JPIA-HAU
 Overall objective: to provide financial
FINANCIAL
ACCOUNTING AND
REPORTING 1
Conceptual Framework; Cash and Cash
Equivalents
Overview of the Handouts:
1. Conceptual Framework
2. Introduction to Financial Accounting and
Reporting
3. Cash and Cash Equivalents
1 CONCEPTUAL FRAMEWORK
- Official Name: “Conceptual Framework for
Accounting/Framework for Preparation &
Presentation of FS”
- Sets out the concepts used in the
preparation and presentation of financial
statements for external users
- Is not a PFRS (it does not define standard
for any particular measurement or
disclosure issue: nothing in the CF
overrides any specific PFRS; in the case of
conflict, the requirements of PFRS prevail
over the Conceptual Framework)
- The purposes of the Conceptual
Framework are:
a. Assist FRSC in developing PFRS and
its review and adoption of existing
International Financial Reporting
Standards (IFRS)
b. Assist preparers of FS in applying in
applying PFRS and in dealing with
topics that have yet to form the subject
of PFRS
c. Assist auditors in forming an opinion on
whether FS comply with PFRS
d. Assist users in interpreting information
contained in the FS
e. Provide interested parties with
information about formulation of PFRS
by FRSC
1.1 Qualitative Characteristics of Useful
Financial Information
1. Relevance (FUNDAMENTAL)
a. Predictive Value
b. Confirmatory or feedback value
2. Faithful Representation (FUNDAMENTAL)
a. Freedom from Error
b. Neutrality
c. Completeness
3. Comparability (ENHANCING)
4. Understandability (ENHANCING)
5. Timeliness (ENHANCING)
6. Verifiability (ENHANCING
1.2 Objective of Financial Reporting
Financial Accounting 1 Handouts #1 – Conceptual Framework; CCE
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
 Specific objective: to provide
information about entity resources,
claims, and changes in resources
prospects of future net cash flows to the
entity
1.3 Statement of Financial Position
- Or Balance Sheet
- a formal statement showing the resources
(assets), obligations (liabilities), and equity
at a given point in time
1.4 Elements of Statement of Financial
Position (Balance Sheet)
Assets
- are resources controlled by the entity as a
result of past events and from which future
economic benefits are expected to flow to
the entity
Liabilities
- are the present obligations of the entity
arising from past events, the settlement of
which are expected to result in an outflow
from the entity of resources embodying
economic benefits
Equity
- is the owners’ residual interest in the
assets of an entity that remains after
deducting its liabilities
1.5 Recognition of Assets and Liabilities:
Assets are recognized when
- it is probable that future economic benefits
will flow
- cost or value can be measured reliably
Liabilities are recognized when:
- probable that an outflow of resources
embodying economic benefits will result
from the settlement
- amount can be measure reliably
1.6 Current and Non-current classification:
Current asset – when it satisfies any of the ff:
1. expected to be realized in, or is held for sale
or consumption in the normal course of the
enterprise’s operating cycle
2. held for trading
3. expected to be realized within 12 months
after balance sheet date
4. cash or cash equivalent, which is not
restricted in its use
*All other assets should be classified as non-
current asset

*Current assets are usually listed in order of
liquidity
Current liabilities – when it satisfies any of the ff:
1. expected to be settled in the normal course
of the enterprise’s operating cycle
2. held for trading
3. due to be settled within 12 months after
balance sheet date
4. entity does not have an unconditional
right to defer settlement of the liability for
at 12 months after balance sheet date
*All other liabilities should be classified as non-
current liabilities
Shareholders’ Equity – residual interest of owners
in the net assets of a corporation measured by the
excess of assets over liabilities
2 CASH AND CASH EQUIVALENTS
2.1 Cash
Composition of Cash
- includes cash on hand as well as current
and other accounts maintained with banks
such as the ff:
a. Undeposited currency and coins
b. Petty cash – cash items kept on hand to
pay for minor expenditures
c. Demand deposits – amounts on deposit in
checking and savings accounts,
respectively
d. Undeposited negotiable checks – are
checks payable to the company or bearer
but not yet presented to the bank for
payment
e. Foreign currencies – converted to their pose
values
f. Bank drafts – commitments by banking
institutions to advance funds on demand by
the party to whom the draft was directed
g. Money orders – similar financial
instruments to bank drafts but are drawn
generally from authorized post offices or
other financial institutions
h. Other short-term funds for current
operations
***Bank overdraft is presented as an accounting
liability. However, a bank overdraft that is repayable
on demand that forms part of an entity’s cash
management should be included as a component
of cash and cash equivalent
2.2 Cash Equivalents
- Short-term highly liquid investments that are
readily convertible into cash and so near
their maturity that they present insignificant
risk of changes in value because of
changes in interest rates. Only highly liquid
investments that are acquired three months
before maturity can qualify as cash
equivalents such as the following:
Financial Accounting 1 Handouts #1 – Conceptual Framework; CCE
JPIA-HAU
a. Three-month commercial paper or
money market instrument
b. Three-month time deposit
c. Three-month treasury bills
2.3 Valuation of Cash and Cash
Equivalents in the statement of
financial position
a. Is generally valued at face amount
b. Cash in foreign currency is valued in
Philippine peso using the current exchange
rate as of the balance sheet date
c. Cash in bank or financial institutions having
financial difficulty or in bankruptcy should
bee shown at its estimated realizable or
recoverable value
2.4 Financial Statement Presentation
Shown as the first item among the current assets,
as one line item but details should be disclosed in
the notes to financial statements
2.5 Compensating Balance
- A set of amount of cash that a firm must
keep to its checking account or saving
account at all times as part of a loan
agreement
- The ff are the generally accepted
procedures to disclose compensating
balance:
1. Legally restricted compensating balance
a. If held as compensating balance
against short-term borrowing
arrangements, it should be stated
separately under current assets
b. If held against long-term borrowings,
it should be separately classified as
non-current asset either in the
Investments or Other Assets
c. But under no circumstances should
it be included in the caption “Cash
and Cash Equivalents”
2. Unrestricted – should be included as part
of cash items on deposit
3. In the absence of any information –
compensating balance is always considered
restricted