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FINANCIAL ACCOUNTING AND REPORTING

CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1. The conceptual framework is intended to establish

a. The hierarchy of sources of GAAP.
b. GAAP in financial reporting by business entities
c. The meaning of present fairly in accordance with GAAP.
d. The objectives and concepts for use in developing standards of financial accounting and
reporting.
2. Philippine Financial Reporting Standards include
a. Philippine Financial Reporting Standards corresponding to IFRS issued by IASB.
b. Philippine Accounting Standards corresponding to IAS issued by IASC.
c. Philippine Interpretations corresponding to IFRIC and SIC Interpretations, and
Interpretations developed by PIC.
d. All of these
3. Which statement is true concerning the Conceptual Framework for Financial Reporting?
a. The Conceptual Framework is a reporting standard and therefore defines standard for
any particular measurement or disclosure issue.
b. The Conceptual Framework is concerned with general purpose financial statements
including consolidated financial statements.
c. In cases of conflict, the requirements of the Conceptual Framework prevail over those of
the relevant PFRS.
d. All of these statements are true.
4. Which is not a basic purpose of the Conceptual Framework?
a. To assist FRSC in developing accounting standards that represent GAAP in the Philippines.
b. To assist FRSC in reviewing and adopting existing international accounting standards.
c. To promulgate rules and regulations affecting the practice of the accountancy profession in
the Philippines.
d. To assist auditors in forming an opinion as to whether financial statements conform with
accounting standards.
5. The Conceptual Framework for Financial Reporting deals with all of the following, except
a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. Definition, recognition and measurement of elements of financial statements
d. Generally accepted accounting principles
6. A soundly developed conceptual framework of accounting should
a. Increase financial statement users understanding and confidence in financial reporting.
b. Enhance comparability of financial statements of different entities
c. Allow new and emerging practical problems to be solved more quickly
d. All of these
7. What provides "the why"-the goal and purpose of accounting?
a. Measurement and recognition concepts such as assumptions, principles and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objective of financial reporting
8. A conceptual framework of accounting should
a. Lead to uniformity of financial statements among companies within the same industry.
b. Eliminate alternative accounting principles and methods.
c. Guide the FRSC in developing generally accepted auditing standards.
d. Define the basic objectives, terms, and concepts of accounting.
9. The information provided by financial reporting pertains to
a. Individual business enterprises, rather than to industries or an economy as a whole or to
members of society as consumers.
b. Business industries, rather than to individual enterprises or an economy as a whole or to
members of society as consumers.
c. Individual business enterprises, industries, and an economy as a whole, rather than to
members of society as consumers.
d. An economy as a whole and to members of society as consumers, rather than to individual
enterprises or industries.

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10. Which of the following is not normally an objective of financial reporting?

a. To provide information about assets, claims against those assets and changes in them.
b. To provide information that is useful in assessing an entitys sources and uses of cash.
c. To provide information that is useful in lending and investing decisions.
d. To provide information about an entitys liquidation value.

11. Information about the performance of an enterprise is required in order to assess potential
changes in the economic resources that it is likely to control in the future. This information is
primarily pictured in the
a. Cash flow statement
b. Statement of changes in equity
c. Statement of financial position
d. Income statement

12. Which of the following is not an underlying assumption of financial statements?

a. Going concern
b. Accounting entity
c. Time period
d. Accrual

13. The going concern assumption means that

a. Where parent and subsidiary relationship exists, consolidated statements for affiliates are
prepared because the parent and the subsidiary are a single economic entity.
b. The accounting function is to account for nominal pesos and not for constant pesos
changes in the purchasing power.
c. The enterprise will continue in operation for the foreseeable future and the enterprise has
neither the intention nor the need to liquidate or curtail materiality the scale of its
operations.
d. The indefinite life of an enterprise is subdivided into accounting periods which are usually of
equal length for the purpose or preparing financial reports on financial position,
performance and cash flows.
14. Which underlying concept serves as the basis for preparing financial statements at regular
intervals?
a. Time period c. Accounting entity
b. Going concern d. Stable monetary unit
15. During the lifetime of an entity, accountants produce financial statements at arbitrary or artificial
points in time in accordance with which basic accounting concept?
a. Cost and benefit constraint
b. Periodicity assumption
c. Materiality
d. Expense recognition principle

16. Under current IFRS, inflation is ignored in accounting due to

a. Economic entity assumption
b. Going concern assumption
c. Monetary unit assumption
d. Periodicity assumption

17. The economic entity assumption

a. Is inapplicable to unincorporated businesses
b. Recognizes the legal aspects of business organizations
c. Requires periodic income measurement
d. Is applicable to all forms of business organizations

18. Consolidated financial statements are prepared when a parent-subsidiary relationship exists.
a. Economic entity assumption
b. Relevance characteristic
c. Comparability characteristic
d. Neutrality characteristic

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19. What are qualitative characteristics of financial statements?
a. Qualitative characteristics are the attributes that make the information provided in the
financial statements useful to users.
b. Qualitative characteristics are broad classes of the financial effects of transactions.
c. Qualitative characteristics are nonqualitative aspects of an entitys financial statements.
d. Qualitative characteristics measure compliance with all relevant PFRS.

20. In the Conceptual Framework, qualitative characteristics

a. Are considered either fundamental or enhancing.
b. Contribute to the decision-usefulness of financial reporting information.
c. Distinguish better information from inferior information for decision-making purposes.
d. All of the choices are correct.

21. The fundamental qualitative characteristics are

a. Relevance and reliability
b. Relevance and materiality
c. Relevance, faithful representation and materiality
d. Relevance and faithful representation

22. Accounting information is considered relevant when it

a. Can be depended on to represent the economic conditions and events that it is intended to
represent
b. Is capable of making a difference in a decision
c. Is understandable by reasonably informed users of accounting information
d. Is verifiable and neutral

23. Which statement is incorrect concerning the qualitative characteristic of relevance?

a. The relevance of information is affected by its nature and materiality.
b. To be useful, information must be relevant to the decision-making needs of users.
c. Information about financial position and past performance is frequently used as basis for
predicting future financial position and performance and other matters such as dividend and
wage payments and ability of the entity to meet it financial commitments as they fall due.
d. The predictive and confirmatory roles of information are not interrelated.

24. Which of the following is an ingredient of relevance?

a. Predictive value
b. Confirmatory value
c. Neutrality
d. Predictive value and confirmatory value

25. Which of the following statements about materiality is not correct?

a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if the inclusion or omission would influence or change the judgment of a
reasonable person.
d. All of these are correct statements about materiality.

26. What is the quality of information that gives assurance that it is reasonably free of error and
bias ?
a. Relevance
b. Faithful representation
c. Verifiability
d. Neutrality

27. To be a faithful representation, information must be all of the following, except

a. Complete
b. Free from error
c. Confirmatory
d. Neutral

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28. Which is incorrect concerning the quality or relevance?
a. The relevance of information is not affected by its nature and materiality.
b. The information must be relevant to the decision-making needs of the users in order to be
useful.
c. The predictive and confirmatory roles of information are interrelated.
d. Relevance is a primary quality of financial information because it relates to the content of
the information.

29. Which of the following terms best describes information in financial statements that is neutral?
a. Understandable
b. Reliable
c. Relevant
d. Unbiased

30. This means that the financial reports should include all information necessary for a user to
understand the phenomenon being depicted including all necessary description and
explanations.
a. Completeness
b. Neutrality
c. Free from error
d. Substance over form
31. It is the inclusion of a degree of caution in the exercise of judgment needed in making
estimates required under conditions of uncertainty such as assets and income are not
overstated or liabilities and expenses are not understated.
a. Prudence (conservatism) c. Materiality
b. Judgment d. Neutrality
32. If information is to represent faithfully the transactions and other events that it purports to
represent, it is necessary that they are accounted for and presented in accordance with their
substance and economic reality and not merely their legal form.
a. Faithful representation c. Completeness
b. Neutrality d. Substance over form
33. Enhancing qualities include all of the following, except
a. Comparability
b. Neutrality
c. Understandability
d. Verifiability
34. What is meant by comparability when discussing financial accounting information?
a. Information has predictive or feedback value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across entities.
d. Information is timely.
35. What is meant by consistency when discussing financial accounting information?
a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.

36. An enhancing quality described in the Conceptual Framework is that

a. Information must be decision-useful to all potential users of financial reporting.
b. General-purpose financial reporting is the primary source of information for users of
financial reporting.
c. Users need reasonable knowledge of business and financial accounting matters to
understand the information contained in financial statements.
d. All of the choices are correct.

37. This enhancing qualitative characteristic is demonstrated when a high degree of consensus
can be secured among independent measurers using the same measurement method.
a. Comparability
b. Understandability
c. Verifiability
d. Timeliness

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38. Proponents of historical cost ordinarily maintain that in comparison with all other valuation
alternatives for financial reporting, statements prepared using historical cost are more
a. Verifiable
b. Relevant
c. Indicative of the entity's purchasing power
d. Conservative

39. An entity issuing the annual financial reports within one month after the end of the year is an
example of which enhancing quality of accounting information?
a. Neutrality
b. Timeliness
c. Predictive value
d. Representational faithfulness

40. The Conceptual Framework includes which of the following constraints?

a. Prudence
b. Conservatism
c. Cost
d. All of the choices are constraints in the conceptual framework

41. Which of the following best describes the cost-benefit constraint?

a. The benefits of the information must be greater than the costs of providing it.
b. Financial information should be free from cost to users of the information.
c. Costs of providing financial information are not always evident or measurable but must be
considered.
d. All of the choices are correct.
42. Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed as the
a. Elements of financial statements c. Accounting constraints
b. Concepts of capital and capital maintenance d. Features of accounting

43. The elements directly related to the measurement of performance are

a. Income and expenses c. Assets and liabilities
b. Assets, liabilities and equity d. Income, expenses and equity

44. A liability is
a. A resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise.
b. A present obligation of the enterprise arising from past events the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic
benefits.
c. The residual interest in the assets of the enterprise after deducting all of its liabilities.
d. Equivalent to all financial resources of the enterprise.

45. Which is incorrect concerning the recognition of a liability?

a. Obligations may be legally enforceable as a consequence of a binding contract or statutory
requirement.
b. If an enterprise decides as a matter of policy to rectify faults in its products even when
these become apparent after the warranty period has expired, the amounts that are
expected to be expended in respect of goods sold are liabilities.
c. An obligation normally arises only when the asset is delivered or the enterprise enters
enters into an irrevocable agreement to acquire the asset.
d. A decision by the management of an enterprise to acquire assets in the future, in itself,
gives rise to a present obligation.

46. Which is not an essential characteristic of an asset?

a. The asset is controlled by the enterprise
b. The asset is the result of a past transaction or event
c. The asset provides future cash flows to the entity.
d. The cost of the asset can be measured reliably.

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47. It is the process of incorporating in the financial statements an item that meets the definition of
an element of financial statements.
a. Recognition c. Realization
b. Allocation d. Summarization

48. The term revenue recognition conventionally refers to

a. The process of identifying the transactions to be recorded as revenue in an accounting
period
b. The process of measuring and relating revenue and expenses
c. The earning process which gives rise to revenue realization
d. The process of identifying transactions that result in an inflow of assets from customers

49. It is the process of determining the monetary amounts at which the elements are to be
recognized and carried in the balance sheet and income statement.
a. Measurement c. Reporting
b. Recognition d. Interpreting

50. Historical cost is the

a. Amount of cash or cash equivalent paid or the fair value of the consideration given at the
time the asset was acquired.
b. Amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquired currently.
c. Amount of cash or cash equivalent that could currently be obtained by selling the asset in
an orderly disposal.
d. Discounted value of the future net cash inflows that an item is expected to generate in the
normal course of business.

51. Technically, this arises in the course of the ordinary regular activities of an enterprise and is
referred to by a variety of different names including sales, interest, dividends, royalties and
rent.
a. Income c. Profit
b. Gain d. Revenue

52. Which statement is incorrect concerning the elements directly related to the measurement of
performance?
a. Gains represent other items that meet the definition of income and do not arise in the
course of ordinary regular activities.
b. Losses represent other items that meet the definition of expenses and do not arise in the
course of ordinary regular activities.
c. The definition of expenses encompasses losses as well as those expenses that arise in the
course of ordinary regular activities.
d. The definition of revenue encompasses both income and gains.

53. The process of matching of costs with revenue involves the simultaneous or combined
recognition of revenue and expenses that result directly and jointly from the same transactions
or other events. This approach is exemplified by which of the following?
a. Expenses are recognized in the income statement on the basis of direct association
between the costs incurred and the earning of specific items of income.
b. When economic benefits are expected to arise over several accounting periods and the
association with income can only be broadly or indirectly determined, expenses are
recognized on the basis of systematic and rational allocation.
c. An expense is recognized immediately when an expenditure produces no future economic
benefits or when future economic benefits do not qualify or cease to qualify for recognition
as an asset.
d. An expense is recognized immediately when a liability is incurred without recognition of an
asset as when a liability under a product warranty arises

54. An expense is recognized immediately in the income statement

I. When the expenditure produces no future economic benefits.
II. When the cost incurred ceases to qualify for recognition as an asset in the balance sheet.
a. I only c. Both I and II
b. II only d. Neither I nor II

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55. Which of the following is not a theoretical basis for the allocation of expense?
a. Immediate recognition c. Cause and effect association
b. Systematic and rational allocation d. Profit maximization

56. What is another term for equity?

a. Net assets c. Revenue
b. Net losses d. Liability

57. Which statement is correct concerning the two concepts of capital?

I. Under a financial capital concept, such as invested money or invested purchasing power,
capital is synonymous with the net assets or equity of the entity.
II. Under a physical capital concept, such as operating capability, capital is regarded as the
productive capacity of the entity.
a. Both I and II c. I only
b. Neither I nor II d. II only

58. Under the financial capital maintenance concept, a profit is earned when
I. The financial amount of the net assets at the end of the period exceeds the financial amount
of the net asset at the beginning of the period, after excluding any distributions to and
contributions from owners during the period.
II. The physical productive capacity of the entity (funds needed to achieve that capacity) at the
end of the period exceeds the physical productive capacity at the beginning of the period,
after excluding any distributions to and contributions from owners during the period.
a. Both I and II c. I only
b. Neither I nor II d. II only

59. Which of the following accounting theory justifies the use of historical cost method in the
preparation of financial statements?
a. Conservatism c. Relevance
b. Objectivity d. Comparability

60. Which statement is incorrect concerning the concept of capital?

a. The selection of the appropriate concept of capital should be based on the needs of the
users of the financial statements.
b. A financial capital concept is adopted if the users are primarily concerned with the
maintenance of nominal invested capital or purchasing power of invested capital.
c. A physical capital concept is adopted if the main concern of the users is the operating
capability of the entity.
d. A physical capital concept is adopted by most entities in preparing their financial
statements.

- END-

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