Chapter #2

The Conceptual Framework for Financial Reporting

TRUE OR FALSE

1. Users of financial statements are assumed to need no knowledge of business and financial accounting
matters to understand information contained in financial statements. False
2. Relevance and faithful representation are the two primary qualities that make accounting
information useful for decision making. True
3. Verifiability and predictive value are two ingredients of faithful representation. False
4. Comprehensive income includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. True
5. Revenues are realizable when assets received or held are readily convertible into cash or claims to
cash. True
6. The idea of consistency means that companies cannot switch from one accounting method to
another. False
7. A soundly developed conceptual framework of concepts and objectives should allow new and
emerging practical problems to be more quickly solved. True
8. The underlying theme of the conceptual framework is decision usefulness. True
9. Neutrality means that information cannot favor one set of interested parties over another. True
10. In order to justify requiring a particular measurement or disclosure, the benefits to be derived from
it must equal the costs associated with it. False
11. Timeliness and neutrality are two ingredients of relevance. False
12. A decrease in net assets arising from peripheral or incidental transactions is called a loss. True
13. Revenue generally should be recognized at the end of production. False
14. An expenditure should be recorded as an asset rather than an expenses when the amount is material.
False
15. The Conceptual Framework should be a basis for standard-setting. True
16. The historical cost principle would be of limited usefulness if not for the going concern assumption.
True
17. The Conceptual Framework should be based on fundamental truths that are derived from the laws of
nature. True
18. Prudence or conservatism means when in doubt, choose the solution that will be least likely to
overstate liabilities or expenses. False
19. The expense recognition principle states that debits must equal credits in each transaction. False
20. When a company issues its annual financial reports within one month of the end of the year depicts
the characteristics of timeliness. True

MULTIPLE CHOICE – THEORIES

1. Which of the following is not a chapter in the IASB Conceptual Framework?

A. The objectives of financial statements
B. The elements of financial statements
C. Concepts of income and expenditure
D. Concepts of capital and capital maintenance

2. Which of the following is the first steps within hierarchy of guidance to which management refers,
and whose applicability at considers, when selecting accounting policies?
A. Consider the applicability of the definitions, recognition criteria, and measurement concepts in
the Conceptual Framework.
B. Apply the requirements in the PRFS dealing with similar and related issues.
C. Consider the most recent pronouncements of other standard-setting bodies to the extent they do
not conflict with PFRS or the Conceptual Framework.
D. Apply a standard from PFRS if it specifically relates to the transaction, event, or condition.

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3. The FRCS recognizes that in a limited number of cases there may be a conflict between the
Conceptual Framework and a Philippine Financial Reporting Standards. In those cases, where there
is a conflict,
A. the provisions of standards issued by IASB will prevail.
B. the professional judgement of the accountant should prevail and this may necessitate disclosure
in the notes.
C. the requirements of the Conceptual Framework prevail over those of the Philippine Financial
Reporting Standard.
D. the requirements of the Philippine Financial Reporting Standard prevail over those of the
Conceptual Framework.

4. Which if the following statements is false?

A. Nothing in the Conceptual Framework overrides any Standard or any requirement in a Standard.
B. To meet the objective of the genera-purpose financial reporting, the Board may sometimes
specify requirements that depart from aspects of the Conceptual Framework.
C. Conceptual Framework for Financial Reporting was issued by the International Accounting
Standards Board in September 2010. It was revised in March 2018.
D. Revisions of the Conceptual Framework will automatically lead to changes to the Standards.

5. These are financial reports intended to meet the information needs of users who are unable to
require the preparation of financial reports tailored to meet their specific information needs.
A. Feasibility reports
B. General purpose financial reports
C. Special purpose financial reports
D. Prospectus

6. The primary users to whom general purpose of financial reports are directed.
I. Existing and potential investors
II. Rating agencies
III. Lenders and other creditors
IV. Government
V. Employees

A. I only
B. I and II
C. I, II, III, IV, V
D. I and III

7. Financial statements are prepared and presented for external users by many entities around the
world. Although such financial statements may appear similar from country to country, there are
differences which have probably been caused by a variety of social, economic, and legal
circumstances and by different countries having in mind the needs of different users of financial
statements when setting national requirements. These different circumstances have led/resulted to
all of the following except
A. differences in the scope of the financial statements and the disclosures made in them.
B. different audit opinions resulting to various losses, litigations, and differences in audit standards.
C. use of different criteria for the recognition of items in the financial statements and in a
preference for different bases of measurement.
D. use of a variety of definitions of the elements of financial statements; that is, for example, assets,
liabilities, equity, income, and expenses.

8. How does the conceptual framework describe the qualitative characteristics of financial statements?
A. Non-qualitative aspects of financial position and financial performance

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 B. Measure the extent to which an entity has complied with all relevant standards and
interpretations
C. Broad classes of financial effects of transactions and other events
D. Attributes that make the information provided in financial statements useful to user

9. Which of the following characteristics replaces the “reliability” characteristic under the old
Conceptual Framework?
A. Faithful representation
B. Prudence
C. Substance over form
D. Verifiability

10. If accounting information has confirmatory value, it

A. is prepared on an annual basis.
B. is neutral in its representations.
C. has been verified by external audit.
D. confirms or correct prior expectations.

11. To be a perfectly faithful representation, a depiction would have three characteristics. Which of the
following is not included?
A. No errors or omissions in the description of the phenomenon or transactions.
B. The information contained in the financial statements must be free from bias.
C. Relevant information should be presented in a way that facilitates understanding and avoids
erroneous implication.
D. When the information can help users increase the likelihood of correctly depicting or forecasting
outcome of events.

12. The qualitative objective of financial accounting that is directed towards meeting the common needs
of users and is independent of presumptions about particular needs and desires of specific uses of
the information is known as
A. comparability.
B. neutrality.
C. relevance.
D. verifiability.

13. How does the conceptual framework describe the enhancing qualitative characteristics of financial
statements (Choose the incorrect statement)?
A. Serves as threshold in determining materiality.
B. Primarily relate to the presentation and form of financial information.
C. Enhances the usefulness of information that both is relevant and provides a faithful
representation of what it purports to represent.
D. All statements relate to the enhancing qualitative characteristics.

14. The enhancing qualitative characteristics of financial reporting are

A. cost-benefit and materiality.
B. relevance, reliability, and faithful representation.
C. completeness, neutrality, and freedom from error.
D. comparability, verifiability, timeliness, and understandability.

15. Which of the following statements is not a feature of financial information’s “comparability”
characteristics?
A. A comparison requires at least two items.
B. Consistency, although related to comparability, is not the same.
C. Comparability is uniformity.
D. Comparability is the goal; consistency helps to achieve that goal.

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16. Which among the following is an indirect user of financial accounting information?
A. A stockholder of the corporation
B. A potential supplier of the enterprise
C. A bank which intends to grant loan to the enterprise
D. The trade association to which the enterprise belongs as a member

17. Which of the following is most likely to prepare the most accurate financial forecast for a corporate
enterprise based on empirical evidence?
A. Financial analysts
B. Corporate management
C. Independent certified public accountants
D. Investors using statistical models to generate forecasts

18. The providers of risk capital and their advisers

A. are interested in information about the stability and profitability of the employers.
B. are interested in information that enables them to determine whether their moans and the
interest attaching to them will be aid when due.
C. are concerned with the risk inherent in and return provided by their investment and need
information to help determine whether they should buy or sell
D. have an interest in information about the continuance of an enterprise especially when they
have a long-term involvement with or are dependent on the enterprise.

19. Which statement is incorrect concerning the users and their information needs?
A. Government and their agencies are interested in the allocation of resources and therefore the
activities of the enterprise.
B. Employees and their representative groups are interested in information about the stability and
profitability of the enterprise.
C. Enterprises affect members of the public in a variety of ways, including the number of people
they employ and their patronage of local suppliers.
D. Suppliers and trade creditors have an interest in information about the continuance of an
enterprise, especially when they have a long-term involvement with or are dependent on the
enterprise.

20. Financial information exhibits the characteristic of consistency when

A. gains and losses are shown separately on the income statement.
B. accounting entities give similar events the same accounting treatment each period.
C. expenditures are reported as expenses and netted against revenue in the period in which they
are paid.
D. accounting procedures are adopted which smooth net income and make results consistent
between years.

21. Verifiability implies

A. consensus
B. legal evidence
C. legal verdict
D. logic

22. An essential quality of the information provided in financial statements is that it is readily
understandable by users. For this purpose, users are
I. Assume to have a reasonable knowledge of business and economic activities and accounting
and a willingness to study the information with reasonable diligence.
II. Informed of the accounting policies employed and changes in those policies and the effects of
such changes.

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 A. I
B. II
C. Both I and II
D. Neither I nor II

23. Objectivity is assumed to be achieved when an accounting transaction

A. allocates revenue or expenses in a rational and systematic manner.
B. is recorded in a fixed amount of pesos.
C. involves an arms’ length transaction between two independent parties.
D. involves the payment or receipt of cash.

24. Overstating an expense in the current period is acceptable

A. because it is conservative.
B. as long as it is consistently done.
C. only when the amount involved is immaterial.
D. because it relieves the future period of additional burden.

25. The accountant of MAU Enterprise is considering a number of transactions and events and how they
should be treated in accordance with the concepts and qualitative characteristics of financial
information as set out in the Conceptual Framework. During the year ended 31 March 20x1, MAU
experienced the following transactions or events.
I. Sold an asset to a finance company and leased it back for the remainder of its useful life. The
accountant has decided that this should be treated as a secured loan.
II. The company's statement of profit or loss prepared using historical cost show the loss from
operating its shops, but the company is aware that the increase in the value of its properties
during the period far outweighed the operating loss.
III. Inventory has up to this year been valued using FIFO but the accountant is considering
changing to the weighted average method for the year to 31 March 20x1.

The accountant is aware that some members of the Board of MAU have little understanding of
accounting and he is worried about his presentation of the financial statements at the Board meeting.

How should he deal with this situation?

A. He should deliver his presentation just to those who are financially qualified.
B. He should classify, characterize, and present the information clearly and precisely.
C. He should open his presentation with the evidence that some of them may not understand all of
it.
D. In doing his presentation he should omit any complex issues, so that everybody can understand
what he is saying.

26. Which concept or qualitative characteristic has influenced the decision in (I) above?
A. Accruals
B. Comparability
C. Faithful representation
D. Verifiability

27. In looking at issue (II) above, the accountant decides that the property should be revalued. Which
concept or qualitative characteristic has been applied in making this decision?
A. Going concern
B. Materiality
C. Relevance
D. Timeliness

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28. Because of loss on operating the shops, the accountant Is considering the issue of going concern. If it
were decided that MAU was no longer a going concern at 31 March 20x1, which of the following
would apply in accordance with the Conceptual Framework?
A. All the assets should be liquidated.
B. Financial statements do not need to be prepared.
C. The financial statements should be prepared on a different basis.
D. The financial statements should be prepared as normal and the going concern status disclosed in
the notes.

29. Which of the following does not describe a reporting entity?

A. A reporting entity is not necessarily a legal entity.
B. An entity that is required, or chooses, to prepare financial statements.
C. A reporting entity can be a single entity or a portion of an entity or can comprise more than one
entity.
D. All of these is statements describe a reporting entity.

30. When should an item that meets the definition of an element be recognized, according to the
Conceptual Framework?
A. When the element has a cost or value that can be measured with reliability.
B. When the entity obtains control of the rights or obligations associated with the item.
C. When it is probable that any future economic benefit associated with the item will flow to or
from the entity.
D. When it is probable that any future economic benefit associated with the item will flow to or
from the entity and the items has a cost or value that can be measured with reliability.

31. Which of the following relate to financial position in a set of financial statements?
A. Income and expenses
B. Assets, liability, and equity
C. Income, expenses, and liabilities
D. Assets, liabilities, income, and expenses

32. Which of the following relate to financial performance in a set of financial statements?
A. Income and expenses
B. Assets, liability, and equity
C. Income, expenses, and liabilities
D. Assets, liabilities, income, and expenses

33. A right that has the potential to produce economic benefits.

A. Economic entity
B. Economic resource
C. Economic right
D. Legal right

34. An economic resource could produce economic benefits for an entity by entitling or enabling it to do
one or more of the following, except
A. extinguish liabilities by transferring the economic resource
B. receive contractual cash flow or another economic resource
C. exchange economic resources with another party on unfavorable terms
D. receive cash or other economic resources by selling the economic resource

35. It is a duty or responsibility that an entity has no practical ability to avoid.

A. Control
B. Economic condition
C. Obligation
D. Pledge

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36. Which of the following rights that do not correspond to an obligation of another party?
A. Rights to receive cash
B. Rights to use intellectual property
C. Rights to receive goods or services
D. Rights to exchange economic resources with another party on favorable terms

37. It is the right or the group of rights, the obligation or the group of obligations, or the group of rights
and obligations, to which recognition criteria and measurement concepts are applied.
A. Asset
B. Bank account
C. Chart of account
D. Unit of account

38. The revised definition of asset excludes which of the following?

A. Controlled by the entity
B. As a result of past events
C. A present economic resource
D. From which future economic benefits are expected to flow to the entity.

39. The three aspects in the revised definition of asset, excludes which of the following?
A. Right
B. Control
C. Ownership
D. Potential to produce economic benefits

40. Which of the following represents a liability?

A. The obligation to pay for goods that an entity expects to order from suppliers next year.
B. The obligation to provide goods that customers have ordered and paid for during the current
year.
C. The obligation to pay interest on a five-year note payable that was issued the last day of the
current year.
D. The obligation to distribute an entity's own shares next year as a result of a stock dividend
declared near the end of the current year.

41. The following statements relate to liabilities. Which of the following is (are) false?
I. Liabilities may be measured by estimates of a definite character when the amount of the
liability cannot be measured precisely.
II. All monetary liabilities should be stated in the balance sheet at their present (discounted)
values.
III. Under current GAAP, there are instances where an increase in liability is matched with an
increase in revenue
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

42. Which one of the following would be classified as a liability?

A. PDAC has estimated the tax charged on its profits for the year just ended as P165,000.
B. SBCI is planning to invest in new machinery and has been quoted a price of P570,000.
C. BRCI’s business manufactures a product under license. In 12 months’ time the license expires
and BRCI will have to pay P50,000 for it to be renewed.
D. PGMI purchase an investment 9 months ago for P120,000. The market for these investments has
now fallen and PGMI’s investment is valued at P90,000.

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43. Income refers to __________ in assets, or __________ in liabilities, that result in __________ in equity, other
than those relating to distributions to holders of equity claims.
A. increases, increases, increases
B. increases, increases, decreases
C. increases, decreases, increases
D. increases, decreases, decreases

44. Expenses refers to __________ in assets, or __________ in liabilities, that result in __________ in equity, other
than those relating to distributions to holders of equity claims.
A. increases, increases, decreases
B. decreases, increases, decreases
C. decreases, decreases, increases
D. decreases, decreases, decreases

45. Which of the following statements conforms to the realization concept?

A. Cash was collected on accounts receivable.
B. Depreciated equipment was sold in exchange for a note receivable.
C. Product unit costs are assigned to cost of goods sold when the units were sold.
D. Equipment depreciation was assigned to a production department and then to product unit cost.

46. This pertains to the removal of all or part of a recognized asset or liability from the an entity's
statement of financial position.
A. Derecognition
B. Realization
C. Recognition
D. Write-off

47. The two measurement bases mentioned in the Conceptual Framework are
A. historical cost and fair value.
B. current value and historical cost.
C. replacement cost and current value.
D. historical cost and replacement cost.

48. Historical cost means that assets are recorded at the

A. discounted value of the future net cash flow from the use of an asset.
B. amount of cash or cash equivalents that would have to be paid if the same asset was acquired
currently.
C. amount of cash or cash equivalents that could currently be obtained from the sale of an asset in
an orderly disposal.
D. amount of cash or cash equivalents paid, or the fair value of the consideration given to acquire
them at the time of acquisition.

49. A Muntinlupa City business P25,000 cash for equipment used in the business. At the time of the
purchase, the equipment had a list price of P30,000. When the balance sheet was prepared, the value
of the equipment later rose to P32,000. What is the relevant measure of the value of the equipment?
A. Historical cost, P25,000
B. Fair market cost, P30,000
C. Current market cost, P32,000
D. P25,000 on the day of purchase, P32,000 on balance sheet date

50. The net worth method, otherwise known as the capital maintenance approach, is a concept in which
A. profit equals to change in the market value of the net assets during a period.
B. market values adjusted for the effects of inflation or deflation are used to measure profit.
C. the financial statement effects of business events classified as revenues, gains, expenses, and
losses, which are used to measure and define profit.

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 D. profit is measured as the amount that an enterprise could distribute to its owners and be as well
off at the end of the period as it was at the beginning of the period.

51. Which of the measurement basis is adopted in the physical capital maintenance concept?
A. Current cost
B. Fair value
C. Historical cost
D. Present value

52. Under a financial capital maintenance concept, a profit is earned if

A. the financial amount of the net assets at the beginning exceeds the financial amount of the assets
at the end.
B. the financial amount of the net assets at the end exceeds the financial amount of the net assets at
the beginning.
C. the financial amount of net assets at the beginning exceeds the financial amount of net assets at
the end after excluding any distribution and contribution from owners.
D. the financial amount of the net assets at the end exceeds the financial amount of the net assets of
the beginning after excluding any distribution and contribution from owners.

53. This concept should be used if the main concern of users is with the operating capability of the entity.
A. Financial capital concept
B. Invested capital concept
C. Operating capital concept
D. Physical capital concept

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