POINTERS FOR PRELIM EXAMS:

WEEK 2:
Definition of Accounting
ACCOUNTING STANDARDS COUNCIL (ASC):
A service activity. Its function is to provide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions
and in making reasoned choices among alternative actions.

R-ecording financial transactions

In accounting, this is journalizing and input it in a book called General Journal. Before
you record a transaction, you must identify if it is either an accountable event or
nonaccountable event. Second, analyze. There should be a dual effect: “value received” and
“value parted with”. We call this the double-entry system. Then, we can measure. How? By
assigning of monetary values involved in the transaction. In the Philippines, we use the
Philippine peso (₱).
C-lassifying
It involves sorting or grouping of similar transactions and events into their respective
kind and classes. In accounting, this is called “posting” and we post it to the “General
Ledger”.
S-ummarizing
It involves the completion of the financial statements and the accounting requirements
as well. You sum it up into a more understandable form. Summarization of data is achieved
by preparation of financial statements and other financial reports.
I-nterpreting
It is in this phase that the financial statements are analyzed, interpreted and
communicated to those interested parties (users of financial information) for the basis of
making a useful economic decision.

Bookkeeping is a mechanical task involving the collection of basic financial data. The data
are first entered in the accounting records or the books of accounts, and then extracted,
classified and summarized in the form of income statement, balance sheet and cash flows
statement. The bookkeeping procedures usually end when the basic data have been entered
in the books of accounts and the accuracy of each entry has been tested.

BRANCHES OF ACCOUNTING
Auditing
Auditing is the accountancy profession’s most significant service to the public. There are two
main classifications of audit – external and internal. An external audit is the independent
examination that ensures fairness and reliability of the reports that management submits to
users outside the business entity. The result of the examination is embodied in the
independent auditor’s report. External auditors are appointed from outside the organization.
The external auditor’s job is to protect the interests of the users of the financial statements. By
contrast, internal auditors are employees of the company. They are appointed by, and answer
to, the company’s management though they work independently of the accounting and other
departments. To differentiate further, internal auditors perform routine tasks and undertake
detailed checking of the company’s accounting procedures, whereas external auditors are
likely to go in for much more selective testing.

Cost Accounting
Cost accounting deals with the collection, allocation, and control of the cost of producing
specific goods and services. This accumulation and explanation of actual and prospective cost
data is important to control current operations and to plan for the future. Cost accounting now
forms one of the main sub-branches of management accounting.
Financial Accounting
Financial accounting is focused on the recording of business transactions and the periodic
preparation of reports on financial position and results of operation. It is the more specific term
applied to the preparation and subsequent publication of highly summarized financial
information. The information supplied is usually for the benefit of the owners of the entity, but
it can also be used by management for planning and control purposes. It will also be of interest
to other parties, e.g. employees and creditors.

Management Accounting
Management accounting incorporates cost accounting data and adapts them for specific
decisions which management may be called upon to make. A management accounting system
incorporates all types of financial and non-financial information from a wide range of sources.
Taxation
Tax accounting includes the preparation of tax returns and the consideration of the tax
consequences of proposed business transactions or alternative courses of action.
Accountants with this specialization aim to comply with the existing tax statutes but are also
in constant legal search for ways to minimize tax payments.
Government Accounting
It is concerned with the identification of the sources and uses of resources consistent
with the provisions of city, municipal, provincial or national laws. The government
collects and spends huge amount of public funds annually so it is necessary that there is
proper custody and disposition of these funds.
WEEK 3: OBJECTIVES OF THE FINANCIAL STATEMENTS:

Who has the primary responsibility in preparing and presenting the financial statements?
The management of the enterprise

The sets of financial statements are:

1. Statement of Financial Position
2. Statement of Financial Performance
3. Statement of Cash Flows
4. Statement of Changes in Owner’s Equity
5. Notes to Financial Statements

UNDERLYING ASSUMPTIONS:

Accrual Basis
The financial statements, except for the cash flow statement, are prepared on the accrual
basis of accounting in order to meet their objectives. Under the accrual basis, the effects of
transactions and other events are recognized when they occur and not as cash is received or
paid. This means that the accountant records revenues as they are earned and expenses as
they are incurred. The timing of cash flows is relatively immaterial for determining when to
recognize revenues and expenses.

Financial statements prepared on the accrual basis inform users not only of past transactions
involving payment and receipt of cash, but also of obligations to pay cash in the future, and of
resources that represent cash to be received in the future. Generally accepted accounting
principles require that a business use the accrual basis.

In cash basis accounting however, the accountant does not record a transaction until cash is
received or paid. Generally. Cash receipts are treated as revenues and cash payments as
expenses. Cash basis income is the difference between operating cash receipts and
disbursements. These cash flows necessarily exclude investments by and distributions to the
owner in the computation of income.

CASH BASIS ACCRUAL BASIS

Revenue is recorded when cash is Revenue is recorded when goods or
received services are delivered or rendered
Expenses are recorded when it is paid Expenses are recorded when it is
incurred

Going Concern

The financial statements are normally prepared on the assumption that an enterprise is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that
the enterprise has neither the intention nor the need to liquidate or curtail materially the scale
of its operations.

This assumption underlies the depreciation of assets over their useful lives. If an entity expects
to liquidate in the near future, its assets are valued at their worth at liquidation rather than
original cost.
WEEK 4: CONCEPTUAL FRAMEWORK:

IASB stands for International Accounting Standards Board.

QUALITATIVE CHARACTERISTICS

Fundamental Qualitative characteristics:

1. Relevance - accounting information must be capable of making a difference in a

decision
a. Predictive Value
the financial information is useful because it can be used as an input to
processes employed by users to predict future outcomes, in making users’
own predictions.
b. Confirmatory Value
the financial information is useful if it provides feedback about previous
evaluations (confirms or changes a previous understanding).
c. Materiality
Information is material if omitting it or misstating it could influence decisions
that users make on the basis of the reported financial information

2. Faithful representation - that the numbers and descriptions match what really existed
or happened. (FREE CO NE)
1. Free from error / freedom from error
An information item that is free from error will be a more accurate (faithful)
representation of a financial item.

2. Completeness
All the information that is necessary for faithful representation is provided. An
omission can cause information to be false or misleading and thus not be helpful
to the users of financial reports.
3. Neutrality
A company cannot select information to favor one set of interested parties over
another. Unbiased information must be the overriding consideration.

Enhancing Qualitative characteristics (VCUT)

1. Verifiability
Verifiability is the extent to which information is reproducible given the same data and
assumptions.
2. Comparability
Comparability is the degree to which accounting standards and policies are consistently
applied from one period to another.
3. Understandability
Understandability is the degree to which information is easily understood.
4. Timeliness
Timeliness is how quickly information is available to users of accounting information.