated in terms of a common unit
of measure; changes in purchasing power are ignored.
d. Time Period-the life of the business is divided into series of reporting periods.
e. Materiality concept- information is material if its omission or misstatement could influence
economic decisions.
f. Cost benefit (Reasonable assurance/Pervasive constraint/ Cost constraint) - the cost of
processing and communicating information should not exceed the benefits to be derived
from it.
g. Accrual Basis of accounting- effects of transactions are recognized when they occur (and
not as cash or its equivalent is received or paid) and they are recognized in the accounting
periods to which they relate.
h. Historical cost concept (cost principle) - the value of an asset is to be determined on the
basis of acquisition cost.
i. Concept of Articulation- all of the components of a complete set of financial statements are
interrelated.
j. Full Disclosure Principle - financial statements provide sufficient detail to disclose matters
that make a difference to users, yet sufficient condensation to make the information
understandable, keeping in mind the costs of preparing and using it.
k. Consistency concept - financial statements are prepared on the basis of accounting
principles which are followed consistently from one period to the next.
l. Matching (Associating cause and effect) – costs are recognized as expenses when the
related revenue is recognized.
m. Entity theory- the accounting objective is geared towards the proper income determination.
It emphasizes the income statement and is exemplified by the equation “Assets +
Liabilities=Capital”.
n. Proprietary theory - the accounting objective is geared towards the proper valuation of

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

assets. It emphasizes the importance of the balance sheet and is exemplified by the
equation “Assets + Liabilities = Capital”.
o. Residual equity theory - this theory is applicable where there are two classes of shares
issued, ordinary and preferred. The equation is “Assets+ Liabilities-Preferred shareholders’
Equity=Ordinary Shareholders’ Equity.
p. Fund theory - the accounting objective is the custody and administration of funds.
q. Realization - the process of converting non-cash assets into cash or claims to cash.
r. Prudence (conservatism) - the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty, such
that assets or income are not overstated and liabilities or expenses are not understated.

Common branches of accounting

a. Financial accounting/Financial Reporting- focuses on general purpose financial statements.

b. Management accounting - focuses on special financial reports geared towards the needs of
an entity’s management.
c. Cost accounting - the systematic recording and analysis of the costs of materials, labor, and
overhead incident to production.
d. Auditing - a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between these assertions and established criteria and communicating the results to
interested users.
e. Tax accounting - the preparation of tax returns and rendering of tax advice, such as
determination of tax consequences of certain proposed business endeavours.
f. Government accounting- the accounting for the national government and its
instrumentalities, focusing attention on the custody of public funds and the purpose or
purposes to which such funds are committed.

Four sectors in the practice of accountancy

1. Practice of Public accountancy
2. Practice in Commerce and Industry
3. Practice in Education/Academe
4. Practice in the Government

Accounting standards in the Philippines

Philippine Financial Reporting Standards (PFRS) - are standards and interpretations adopted by
the Financial Reporting Standards Council (FRSC).
They comprise:
 Philippine Financial Reporting Standards (PFRS)
 Philippine Accounting Standards (PASs)
 Interpretations

Skill-building Activities

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

Let’s try to practice what you have learned! Check your answers against the Key to Corrections found
at the end of this SAS. Write your score on the space provided.

MODIFIED TRUE OR FALSE: IF THE STATEMENT IS TRUE, WRITE TRUE ON THE SPACE
PROVIDED. OTHERWISE, INDICATE THE WORD/PHRASE THAT MAKES THE STATEMENT
INCORRECT. ERASURES OF ANY KIND IS STRICTLY PROHIBITED.

__________________________1. Accounting is “the process of identifying, measuring, and converting

economic information to permit informed judgment and decisions by users of information.”
__________________________2. Identifying - the process of analyzing events and transactions to
determine whether or not they will be recognized. All events are recognized.
__________________________3. The most commonly used bases of measurement is fair value.
__________________________4. When measurement is affected by estimates, the items measured are
said to be valued by opinion.
__________________________5. When measurement is unaffected by estimates, the items measured are
said to be valued by fact.
__________________________6. The basic purpose of accounting is to provide information about
economic activities intended to be useful in making management decisions.
__________________________7. General purpose and Special purpose accounting information are
governed by the Philippine Financial Reporting Standards (PFRSs).
__________________________8. Changes in purchasing power are in considered in preparing the
financial statements.
__________________________9. Under the concept of Articulation, all of the components of a complete
set of financial statements are interrelated.
__________________________10. Sale the process of converting non-cash assets into cash or claims for
cash.
__________________________11. Under fund theory, the accounting objective is the custody and
administration of funds.
__________________________12. Employment or appointment to a position in an accounting professional
group in the government or in a government–owned and/or controlled corporation where decision making
requires professional knowledge in the science of accounting, or where civil service eligibility as a CPA is a
prerequisite falls under the practice of Public Accountancy.
__________________________13. Practice in Education/Academe refers to employment in the private
sector in a position which involves decision making requiring professional knowledge in the science of
accounting and such position requires that the holder thereof must be a CPA.
__________________________14. Philippine Financial Reporting Standards (PFRSs) are Standards and
Interpretations adopted by the Financial Accounting Standards Board (FASB).
__________________________15. Entities should follow a uniform set of generally acceptable reporting
standards when preparing and presenting financial statements

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

Check for Understanding (Graded Quiz)

To better test your knowledge on the topic, encircle the best answer below without looking in your
content notes. Be honest at all times. Your teacher will provide you the key answer in this activity.

MULTIPLE CHOICE. ENCIRCLE THE LETTER OF YOUR CHOICE. ERASURE OF ANY KIND IS
STRICTLY PROHIBITED.

1. It refers to the process of incorporating the effects of an accountable event in the statement of
financial position or the statement of profit or loss and other comprehensive income through a
journal entry.
a. realization
b. derecognition
c. recognition
d. posting

2. All of the following are events considered as exchange or reciprocal transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription of the entity’s own equity instrument (i.e., contributions by owners)
d. exchange of a note payable for an account payable
e. borrowing of money from a bank

3. All of the following are events considered nonreciprocal transfers, except

a. declaration of cash dividends
b. declaration of stock dividends
c. payment of accounts payable
d. imposition of fines
e. theft

4. These are events involving an entity and another external party.

a. external events
b. internal events
c. transactions
d. life events

5. It is the accounting process of assigning numbers, commonly in monetary terms, to the

economic transactions and events.
a. analyzing c. classifying
b. measuring d. interpreting

6. What is the basic purpose of accounting?

a. To provide quantitative financial information about economic activities.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

b. To provide all information that users need in making economic decisions.

c. To provide qualitative financial information about economic activities intended to be useful in
making economic decisions.
d. To provide quantitative financial information about economic activities intended to be useful
in making economic decisions.

7. Accounting provides which type of information?

a. quantitative
b. financial information
c. qualitative
d. all of these

8. General purpose financial statements are

a. those statements that cater to the common and specific needs of a wide range of external
users.
b. those statements that cater to the common needs of a wide range of external users and
internal users.
c. those statements that cater to the common needs of a limited range of external users.
d. those statements that cater to the common needs of a wide range of external users.

9. External users are those

a. who do have the authority to demand financial reports tailored to their specific needs.
b. who do not have the authority to demand financial reports tailored to their common needs.
c. who do not have the authority to demand financial reports tailored to their specific needs.
d. who belong to countries other than the domicile country of the reporting entity

10. The primary objective of financial reporting is to provide

a. information about economic resources, claims to these resources, and changes in them.
b. information useful for investment and credit decisions.
c. information useful in predicting future cash flows.
d. all of these

11. Which of the following statements is false?

a. Accountable events are those that have an effect in an entity's assets, liabilities, equity,
income or expenses.
b. The term “recognition” as used in accounting refers to the process of incorporating the
effects of an accountable event in the statement of financial position or the statement of
profit or loss and other comprehensive income through a memo entry.
c. External events are those that involve the reporting entity and an external party.
d. The Board of Accountancy consists of a chairperson and six members.

12. Which of the following statements is true?

a. In current practice, accounting provides only quantitative information that is useful in making
economic decisions.
b. External users are those who do not have the authority to demand financial reports tailored

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

to their specific needs.

c. Under the stable monetary unit assumption, the owners of the business and the business
are viewed as a single reporting entity. Therefore, the personal transactions of the owners
are recorded in the books of accounts.
d. The practice of accountancy in the Philippines is regulated under R.A. 9892.

13. Which of the following statements correctly refer to the accounting process?
I. Measuring is the accounting process of analyzing business activities as to whether or not
they will be recognized in the books.
II. Recognition refers to the process of including the effects of an event in the totals of the
statement of financial position or the statement of profit or loss and other comprehensive
income through memo entries.
III. Disclosure of events in the notes to financial statement without including their effect in the
totals of the statement of financial position or statement of profit or loss and other
comprehensive income is not an application of the recognition principle.
IV. An accountable event is an event that has an effect on the assets, liabilities or equity of an
entity and its effect can be measured reliably.
V. Sociological and psychological matters are within the scope of accounting.
a. I, II, III, IV and V
b. I, II, III and IV
c. IV
d. III and IV

14. Which of the following statements is true?

I. Loss from theft is classified as a nonreciprocal transfer.
II. Internal events are changes in economic resources by actions of other entities that do not
involve transfers of resources and obligations.
III. Nonreciprocal transfers involve the transfer of resources in only one direction, either from an
entity to other entities or from other entities to the entity.
IV. Internal events are sudden, substantial, unanticipated reductions in resources not caused
by other entities.
V. Fire, earthquake and flood are examples of accountable events classified as internal events.
a. I, II, III and V
b. I, III and V
c. II, III, IV and V
d. I, III, IV and V

15. Asset measurements in conventional financial statements

a. are confined to historical cost.
b. are confined to historical cost and current cost.
c. reflect several financial attributes.
d. do not reflect output values.

16. During the lifetime of an entity, accountants produce financial statements at arbitrary points in
time in accordance with which basic accounting concept?

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

a. Cost/benefit constraint
b. Periodicity assumption
c. Conservatism constraint
d. Matching principle

17. What accounting concept justifies the use of accruals and deferrals?
a. Going concern assumption
b. Materiality constraint
c. Consistency characteristic
d. Monetary unit assumption

18. The assumption that a business enterprise will not be sold or liquidated in the near future is
known as the
a. economic entity assumption.
b. monetary unit assumption.
c. conservatism assumption.
d. going concern.

19. Valuing assets at their liquidation values rather than their cost is inconsistent with the
a. periodicity assumption.
b. matching principle.
c. materiality constraint.
d. historical cost principle.

20. When products or other assets are exchanged for cash or claims for cash, they are said to be
a. allocated.
b. realized.
c. recognized.
d. earned.

C. LESSON WRAP-UP
FAQs
What does the term “generally acceptable” mean?
 The term “generally acceptable” means that either:
a. the standard has been established by an authoritative accounting rule-making body; or
b. the principle has gained general acceptance due to practice over time and has been proven to
be most useful.

Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.

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 ACC 103: Conceptual Framework & Accounting Standards
Module #3-4 Student Activity Sheet

Thinking about Learning

From a rating of 1-10, determine if you have learned all the learning objectives. What is the reason for
your rating?
________________________________________________________________________________
________________________________________________________________________________

What part of the module gave you a hard time to comprehend?

________________________________________________________________________________
________________________________________________________________________________

Any other questions or concerns you want to raise?

________________________________________________________________________________
________________________________________________________________________________

“Put your best foot forward.”

-Nothing Follows-

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