Week 001 Financial Statements and Conceptual Framework For Financial Reporting

Week 001
Financial Statements and

Conceptual Framework
for Financial Reporting
Week 001: Financial Statements and Conceptual Framework for Financial Reporting
Objectives
• Define the concept of cost constraint of useful
financial reporting
• Identify the four basic underlying assumptions of

financial reporting
• Identify the four measurement bases or financial

attributes of elements
Source:
https://cdn.lynda.com/course/441605/441605-
636269220092757522-16x9.jpg
Date of access:
10/5/2017
Objectives
• Define the concepts of capital and capital Insert for every slide at least one
maintenance photo related to the concept being
discussed in the slide. Dedicate this
space for the image.
The format of the photo should be

“.jpg” or “.png”.
At the bottom of the photo, indicate

the complete details of the source
of the image. If it is from the
Source:
Internet, indicate the complete URL
https://cdn.lynda.com/course/441605/441605-
and date of access.
636269220092757522-16x9.jpg
Date of access:
10/5/2017
Course Outline
1.1. Cost constraint of useful financial reporting
1.2. Underlying assumptions
1.3. Measurement bases
1.4. Capital and capital maintenance concepts
Source:
https://www.accountingweb.com/sites/default/files/st
yles/banner/public/financial_statement_ivsigns.jpg?i
tok=ylGeWfhT
Date of access:
10/5/2017
Cost Constraint of Useful Financial Reporting

- reporting financial information imposes cost and
such cost is justified by the benefit derived from the
financial information
- “the benefit derived from the information should

exceed the cost incurred in obtaining the
information”
Source:
https://www.youngclausco.com/static/images/busine
ss-financial-statements.jpg
Date of access:
10/6/2017
Underlying Assumptions
Basic assumptions underlying the financial accounting
structure:
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity
Source:
Date of access:
10/6/2017
Underlying assumptions
Economic entity assumption
• economic activity can be identified with a
particular unit of accountability
• a company keeps its activity separate and distinct

from its owners and other business unit
Source:
Date of access:
10/6/2017
Underlying assumptions
Going concern assumption
• entity is viewed as continuing in operation
indefinitely in the absence of evidence to the
contrary. Also known as continuity assumption.
• applies in most business situations except where

liquidation appears imminent
Source:
Date of access:
10/6/2017
Monetary unit assumption
• money is the common denominator of economic
activity and provides an appropriate basis for
accounting measurement and analysis.
• relevant, simple, universally available,

understandable, and useful
Source:
Date of access:
10/6/2017
Periodicity assumption
• time period assumption
• implies that a company can divide its economic

activities into artificial time periods
• time periods vary, but the most common are

monthly, quarterly, and yearly
Source:
Date of access:
10/6/2017
Measurement Bases
The measurement bases or financial attributes include:
a. Historical cost
b. Current cost
c. Realizable value
d. Present value
Source:
Date of access:
10/6/2017
Measurement Bases
Historical cost
• the amount of cash or cash equivalents paid or
the fair value of the consideration given to
acquire an asset at the time of acquisition
• most commonly used measurement base
• It is also known as “past purchase exchange

price”
Source:
Date of access:
10/6/2017
Measurement Bases
Current cost
• amount of cash or cash equivalent that would
have to be paid if the same or an equivalent
assets was acquired currently
• also known as “current purchase exchange

price”
Source:
Date of access:
10/6/2017
Measurement Bases
Realizable value
• amount of cash or cash equivalent that could
currently be obtained by selling the asset in an
orderly disposal
• also known as “current sale exchange price” or

“exit value”
Source:
Date of access:
10/6/2017
Measurement Bases
Present value
• discounted value of the future net cash inflows
that the item is expected to generate in the
normal course of business
• also known as “future exchange price”
Source:
Date of access:
10/6/2017
Capital and Capital Maintenance Concepts

- financial performance of an entity is determined
using two approaches, namely capital maintenance
and transaction approach
- the transaction approach is the traditional

preparation of an income statement
Source:
Date of access:
10/6/2017

- capital maintenance approach means that net income
occurs only after the capital used from the beginning
of the period is maintained.
- net income is the amount an entity can distribute to

its owners and be as “well-off ” at the end of the year
as at the beginning
Source:
Date of access:
10/6/2017

- the Conceptual Framework considers two concepts
of capital maintenance or “well-offness”, namely:
• Financial capital
• Physical capital
Source:
Date of access:
10/6/2017

Financial capital
• absolute monetary amount of the net assets
contributed by shareholders
• amount of the increase in net assets resulting

from earnings retained by the entity
• is based on historical cost
Source:
Date of access:
10/6/2017

Physical capital
• quantitative measure of the physical productive
capacity to produce goods and services
• requires that productive assets shall be

measured at current cost rather than physical
cost
Source:
Date of access:
10/6/2017
In summary:
Basic assumptions underlying the financial accounting

structures are:
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity Source:
Date of access:
10/6/2017

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Week 001

Financial Statements and

• Identify the four basic underlying assumptions of

• Identify the four measurement bases or financial

The format of the photo should be

At the bottom of the photo, indicate

1.2. Underlying assumptions

1.3. Measurement bases

1.4. Capital and capital maintenance concepts

Cost Constraint of Useful Financial Reporting

- “the benefit derived from the information should

• a company keeps its activity separate and distinct

• applies in most business situations except where

• relevant, simple, universally available,

• implies that a company can divide its economic

• time periods vary, but the most common are

• most commonly used measurement base

• It is also known as “past purchase exchange

• also known as “current purchase exchange

• also known as “current sale exchange price” or

• also known as “future exchange price”

Capital and Capital Maintenance Concepts

- the transaction approach is the traditional

Capital and Capital Maintenance Concepts

- net income is the amount an entity can distribute to

Capital and Capital Maintenance Concepts

Capital and Capital Maintenance Concepts

• amount of the increase in net assets resulting

• is based on historical cost

Capital and Capital Maintenance Concepts

• requires that productive assets shall be

Basic assumptions underlying the financial accounting

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