CF FS and Reporting Entity

Conceptual Framework: Financial Statement and Reporting Entity
Financial statements provide information about economic resources of the reporting entity, claims against the entity and
changes in the economic resources and claims.
Types of Financial statements

1. Consolidated Financial Statements- Both the parent and its subsidiaries. Single reporting entity.
2. Unconsolidated Financial Statements- Parent alone. Not about those of the subsidiaries
3. Combined Financial Statement
Reporting entity is an entity that is required or chooses to prepare financial statements.
Reporting period is the period when financial statements are prepared for general purpose financial reporting.
Accounting assumptions are the basic notions or fundamental premises on which the accounting process is based.
Going concern
 Only underlying assumption mentioned in the Conceptual Framework for Financial Reporting.
 The ability of the entity to continue in operation for the foreseeable future.
 Assumption:
o The historical cost principle is credible.
o Depreciation and amortization policies are justifiable and appropriate.
o The current and noncurrent classification of assets and liabilities is justifiable and significant.
o Relatively stable economic, political and social environment.
o Not be followed when an entity in bankruptcy reports financial results.
 The valuation of a promise to receive cash in the future at present value is valid because of the accounting concept
of going concern.
 Justifies the usage of accruals and deferrals.
Economic entity assumption

 Financial statements that are prepared for the business are separate and distinct from the financial statements of the
owners.
 It is applicable to all forms of business organizations.
 Accounting Entity, applicable whenever accounting is involved.
 When a parent and subsidiary relationship exists, consolidated financial statements are prepared in recognition of
economic entity.
Accounting period
 Serves as the basis for preparing financial statements at regular artificial points in time.
Monetary unit assumption

 Threatened by the existence of severe inflation in an economy.
Important characteristics of the financial statements that accountants currently prepare:
 Financial statements articulate with one another because measuring financial position is related to measuring
changes in financial position.
 The information in financial statements is summarized and classified to help meet users’ needs.
 Financial statements can be justified only if the benefits exceed the costs.
Assessing cash flows prospects- Over the king run, trends in revenue and expenses are generally more meaningful than
trends in cash receipts and disbursements.
In measuring financial performance, accrual accounting is used because it provides a better indication of ability to
generate cash flows than cash basis.
Entity equation- the accounting equation “assets = liabilities + equity”
Residual equity- The equation “assets minus liabilities minus preference equity equals ordinary equity”
Classifying preference dividends as expense is an application of residual equity.
Entity- primary accounting objective is fair presentation of the financial performance of the entity.
Fiduciary accounting is an application of fund theory.
Theories
1. What is the general objective of financial statements?
a. To provide information about economic resources of an entity, claims against the entity and changes
in the economic resources and claims
b. To assess future cash flows to the entity
c. To assess management stewardship of economic resources
d. To satisfy the information needs of users of financial statements
2. A reporting entity is
a. Necessarily a legal entity
b. Necessarily an economic entity
c. An entity that is required or choose to prepare financial statements
d. A regulatory government authority
3. A reporting entity
a. Can be a single entity
b. Can be a portion of a single entity
c. Can comprise more than one entity
d. All of these can be considered a reporting entity
4. If the reporting entity comprises both the parent and its subsidiaries, the financial statements are referred to as
a. Consolidated financial statements
b. Unconsolidated financial statements
c. Combined financial statements
d. Separate financial statements
5. Combined financial statements provide financial information about
a. The parent and its subsidiaries
b. The parent
c. The subsidiaries
d. Two or more entities without a parent-subsidiary relationship
6. Which best describes the term going concern?
a. When current liabilities exceed current assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The expenses exceed income
7. Which is an implication of the going concern assumption?

a. The historical cost principle is credible
b. Depreciation and amortization policies are justifiable and appropriate
c. The current and noncurrent classification of assets and liabilities is justifiable and significant
d. All of these are an implication of going concern.
8. Which of the following is not a basic assumption underlying financial accounting?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Historical cost assumption
9. Which basic assumption may not be followed when an entity in bankruptcy reports financial results?
c. Periodicity assumption
d. Monetary unit assumption
10. The economic entity assumption
a. Is inapplicable to unincorporated businesses
b. Recognizes the legal aspects of business organization
c. Requires periodic income measurement
d. Is applicable to all forms of business organizations
11. What is being violated if an entity provides financial reports in connection with a new product introduction?
a. Economic entity
b. Periodicity
c. Monetary unit
d. Continuity
12. Which underlying assumption serves as the basis for preparing financial statements at regular artificial points in
time?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit
13. Which basic accounting assumption is threatened by the existence of severe inflation in the economy?
a. Monetary unit assumption
b. Periodicity assumption
c. Going concern assumption
d. Economic entity assumption
14. Inflation is ignored in accounting due to
c. Monetary unit assumption
d. Time period assumption
15. The concept of accounting entity is applicable
a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved.
16. When a parent and subsidiary relationship exists, consolidated financial statements are prepared in recognition of
a. Legal entity
b. Economic entity
c. Stable monetary unit
d. Time period
17. The valuation of a promise to receive cash in the future at present value is valid because of what accounting
concept?
a. Entity
b. Time period
c. Going concern
d. Monetary unit
18. What is the accounting concept that justifies the usage of accruals and deferrals?
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit
19. During the lifetime of an entity accountants produce financial statements at arbitrary points in time in accordance
with what basic accounting concept?
a. Accrual
b. Periodicity
c. Unit of measure
d. Continuity
20. The relatively stable economic, political and social environment supports
a. Conservatism
b. Materiality
c. Timeliness
d. Going concern
Identification
1. The operations of a saving bank are being evaluated by the Bangko Sentral ng Pilipinas. During the investigation,
the BSP has determined that numerous loans made by top management were unwise and have seriously endangered
the future of the saving bank. Going Concern
2. The parent entity in Manila has a subsidiary in Japan. The financial statements of the subsidiary are translated to
pesos for consolidation with the financial statements of the parent entity at year end. Accounting entity
3. A machinery was imported from Canada at a certain cost five years ago. Because of extraordinary inflation, the
machinery has now a current replacement cost which is very much higher than the historical cost. Management
would like to report the machinery at current replacement cost. Monetary Unit
4. An entity has experienced a drastic reduction in revenue by reason of a long dry spell in the area where the entity
grows its tobacco. The management decided to wait until next year and present financial statements for a two-year
period rather than prepare now the traditional twelve-month financial statements. Time period
5. A subsidiary was exhibiting poor financial performance for the current year. In an effort to increase the
subsidiary’s reported income, the parent entity purchased goods from the subsidiary at twice the normal markup.
Accounting entity
6. An entity decided to publish financial statements only in the years when it had good news to report. Time period
7. An entity reported inventory, property, plant and equipment and intangible assets at current value at year-end.
Monetary Unit
8. An electronics entity owned by a proprietor reported the cost of the proprietor's swimming pool as an asset of the
entity. Accounting Entity
9. An entity prepared financial statements adjusted for changes in purchasing power. Monetary unit
10. A mining entity kept no accounting records after starting business. The entity is waiting until the mine is exhausted
to determine the success or failure of business. Time period
11. An entity reported financial statements in nominal pesos that have mixed rather than uniform amount of purchasing
power. Monetary unit
12. A multinational entity published a complete set of financial statements at least once a year, regardless of whether
the financial results were good or bad. Time period
13. The pesos of today can buy as much goods and services as the pesos five years ago. Monetary unit
14. An accounting entity is viewed as continuing in operation in the absence of evidence to the contrary. Going
concern
15. An accounting practitioner mixed personal accounting records with the records of the accounting practice.
Accounting Entity

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CF FS and Reporting Entity

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Conceptual Framework: Financial Statement and Reporting Entity

Types of Financial statements

Reporting entity is an entity that is required or chooses to prepare financial statements.

Economic entity assumption

Monetary unit assumption

Entity equation- the accounting equation “assets = liabilities + equity”

Classifying preference dividends as expense is an application of residual equity.

Fiduciary accounting is an application of fund theory.

7. Which is an implication of the going concern assumption?

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