FRAMEWORK FOR THE

PRESENTATION OF
FINANCIAL STATEMENTS
June 30, 2015

TOPICS
1.
2.
3.
4.
5.
6.
7.

Objective of financial reporting

Underlying assumptions
Qualitative characteristics of useful accounting
information
Elements of financial statements
Recognition concepts
Measurement concepts
Concepts of capital and capital maintenance

MODULE 1
Objectives of
Financial Reporting

OBJECTIVE OF FINANCIAL REPORTING

PAS Framework states:

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.

OBJECTIVE OF FS
PAS Framework, par. 12

The objective of financial statements is to

provide information about the financial
position, performance and changes in
financial position of an entity that is useful to
a wide range of users in making decisions.

OBJECTIVE OF FINANCIAL REPORTING

Brief Explanation
For what purpose Provision of financial information
About

Reporting entity

To whom

Potential and existing investors, lenders

and other creditors (PRIMARY USERS)

For what reason

To assist them in making economic

decisions about providing resources to the
entity.

Examples

Financial highlights and significant ratios

Summary of important financial figures
Analysis of financial statements
FINANCIAL STATEMENTS

OBJECTIVE OF FINANCIAL REPORTING

REFERENCE http://www.chrisjmast.com/portfolio/print/annualreport/

OBJECTIVE OF FINANCIAL REPORTING

SPECIFIC OBJECTIVES OF FINANCIAL REPORTING
(To provide information for the following reasons)
1. Any useful information in
making decision about
providing resources to the
entity.
2. Any useful information in
assessing the prospects of
future net cash flows to the
entity.

3. Information about
entity resources,
claims, and
changes in
resources and
claims.

SAMPLE DECISIONS AND ASSESSMENTS

Determine terms of credit

Increase or decrease reliance

as customer or borrower

Extend credit
Enter suit or
force bankruptcy

OBJECTIVE OF FINANCIAL REPORTING

LIMITATIONS OF FINANCIAL REPORTING
1.

DO NOT and CANNOT provide all of the information

needed by primary users.

2.

NOT DESIGNED to show the value of a reporting entity

but only to help estimate the value of reporting entity.

3.

Only COMMON INFORMATION are provided common to all

users.

4.

Financial reports are BASED ON ESTIMATE AND

JUDGEMENT rather than exact depiction.

OBJECTIVE OF FINANCIAL REPORTING

IN SUMMARY
Over-all objective To provide information that is useful for
decision making.
Directed primarily Primary users (existing and potential
to whom
investors, lenders and other creditors)
Why directed to
primary users?

They have the most critical and immediate

need for information in financial reports.

Is financial
reports usable to
management?

YES to some extent but they can be able to

obtain and access additional financial
information internally.

MODULE 2
Overview
Financial Statements

Business Transactions and Accounting

INPUT

OUTPUT

Accounting
Process

Business
Transactions

1.
2.
3.

RECORDING PHASE
Documentation
Journalizing
Posting to the ledger

SUMMARIZING PHASE
1.
2.
3.
4.
5.
6.
7.

Preliminary Trial Balance preparation

Adjustment data compilation
Worksheet preparation
Financial Statements preparation
Post-Closing Trial Balance preparation
Closing the accounting books
Reversing journal entry preparation

Financial
Statements

PAS 1, par. 10
1.
2.
3.
4.
5.
6.

Statement of
Financial Position
Income Statement
Statement of
Comprehensive
Income
Statement of Cash
Flows
Statement of
Changes in Equity
Notes to FS

What are Financial Statements?

The end product or main output of the
financial accounting process.
END PRODUCT the output (SEE the diagram on
previous slide)
FINANCIAL ACCOUNTING PROCESS The
accounting process

What are financial statements?

A structured financial presentation of the
financial position and financial
performance of an entity.
STRUCTURED - logical, systematic
FINANCIAL expressed in monetary value
PRESENTATION report
FINANCIAL POSITION what we own (assets), what we
owe (liabilities), and what is left for the owners (owners
equity).
FINANCIAL PERFORMANCE revenue, cost and
expenses, and net profit
ENTITY the company itself as separate from its owners

What are financial statements?

The means by which the information
accumulated and processed in financial
accounting is periodically communicated
to users.

MEANS - medium of communication

INFORMATION Financial accounting information
PROCESSED The accounting process
FINANCIAL ACCOUNTING IAS/PFRS
PERIODICALLY Annually, quarterly, monthly
USERS with direct and indirect interest to business
entity.

What are presented in FS?

(1) Financial position
(2) Performance in financial position
(3) Changes in financial position

Specific Financial Statements

(1) Financial position

Statement of Financial Position or Balance

Sheet

(2) Performance
() Statement of Comprehensive Income or
Income Statement

(3) Changes in financial position

() Statement of Cash Flows

RESPONSIBILITY FOR FS
CONCERN

RIEF EXPLANATION

Primary
responsibility in
Financial statements

The MANAGEMENT of the reporting entity.

BODs discharging
of liability

By REVIEWING AND AUTHORIZING the

financial statements for issue before its
submission to stockholder.

Management
accountability

For the safekeeping of the entitys

resources.
For its proper, efficient and profitable use.

RESPONSIBILITY FOR FS

MODULE 3
Underlying Assumptions

BASIC ACCOUNTING
ASSUMPTIONS AND PRINCIPLES

Assumptions

WHAT ARE ACCOUNTING

ASSUMPTIONS?
Assumption

Accounting assumptions
are the basic notions or
fundamental premises on
which certain standard
accounting principles, and
accounting processes or
procedures are based.

ACCOUNTING ASSUMPTIONS
Assumptions are the foundations of accounting
principles.
From accounting assumptions, accounting
principles are conceptualized.
From accounting assumptions, accounting
processes are also conceptualized.

BASIC ACCOUNTING ASSUMPTIONS

1. Business Entity Assumption
2. Going Concern Assumption
3. Quantifiability Assumption
4. Stability of the Peso Assumption
5. Periodicity Assumption

BUSINESS ENTITY ASSUMPTION

This was conceptualized by a Benedictine monk
named Don Pietra who assumed that a business
enterprise was a separate economic entity,
distinct from its owner or owners.
The business is another individual with its own
transactions.

Business Entity Assumption Caricature

All personal transactions of the business owners shall be
accounted separately and should not be accounted or
recorded in the business accounting records.

Business Entity Assumption Application

GOING CONCERN ASSUMPTION

Hanggang
kailan kaya
tatakbo ang
aking
negosyo?
Nobody knows when the
life of the business will end.

GOING CONCERN ASSUMPTION

The business continues to operate for an
indefinite period of time unless otherwise
stated.
If there is an evidence that the business entity
cannot continue to operate due to severe
losses or bankruptcy, or whatever reasons
that made the management or its owners to
discontinue its operations. the going concern
assumption is not anymore applicable.
Instead, the quitting concern shall be applied.

QUANTIFIABILITY ASSUMPTION

I have my meeting yesterday

sa isang potential big client
ng company (transaction 1). I
spent PhP 1,000.00 during the
meeting (transaction 2). Alin
ba sa dalawang transaction
na ito ang ire-record namin
sa accounting records?

QUANTIFIABILITY ASSUMPTION
Only business transactions that can be
quantified shall be recorded by accounting.
The quantification can be in any unit of
measure but in the end, accounting defines
which specific unit of measure shall be used
for recording purposes.

QUANTIFIABILITY ASSUMPTION
I have my meeting yesterday
sa isang potential big client ng
company. I spent PhP 1,000.00
during the meeting. Alin ba sa
dalawang transaction na ito
ang ire-record namin sa
accounting?

ANSWER:
The PhP 1,000.00 spent during the
meeting.

STABILITY OF THE PESO ASSUMPTION

Twenty years ago, ang piso
ko ay pambayad na for
minimum fare sa jeep.
Ngayon, ang piso ko ay di
na puwedeng pambayad as
minimum fare kasi walong
piso na ang katumbas nito
ngayon. Hay buhay!

STABILITY OF THE PESO ASSUMPTION

In accounting, it is assumed that the value of the
Philippine peso will be the same from year to
year.
In accounting, the devaluation of Philippine peso
due to inflation is ignored. Therefore, no
adjustment in acquisition cost will be made.
If there is a significant change in the value of
Peso, there is a separate accounting treatment
for this . This is discussed in higher accounting
subject.

Periodicity Assumption

PERIODICITY ASSUMPTION
The concern of periodicity assumption is the
period of reporting regarding what is happening
to the business? if it is:
a) Earning or not
b) Financially stable or not

Periodicity Assumption Concept

As a solution to period of reporting, the life of the

business is divided into equal period, usually twelve (12)
months or one (1) year.
This is the periodicity
assumption.

Every end of this period, financial reports are prepared in

the form o financial statements.

In fact, reporting period can also be on a daily, weekly,

monthly, quarterly or semi-annual basis.

But for practicality, the acceptable accounting period is

one (1) year.

Periodicity Assumption
The accounting period is of two (2) types, namely:
1. The calendar period. It starts every January 1
and ends every December 31 of each year.
2. The fiscal period. It starts on any first day of
the month within the calendar year and ends
every on the twelfth month from the first day
of the starting month.

Periodicity Assumption Requirement by BIR

For BIR purposes,

only corporation
is allowed to use
the fiscal period.

Other Underlying
Assumptions and Principles

ACCOUNTING PRINCIPLES

Assumption
Accounting Principles

Are principles that govern

current accounting practice
and that is used as a
reference to determine the
appropriate treatment of
complex transactions.

ACCOUNTING PRINCIPLES

Assumption

RECOGNITION
MEASUREMENT
REPORTING

Business
Transactions

Other Underlying
Accounting Assumptions and Principles
1.
2.
3.
4.
5.
6.
7.
8.
9.

Unit of Measure Principle

Historical Cost Principle
Matching Principle
Accrual Basis of Accounting
Objectivity Principle
Full Disclosure Principle
Materiality Principle
Conservatism Principle
Consistency Principle

UNIT OF MEASURE PRINCIPLE

Accounting Assumption Basis:
QUANTIFIABILITY ASSUMPTION
The Monetary Currency is the unit of measure
used in accounting.
Since we are in the Philippines, the unit of
measure shall be the Philippine Peso.
Foreign currencies received shall be converted to
peso using the exchange rate on transaction date.

HISTORICAL COST PRINCIPLE

On January 1, 2011, we
purchased PhP 50,000 worth of
desktop computer. How much is
the amount to be reported for
desktop computer on December
31, 2011? On December 31,
2012? On December 31, 2013?

HISTORICAL COST PRINCIPLE

Accounting Assumption Bases:
1. GOING CONCERN ASSUMPTION
2. STABILITY OF THE PESO ASSUMTION
The historical cost of the transaction shall be
the amount to be recorded and reported from
transaction date to succeeding periods like
months, quarters, years.

HISTORICAL COST PRINCIPLE

On January 1, 2011, we
purchased PhP 50,000 worth of
desktop computer. How much is
the amount to be reported for
desktop computer on December
31, 2011? On December 31, 2012?
On December 31, 2013?

ANSWER:
On December 31, 2011 PhP 50,000.00
On December 31, 2012 PhP 50,000.00
On December 31, 2013 PhP 50,000.00

MATCHING PRINCIPLE

During November, 2011, we

purchased 10 pieces of hotel
souvenir items at PhP 400.00
each. We sold 6 pieces at PhP
1,000.00 each. How much is
our total sales revenues? Our
total cost of goods sold? Our
gross profit from sales?

MATCHING PRINCIPLE
Accounting Assumption Basis:
1. GOING CONCERN ASSUMPTION
2. PERIODICITY ASSUMPTION

Matching Principle simply tells us that you cannot

achieve something without any sacrifices.
In business, you will not earn profits or income
unless you have incurred and paid related costs
and expenses to achieve its target revenues or
simply the goal.
Therefore, it is expected that any remaining income
will be computed by deducting from total income
all related costs and expenses.

MATCHING PRINCIPLE

During November, 2011, we

purchased 10 pieces of hotel
souvenir items at PhP 400.00
each. We sold 6 pieces at PhP
1,000.00 each. How much is
our total sales revenues? Our
total cost of goods sold? Our
gross profit from sales?

ANSWER No. 1:
Total sales revenues PhP
6,000.00
(6 pieces sold x PhP 1,000.00
sales price per piece)

MATCHING PRINCIPLE

During November, 2011, we

purchased 10 pieces of hotel
souvenir items at PhP 400.00
each. We sold 6 pieces at PhP
1,000.00 each. How much is
our total sales revenues? Our
total cost of goods sold? Our
gross profit from sales?

ANSWER No. 2:
Total cost of goods sold PhP 2,400.00
(6 pieces sold x PhP 400.00 purchase
price per piece)

MATCHING PRINCIPLE

During November, 2011, we

purchased 10 pieces of hotel
souvenir items at PhP
400.00 each. We sold 6
pieces at PhP 1,000.00 each.
How much is our total sales
revenues? Our total cost of
goods sold? Our gross profit
from sales?
ANSWER No. 2:
Total cost of goods
Why the total cost of goods sold is
sold PhP 2,400.00
PhP 2,400.00 and not PhP 4,000.00
(6 pieces sold x PhP
(10 pieces purchased x PhP 400.00
400.00 purchase
purchase price per piece)?
price per piece)

MATCHING PRINCIPLE

During November, 2011, we

purchased 10 pieces of hotel
souvenir items at PhP 400.00
each. We sold 6 pieces at PhP
1,000.00 each. How much is our
total sales revenues? Our total
cost of goods sold? Our gross
profit from sales?

ANSWER: There is no related sales revenue yet to 4 pieces unsold.

Therefore, it is illogical to deduct its related purchase cost of PhP
1,600.00 (4 pieces x PhP 400.00 purchase price per piece) from the
sales revenue of PhP 6,000.00 which is related to 6 units already sold.

MATCHING PRINCIPLE

This is the
essence of
MATCHING
PRINCIPLE
Matching
of revenues
to related
cost

MATCHING PRINCIPLE

The cost of
PhP
1,600.00
has no
related
revenues to
match
because
these items
are not yet
sold

MATCHING PRINCIPLE
USING THE SAME CASE, assume further that the following
expenses were paid by the business during November, 2011:

Rental expense of Php 2,000.00 for November and

December, 2011.
Commission Expense 10% of Sales, PhP 600.00 (PhP
6,000.oo sales revenues x 10%)
Power services, PhP 500.00.
Telephone, PhP 500.00

1. How much is the cost of rental to be charged for

November, 2011?
2. How much is the commission expense, power services
and telephone expenses to be charged for November,
2011?

MATCHING PRINCIPLE

These are
November,
2011 costs
which are
related to
November,
2011 sales
revenues

MATCHING PRINCIPLE

REVENUES

COSTS AND
EXPENSES
related to
generation of
revenues during
the reporting
period
(November,
2011)

ACCRUAL BASIS OF ACCOUNTING

Accounting Assumption Basis:
1. GOING CONCERN ASSUMPTION
2. PERIODICITY ASSUMPTION
Its concern is the timing of recognition of revenues
and expenses (or costs).

The questions being asked in its applications are

the following:
How much shall be recognized this period?
What shall be the accounting treatment for the
unrecognized?
When the unrecognized shall be recognized?

MODULE 4
Qualitative characteristics
of useful accounting
information

MODULE 5
Elements of
Financial Statements

OBJECTIVE OF FS
The financial statement information
include the following:
1.
2.
3.
4.

Assets
Liabilities
Equity
Income and Expenses, including gains and
losses
5. Contributions by and distributions to owners in
their capacity as owners
6. Cash flows

MODULE 6
Recognition Concepts

MODULE 7
Measurement Concept

MODULE 5
Concept of Capital and
Capital Maintenance