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CHAPTER 2

CONCEPTUAL FRAMEWORK FOR FINANCIAL


REPORTING
IFRS questions are avaia!e at t"e en# o$ t"is %"a&ter'
TRUE(FALSE)Con%e&tua
Ans*er No' +es%ri&tion
T 1. Nature of conceptual framework.
T 2. Conceptual framework definition.
F 3. Levels of conceptual framework.
T 4 International conceptual framework.
F 5. tatements of Financial !ccountin" Concepts.
T #. $%&ective of financial reportin".
F '. Financial statement users.
T (. )elevance and fait*ful representation.
T +. Consistenc,.
F 1-. )elevance.
F 11. Fait*ful representation.
F 12. .asic elements.
T 13. Compre*ensive income.
T 14. /oin" concern assumption.
F 15. 0conomic entit, assumption.
F 1#. 01pense reco"nition principle.
T 1'. )eco"ni2a%le revenues.
T 1(. upplementar, information.
F 1+. Cost %enefit trade3off.
F 2-. Conservatism.
MULTIPLE CHOICE)Con%e&tua
Ans*er No' +es%ri&tion
c 21. /!!4 defined.
d 22. 4urpose of conceptual framework.
c 23. Conceptual framework.
d 24. Conceptual framework purpose.
d

25. Conceptual framework %enefits.


d 2#. $%&ectives of financial reportin".
a 2'. 5ecision usefulness.
d 2(. /eneral purpose of financial reportin".
a 2+. 4rimar, o%&ective of financial reportin".
a
4
3-. 01ample of compara%ilit,.
a

31. 4rimar, 6ualit, of relevance.


% 32. C*aracteristic of accountin" information.
c 33. C*aracteristic of accountin" information.
c 34. 7eanin" of compara%ilit,.
a 35. 7eanin" of consistenc,.
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
MULTIPLE CHOICE)Con%e&tua 8cont.9
Ans*er No' +es%ri&tion
d 3#. In"redient of relevance.
c 3'. In"redient of relia%ilit,.
a 3(. Consistenc, c*aracteristic.
% 3+. 4rimar, 6ualit, of accountin" information.
d 4-. :ualit, of relevance.
a 41. :ualit, of relia%ilit,.
d 42. Consistenc, 6ualit,.
a 43. 5ecision3usefulness criterion.
c 44. 4rimar, 6ualities of accountin" information.
% 45. 5efinition of relevance.
% 4#. 5efinition of relia%ilit,.
d 4'. )elevance 6ualit,.
c 4(. 7aterialit, c*aracteristic.
d 4+. Completeness c*aracteristic.
% 5-. Neutralit, c*aracteristic.
d 51. Neutralit, c*aracteristic.
c 52. 5efinition of verifia%ilit,.
a 53. :ualit, of predictive value.
c 54. :ualit, of free from error.
d 55. Consistenc,.
% 5#. Consistenc, c*aracteristic.
% 5'. Compara%ilit, and consistenc,.
d 5(. Compara%ilit,.
d 5+. 0lements of financial statements.
c #-. 5istinction %etween revenues and "ains.
c #1. 5efinition of a loss.
d #2. 5efinition of compre*ensive income.
% #3. Components of compre*ensive income.
d
4
#4. Compre*ensive income.
%

#5. 0arnin"s vs. compre*ensive income.


a

##. )eportin" financial statement elements.


% #' .asic element of financial statements.
a #(. .asic element of financial statements.
d #+. .asic element of financial statements.
c '-. 5efinition of "ains.
d '1. ;istorical cost assumption.
c '2. 4eriodicit, assumption.
% '3 /oin" concern assumption.
% '4. 4eriodicit, assumption.
a

'5. 7onetar, unit assumption.


c

'#. 4eriodicit, assumption.


c ''. 7onetar, unit assumption.
d '(. 0conomic entit, assumption.
a '+. 0conomic entit, assumption.
% (-. 4eriodicit, assumption.
a (1. /oin" concern assumption.
d (2. /oin" concern assumption.
d (3. Implications of "oin" concern assumption.
a (4. ;istorical cost principle.
2 ( 2
Conceptual Framework <nderl,in" Financial !ccountin"
MULTIPLE CHOICE)Con%e&tua 8cont.9
Ans*er No' +es%ri&tion
d (5. ;istorical cost principle.
c (#. )evenue reco"nition principle.
d ('. )evenue reco"nition principle.
d ((. )evenue reco"nition principle.
d (+. 7easurement principle.
c +-. 01pense reco"nition principle.
% +1. 4roduct costs.
% +2. 01pense reco"nition principle.
% +3. 01pense reco"nition principle.
% +4. 01pense reco"nition.
c +5. Full3disclosure principle.
a +#. !r"ument a"ainst *istorical cost.
d +'. )eco"nition of revenue.
% +(. )evenue reco"nition principle.
c ++. 5efinition of performance o%li"ation.
a 1--. )e6uired components of financial statements.
d 1-1. )eco"nition of e1penses.
c 1-2. ;istorical cost principle.
a 1-3. 01pense reco"nition principle e1ample.
d 1-4. )ecordin" e1penditure as asset.
c 1-5. ;istorical cost principle violation.
a 1-#. Full disclosure principle violation.
d 1-'. Full disclosure principle.
c 1-(. ;istorical cost principle violation.
a 1-+. Industr, practice constraint.
c 11-. Costs of providin" financial information.
d 111. .enefits of providin" financial information.
c 112. <se of materialit,.
% 113. 5efinition of prudence=conservation.
a 114. 01ample of materialit, constraint.
d 115. Constraints to limit t*e cost of reportin".
a 11#. Cost3%enefit relations*ip.
c 11'. 7aterialit, c*aracteristic.
d 11(. 7aterialit,.
d 11+. 4ervasive constraints.
a 12-. 4rudence or conservatism.
% 121. Conceptual framework second level
a 122. Trade3offs %etween c*aracteristics of accountin" information.
c 123. Trade3offs %etween c*aracteristics of accountin" information.
c
4
124. 4rudence or conservatism.
2 ( 1
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
MULTIPLE CHOICE)CPA A#a&te#
Ans*er No' +es%ri&tion
a 125. :ualit, of predictive value.
% 12#. )elevance and fait*ful representation.
% 12'. Classification of "ains and losses.
% 12(. 0arnin"s concept.
a 12+. Components of compre*ensive income.
% 13-. Components of compre*ensive income.
d 131. Components of compre*ensive income.
d 132. Components of compre*ensive income.
a 133. 5efinition of reco"nition.
4
Note> t*ese 6uestions also appear in t*e 4ro%lem3olvin" urvival /uide.

Note> t*ese 6uestions also appear in t*e tud, /uide.


,RIEF E2ERCISES
Ite.+es%ri&tion
.023134 :ualitative c*aracteristics.
.023135 !ccountin" concepts?identification.
.02313# !ccountin" concepts?identification.
E2ERCISES
02313' !ccountin" concepts?matc*in".
02313( !ccountin" concepts?fill in t*e %lanks.
02313+ .asic assumptions.
02314- ;istorical cost principle.
023141 7atc*in" concept.
CHAPTER LEARNING O,3ECTI4ES
1. 5escri%e t*e usefulness of a conceptual framework.
2. 5escri%e t*e F!.@s efforts to construct a conceptual framework.
3. <nderstand t*e o%&ective of financial reportin".
4. Identif, t*e 6ualitative c*aracteristics of accountin" information.
5. 5efine t*e %asic elements of financial statements.
#. 5escri%e t*e %asic assumptions of accountin".
'. 01plain t*e application of t*e %asic principles of accountin".
2 ( 5
Conceptual Framework <nderl,in" Financial !ccountin"
(. 5escri%e t*e impact t*at t*e cost constraint *as on reportin" accountin" information.
+. Compare t*e conceptual frameworks underl,in" /!!4 and IF).
2 ( 6
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
SUMMAR7 OF LEARNING O,3ECTI4ES ,7 8UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learnin/ O!9e%tive :
1. TF 21. 7C 23. 7C

25. 7C
2. TF 22. 7C 24. 7C 134. 0
Learnin/ O!9e%tive 2
3. TF 4. TF 5. TF 2#. 7C +4. 0
Learnin/ O!9e%tive 1
#. TF 2'. 7C
4
2+. 7C
'. TF 2(. 7C 134. .0
Learnin/ O!9e%tive 5
(. TF 32. 7C 3(. 7C 44. 7C 5-. 7C 5#. 7C 13#. .0
+. TF 33. 7C 3+. 7C 45. 7C 51. 7C 5'. 7C 13'. 0
1-. TF 34. 7C 4-. 7C 4#. 7C 52. 7C 5(. 7C 13(. 0
11. TF 35. 7C 41. 7C 4'. 7C 53. 7C 125. 7C
3-. 7C 3#. 7C 42. 7C 4(. 7C 54. 7C 12#. 7C
31. 7C 3'. 7C 43. 7C 4+. 7C 55. 7C 135. .0
Learnin/ O!9e%tive 6
12. TF #-. 7C #3. 7C

##. 7C #+. 7C 12(. 7C 131. 7C


13. TF #1. 7C
4
#4. 7C #'. 7C '-. 7C 12+. 7C 132. 7C
5+. 7C #2. 7C

#5. 7C #(. 7C 12'. 7C 13-. 7C


Learnin/ O!9e%tive ;
14. TF '2. 7C

'5. 7C '(. 7C (1. 7C 135. .0 14-. 0


15. TF '3. 7C

'#. 7C '+. 7C (2. 7C 13(. 0


'1. 7C '4. 7C ''. 7C (-. 7C (3. 7C 13+. 0
Learnin/ O!9e%tive <
1#. TF ('. 7C +3. 7C ++. 7C 1-5. 7C 13#. .0
1'. TF ((. 7C +4. 7C 1--. 7C 1-#. 7C 13'. 0
1(. TF (+. 7C +5. 7C 1-1. 7C 1-'. 7C 13(. 0
(4. 7C +-. 7C +#. 7C 1-2. 7C 1-(. 7C 14-. 0
(5. 7C +1. 7C +'. 7C 1-3. 7C 133. 7C 141. 0
(#. 7C +2. 7C +(. 7C 1-4. 7C 135. .0
Learnin/ O!9e%tive =
1+. TF 11-. 7C 113. 7C 11#. 7C 11+. 7C 122. 7C 135. .0
2-. TF 111. 7C 114. 7C 11'. 7C 12-. 7C 123. 7C 13#. .0
1-+. 7C 112. 7C 115. 7C 11(. 7C 121. 7C
4
124. 7C
Learnin/ O!9e%tive > ? IFRS 8uestions
1. TF 2. TF 3. TF 4. TF 5. TF #. TF '. TF
(. TF +. TF 1-. TF 11. 7C 12. 7C 13. 7C 14. 7C
15. 7C 1#. ! 1'. !
Note> TF A True3False ! A *ort !nswer
7C A 7ultiple C*oice .0 A .rief 01ercises
0 A 01ercise
2 ( ;
Conceptual Framework <nderl,in" Financial !ccountin"
TRUE(FALSE)Con%e&tua
1. ! soundl, developed conceptual framework ena%les t*e F!. to issue more useful and
consistent pronouncements over time.
2. ! conceptual framework is a co*erent s,stem of concepts t*at flow from an o%&ective.
3. T*e first level of t*e conceptual framework identifies t*e reco"nitionB measurementB and
disclosure concepts used in esta%lis*in" accountin" standards.
4. T*e I!. *as issued a conceptual framework and *as a"reed to develop a common
conceptual framework wit* t*e F!..
5. !lt*ou"* t*e F!. *as developed a conceptual frameworkB no tatements of Financial
!ccountin" Concepts *ave %een issued to date.
#. T*e o%&ective of financial reportin" is t*e foundation of t*e conceptual framework.
'. <sers of financial statements are assumed to need no knowled"e of %usiness and financial
accountin" matters to understand information contained in financial statements.
(. )elevance and fait*ful representation are t*e two primar, 6ualities t*at make accountin"
information useful for decision makin".
+. T*e idea of consistenc, does not mean t*at companies cannot switc* from one accountin"
met*od to anot*er.
1-. Timeliness and neutralit, are two in"redients of relevance.
11. Cerifia%ilit, and predictive value are two in"redients of fait*ful representation.
12. )evenuesB "ainsB and distri%utions to owners all increase e6uit,.
13. Compre*ensive income includes all c*an"es in e6uit, durin" a period e1cept t*ose resultin"
from investments %, owners and distri%utions to owners.
14. T*e *istorical cost principle would %e of limited usefulness if not for t*e "oin" concern
assumption.
15. T*e economic entit, assumption means t*at economic activit, can %e identified wit* a
particular le"al entit,.
1#. T*e e1pense reco"nition principle states t*at de%its must e6ual credits in eac* transaction.
1'. )evenues are reco"ni2ed in t*e accountin" period in w*ic* t*e performance o%li"ation is
satisfied.
1(. upplementar, information ma, include details or amounts t*at present a different
perspective from t*at adopted in t*e financial statements.
2 ( <
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
1+. In order to &ustif, re6uirin" a particular measurement or disclosureB t*e %enefits to %e
derived from it must e6ual t*e costs associated wit* it.
2-. 4rudence or conservatism means w*en in dou%tB c*oose t*e solution t*at will %e least likel,
to overstate lia%ilities or e1penses.
True Fase Ans*ers)Con%e&tua
Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans'
1. T #. T 11. F 1#. F
2. T '. F 12. F 1'. T
3. F (. T 13. T 1(. T
4. T +. T 14. T 1+. F
5. F 1-. F 15. F 2-. F
MULTIPLE CHOICE)Con%e&tua
21. /enerall, accepted accountin" principles
a. are fundamental trut*s or a1ioms t*at can %e derived from laws of nature.
%. derive t*eir aut*orit, from le"al court proceedin"s.
c. derive t*eir credi%ilit, and aut*orit, from "eneral reco"nition and acceptance %, t*e
accountin" profession.
d. *ave %een specified in detail in t*e F!. conceptual framework.
22. ! soundl, developed conceptual framework of concepts and o%&ectives s*ould
a. increase financial statement usersD understandin" of and confidence in financial
reportin".
%. en*ance compara%ilit, amon" companiesD financial statements.
c. allow new and emer"in" practical pro%lems to %e more 6uickl, solved.
d. !ll of t*ese answer c*oices are correct.
23. E*ic* of t*e followin" is not true concernin" a conceptual framework in accountin"F
a. It s*ould %e a %asis for standard3settin".
%. It s*ould allow practical pro%lems to %e solved more 6uickl, %, reference to it.
c. It s*ould %e %ased on fundamental trut*s t*at are derived from t*e laws of nature.
d. !ll of t*ese answer c*oices are true.
24. E*at is a purpose of *avin" a conceptual frameworkF
a. To ena%le t*e profession to more 6uickl, solve emer"in" practical pro%lems.
%. To provide a foundation from w*ic* to %uild more useful standards.
c. Neit*er a nor %.
d. To ena%le t*e profession to more 6uickl, solve emer"in" practical pro%lems and to
provide a foundation from w*ic* to %uild more useful standards.
2 ( =
Conceptual Framework <nderl,in" Financial !ccountin"

25. E*ic* of t*e followin" is not a %enefit associated wit* t*e F!. Conceptual Framework
4ro&ectF
a. ! conceptual framework s*ould increase financial statement usersD understandin" of
and confidence in financial reportin".
%. 4ractical pro%lems s*ould %e more 6uickl, solva%le %, reference to an e1istin"
conceptual framework.
c. ! co*erent set of accountin" standards and rules s*ould result.
d. .usiness entities will need far less assistance from accountants %ecause t*e financial
reportin" process will %e 6uite eas, to appl,.
2#. In t*e conceptual framework for financial reportin"B w*at provides Gt*e w*,G33t*e purpose
of accountin"F
a. )eco"nitionB measurementB and disclosure concepts suc* as assumptionsB principlesB
and constraints
%. :ualitative c*aracteristics of accountin" information
c. 0lements of financial statements
d. $%&ective of financial reportin"
2'. T*e underl,in" t*eme of t*e conceptual framework is
a. decision usefulness.
%. understanda%ilit,.
c. fait*ful representation.
d. compara%ilit,.
2(. T*e o%&ective of "eneral3purpose financial reportin" is to provide financial information
a%out a reportin" entit, to eac* of t*e followin" e1cept
a. potential e6uit, investors.
%. potential lenders.
c. present investors.
d. !ll of t*ese answers are correct.
2+. E*at is t*e primar, o%&ective of financial reportin" as indicated in t*e conceptual
frameworkF
a. 4rovide information t*at is useful to t*ose makin" investin" and credit decisions.
%. 4rovide information t*at is useful to mana"ement.
c. 4rovide information a%out t*ose investin" in t*e entit,.
d. !ll of t*ese answer c*oices are correct.
4
3-. If t*e LIF$ inventor, met*od was used last periodB it s*ould %e used for t*e current and
followin" periods %ecause of
a. compara%ilit,.
%. materialit,.
c. timeliness.
d. verifia%ilit,.
2 ( >
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition

31. E*at is t*e followin" is a c*aracteristic descri%in" t*e primar, 6ualit, of relevanceF
a. 4redictive value.
%. 7aterialit,.
c. Cerifia%ilit,.
d. <nderstanda%ilit,.
32. E*ic* of t*e followin" is a fundamental 6ualit, of useful accountin" informationF
a. Compara%ilit,.
%. )elevance.
c. Neutralit,.
d. 7aterialit,.
33. E*ic* of t*e followin" is a primar, 6ualit, of useful accountin" informationF
a. Conservatism.
%. Compara%ilit,.
c. Fait*ful representation.
d. Consistenc,.
34. E*at is meant %, compara%ilit, w*en discussin" financial accountin" informationF
a. Information *as predictive or confirmator, value.
%. Information is reasona%l, free from error.
c. Information t*at is measured and reported in a similar fas*ion across companies.
d. Information is timel,.
35. E*at is meant %, consistenc, w*en discussin" financial accountin" informationF
a. Information t*at is measured and reported in a similar fas*ion across points in time.
%. Information is timel,.
c. Information is measured similarl, across t*e industr,.
d. Information is verifia%le.
3#. E*ic* of t*e followin" is an in"redient of relevanceF
a. Cerifia%ilit,.
%. Neutralit,.
c. Timeliness.
d. 7aterialit,.
3'. E*ic* of t*e followin" is an in"redient of fait*ful representationF
a. 4redictive value.
%. 7aterialit,.
c. Neutralit,.
d. Confirmator, value.
3(. C*an"in" t*e met*od of inventor, valuation s*ould %e reported in t*e financial statements
under w*at 6ualitative c*aracteristic of accountin" informationF
a. Consistenc,.
%. Cerifia%ilit,.
c. Timeliness.
d. Compara%ilit,.
3+. Compan, ! issuin" its annual financial reports wit*in one mont* of t*e end of t*e ,ear is
an e1ample of w*ic* en*ancin" 6ualit, of accountin" informationF
a. Compara%ilit,.
2 ( :@
Conceptual Framework <nderl,in" Financial !ccountin"
%. Timeliness.
c. <nderstanda%ilit,.
d. Cerifia%ilit,.
4-. E*at is t*e 6ualit, of information t*at is capa%le of makin" a difference in a decisionF
a. Fait*ful representation.
%. 7aterialit,.
c. Timeliness.
d. )elevance.
41. Neutralit, is an in"redient of w*ic* fundamental 6ualit, of informationF
a. Fait*ful representation.
%. Compara%ilit,.
c. )elevance.
d. <nderstanda%ilit,.
42. If t*e FIF$ inventor, met*od was used last periodB it s*ould %e used for t*e current and
followin" periods %ecause of
a. relevance.
%. neutralit,.
c. understanda%ilit,.
d. consistenc,.
43. T*e pervasive criterion %, w*ic* accountin" information can %e &ud"ed is t*at of
a. decision usefulness.
%. freedom from %ias.
c. timeliness.
d. compara%ilit,.
44. T*e two fundamental 6ualities t*at make accountin" information useful for decision
makin" are
a. compara%ilit, and timeliness.
%. materialit, and neutralit,.
c. relevance and fait*ful representation.
d. fait*ful representation and compara%ilit,.
45. !ccountin" information is considered to %e relevant w*en it
a. can %e depended on to represent t*e economic conditions and events t*at it is
intended to represent.
%. is capa%le of makin" a difference in a decision.
c. is understanda%le %, reasona%l, informed users of accountin" information.
d. is verifia%le and neutral.
4#. T*e 6ualit, of information t*at means t*e num%ers and descriptions matc* w*at reall,
e1isted or *appened is
a. relevance.
%. fait*ful representation.
c. completeness.
d. neutralit,.
2 ( ::
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
4'. E*ic* of t*e followin" does not relate to relevanceF
a. 7aterialit,
%. 4redictive value
c. Confirmator, value
d. !ll of t*ese answer c*oices relate to relevance.
4(. !ccordin" to Statement of Financial Accounting Concepts No. 2, materialit, is an in"redient
of t*e fundamental 6ualit, of
)elevance Fait*ful )epresentation
a. Hes Hes
%. No Hes
c. Hes No
d. No No
4+. !ccordin" to Statement of Financial Accounting Concepts No. 2, completeness is an
in"redient of t*e fundamental 6ualit, of
)elevance Fait*ful )epresentation
a. Hes No
%. Hes Hes
c. No No
d. No Hes
5-. !ccordin" to Statement of Financial Accounting Concepts No. 2, neutralit, is an in"redient
of t*e fundamental 6ualit, of
)elevance Fait*ful )epresentation
a. Hes Hes
%. No Hes
c. Hes No
d. No No
51. Neutralit, means t*at information
a. provides %enefits w*ic* are at least e6ual to t*e costs of its preparation.
%. can %e compared wit* similar information a%out an enterprise at ot*er points in time.
c. would *ave no impact on a decision maker.
d. cannot favor one set of interested parties over anot*er.
52. T*e c*aracteristic t*at is demonstrated w*en a *i"* de"ree of consensus can %e secured
amon" independent measurers usin" t*e same measurement met*ods is
a. relevance.
%. fait*ful representation.
c. verifia%ilit,.
d. neutralit,.
53. !ccordin" to Statement of Financial Accounting Concepts No. 2, predictive value is an
in"redient of t*e fundamental 6ualit, of
)elevance Fait*ful )epresentation
a. Hes No
%. Hes Hes
c. No No
d. No Hes
2 ( :2
Conceptual Framework <nderl,in" Financial !ccountin"
54. <nder Statement of Financial Accounting Concepts No. 2, free from error is an in"redient
of t*e fundamental 6ualit, of
Fait*ful )epresentation )elevance
a. Hes Hes
%. No Hes
c. Hes No
d. No No
55. Financial information demonstrates consistenc, w*en
a. firms in t*e same industr, use different accountin" met*ods to account for t*e same
t,pe of transaction.
%. a compan, c*an"es its estimate of t*e salva"e value of a fi1ed asset.
c. a compan, fails to ad&ust its financial statements for c*an"es in t*e value of t*e
measurin" unit.
d. None of t*ese answer c*oices are correct.
5#. Financial information e1*i%its t*e c*aracteristic of consistenc, w*en
a. e1penses are reported as c*ar"es a"ainst revenue in t*e period in w*ic* t*e, are paid.
%. a compan, applies t*e same accountin" treatment to similar eventsB from period to
period.
c. e1traordinar, "ains and losses are not included on t*e income statement.
d. accountin" procedures are adopted w*ic* "ive a consistent rate of net income.
5'. Information a%out different companies and a%out different periods of t*e same compan,
can %e prepared and presented in a similar manner. Compara%ilit, and consistenc, are
related to w*ic* of t*ese o%&ectivesF
Compara%ilit, Consistenc,
a. Companies Companies
%. Companies 4eriods
c. 4eriods Companies
d. 4eriods 4eriods
5(. E*en information a%out two different enterprises *as %een prepared and presented in a
similar mannerB t*e information e1*i%its t*e c*aracteristic of
a. relevance.
%. fait*ful representation.
c. consistenc,.
d. None of t*ese answer c*oices are correct.
5+. T*e elements of financial statements include investments %, owners. T*ese are increases
in an entit,Ds net assets resultin" from ownersD
a. transfers of assets to t*e entit,.
%. renderin" services to t*e entit,.
c. satisfaction of lia%ilities of t*e entit,.
d. !ll of t*ese answer c*oices are correct.
#-. In classif,in" t*e elements of financial statementsB t*e primar, distinction %etween
revenues and "ains is
a. t*e materialit, of t*e amounts involved.
%. t*e likeli*ood t*at t*e transactions involved will recur in t*e future.
c. t*e nature of t*e activities t*at "ave rise to t*e transactions involved.
d. t*e costs versus t*e %enefits of t*e alternative met*ods of disclosin" t*e transactions
involved.
2 ( :1
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
#1. ! decrease in net assets arisin" from perip*eral or incidental transactions is called a8n9
a. capital e1penditure.
%. cost.
c. loss.
d. e1pense.
#2. $ne of t*e elements of financial statements is compre*ensive income. !s descri%ed in
Statement of Financial Accounting Concepts No. 6, G0lements of Financial tatementsBG
compre*ensive income is e6ual to
a. revenues minus e1penses plus "ains minus losses.
%. revenues minus e1penses plus "ains minus losses plus investments %, owners minus
distri%utions to owners.
c. revenues minus e1penses plus "ains minus losses plus investments %, owners minus
distri%utions to owners plus assets minus lia%ilities.
d. None of t*ese answer c*oices are correct.
#3. E*ic* of t*e followin" elements of financial statements is not a component of
compre*ensive incomeF
a. )evenues
%. 5istri%utions to owners
c. Losses
d. 01penses
4
#4. T*e calculation of compre*ensive income includes w*ic* of t*e followin"F
$peratin" Income 5istri%utions to $wners
a. Hes Hes
%. No No
c. No Hes
d. Hes No

#5. !ccordin" to t*e F!. conceptual frameworkB w*ic* of t*e followin" elements descri%es
transactions or events t*at affect a compan, durin" a period of timeF
a. !ssets.
%. 01penses.
c. 06uit,.
d. Lia%ilities.

##. !ccordin" to t*e F!. Conceptual FrameworkB t*e elementsassetsB lia%ilitiesB and
e6uit,descri%e amounts of resources and claims to resources at=durin" a
7oment in Time 4eriod of Time
a. Hes No
%. Hes Hes
c. No Hes
d. No No
#'. E*ic* of t*e followin" is not a %asic element of financial statementsF
a. !ssets.
%. .alance s*eet.
c. Losses.
d. )evenue.
2 ( :5
Conceptual Framework <nderl,in" Financial !ccountin"
#(. E*ic* of t*e followin" %asic elements of financial statements is more associated wit* t*e
%alance s*eet t*an t*e income statementF
a. 06uit,.
%. )evenue.
c. /ains.
d. 01penses.
#+. Issuance of common stock for cas* affects w*ic* %asic element of financial statementsF
a. )evenues.
%. Losses.
c. Lia%ilities.
d. 06uit,.
'-. E*ic* %asic element of financial statements arises from perip*eral or incidental
transactionsF
a. !ssets.
%. Lia%ilities.
c. /ains.
d. 01penses.
'1. E*ic* of t*e followin" is not a %asic assumption underl,in" t*e financial accountin"
structureF
a. 0conomic entit, assumption.
%. /oin" concern assumption.
c. 4eriodicit, assumption.
d. ;istorical cost assumption.
'2. E*ic* %asic assumption is illustrated w*en a firm reports financial results on an annual
%asisF
a. 0conomic entit, assumption.
%. /oin" concern assumption.
c. 4eriodicit, assumption.
d. 7onetar, unit assumption.
'3. E*ic* %asic assumption ma, not %e followed w*en a firm in %ankruptc, reports financial
resultsF
a. 0conomic entit, assumption.
%. /oin" concern assumption.
c. 4eriodicit, assumption.
d. 7onetar, unit assumption.
'4. E*ic* accountin" assumption or principle is %ein" violated if a compan, provides financial
reports onl, w*en it introduces a new productF
a. 0conomic entit,.
%. 4eriodicit,.
c. )evenue reco"nition.
d. Full disclosure.
2 ( :6
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition

'5. E*ic* of t*e followin" %asic accountin" assumptions is t*reatened %, t*e e1istence of
severe inflation in t*e econom,F
a. 7onetar, unit assumption.
%. 4eriodicit, assumption.
c. /oin"3concern assumption.
d. 0conomic entit, assumption.

'#. 5urin" t*e lifetime of an entit, accountants produce financial statements at artificial points
in time in accordance wit* t*e concept of
)elevance 4eriodicit,
a. No No
%. Hes No
c. No Hes
d. Hes Hes
''. <nder current /!!4B inflation is i"nored in accountin" due to t*e
a. economic entit, assumption.
%. "oin" concern assumption.
c. monetar, unit assumption.
d. periodicit, assumption.
'(. T*e economic entit, assumption
a. is inapplica%le to unincorporated %usinesses.
%. reco"ni2es t*e le"al aspects of %usiness or"ani2ations.
c. re6uires periodic income measurement.
d. is applica%le to all forms of %usiness or"ani2ations.
'+. 4reparation of consolidated financial statements w*en a parent3su%sidiar, relations*ip
e1ists is an e1ample of t*e
a. economic entit, assumption.
%. relevance c*aracteristic.
c. compara%ilit, c*aracteristic.
d. neutralit, c*aracteristic.
(-. 5urin" t*e lifetime of an entit,B accountants produce financial statements at ar%itrar,
points in time in accordance wit* w*ic* %asic accountin" conceptF
a. Cost constraint
%. 4eriodicit, assumption
c. Conservatism constraint
d. 01pense reco"nition principle
(1. E*at accountin" concept &ustifies t*e usa"e of depreciation and amorti2ation policiesF
a. /oin" concern assumption
%. Fair value principle
c. Full disclosure principle
d. 7onetar, unit assumption
2 ( :;
Conceptual Framework <nderl,in" Financial !ccountin"
(2. T*e assumption t*at a compan, will not %e sold or li6uidated in t*e near future is known
as t*e
a. economic entit, assumption.
%. monetar, unit assumption.
c. periodicit, assumption.
d. None of t*ese answer c*oices are correct.
(3. E*ic* of t*e followin" is an implication of t*e "oin" concern assumptionF
a. T*e *istorical cost principle is credi%le.
%. 5epreciation and amorti2ation policies are &ustifia%le and appropriate.
c. T*e current3noncurrent classification of assets and lia%ilities is &ustifia%le and
si"nificant.
d. !ll of t*ese.
(4. 4roponents of *istorical cost ordinaril, maintain t*at in comparison wit* all ot*er valuation
alternatives for "eneral purpose financial reportin"B statements prepared usin" *istorical
costs are more
a. verifia%le.
%. relevant.
c. indicative of t*e entit,Ds purc*asin" power.
d. conservative.
(5. Caluin" assets at t*eir li6uidation values rat*er t*an t*eir cost is inconsistent wit* t*e
a. periodicit, assumption.
%. e1pense reco"nition principle.
c. materialit, constraint.
d. *istorical cost principle.
(#. )evenue is reco"ni2ed in t*e accountin" period in w*ic* t*e performance o%li"ation is
satisfied. T*is statement descri%es t*e
a. consistenc, c*aracteristic.
%. e1pense reco"nition principle.
c. revenue reco"nition principle.
d. relevance c*aracteristic.
('. /enerall,B revenue from sales s*ould %e reco"ni2ed at a point w*en
a. mana"ement decides it is appropriate to do so.
%. t*e product is availa%le for sale to t*e ultimate consumer.
c. t*e entire amount receiva%le *as %een collected from t*e customer and t*ere remains
no furt*er warrant, lia%ilit,.
d. None of t*ese answer c*oices are correct.
((. )evenue "enerall, s*ould %e reco"ni2ed
a. at t*e end of production.
%. at t*e time of cas* collection.
c. w*en reali2ed.
d. w*en t*e performance o%li"ation is satisfied.
2 ( :<
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
(+. T*e measurement principle includes t*e
a. fair value principle onl,.
%. *istorical cost principle onl,.
c. revenue reco"nition principle and e1pense reco"nition principle.
d. *istorical cost principle and t*e fair value principle.
+-. E*ic* of t*e followin" is commonl, referred to as t*e matc*in" principleF
a. )evenue reco"nition principle
%. 7easurement principle
c. 01pense reco"nition principle
d. Full disclosure principle
+1. 4roduct costs include eac* of t*e followin" eA%e&t
a. over*ead.
%. officer@s salaries.
c. material.
d. la%or.
+2. T*e allowance for dou%tful accountsB w*ic* appears as a deduction from accounts
receiva%le on a %alance s*eet and w*ic* is %ased on an estimate of %ad de%tsB is an
application of t*e
a. consistenc, c*aracteristic.
%. e1pense reco"nition principle.
c. materialit, 6ualit,.
d. revenue reco"nition principle.
+3. T*e accountin" principle of e1pense reco"nition is %est demonstrated %,
a. not reco"ni2in" an, e1pense unless some revenue is reali2ed.
%. associatin" effort 8e1pense9 wit* accomplis*ment 8revenue9.
c. reco"ni2in" prepaid rent received as revenue.
d. esta%lis*in" an !ppropriation for Contin"encies account.
+4. E*ic* of t*e followin" serves as t*e &ustification for t*e periodic recordin" of depreciation
e1penseF
a. !ssociation of efforts 8e1pense9 wit* accomplis*ments 8revenue9
%. ,stematic and rational allocation of cost over t*e periods %enefited
c. Immediate reco"nition of an e1pense
d. 7inimi2ation of income ta1 lia%ilit,
+5. !pplication of t*e full disclosure principle
a. is t*eoreticall, desira%le %ut not practical %ecause t*e costs of complete disclosure
e1ceed t*e %enefits.
%. is violated w*en important financial information is %uried in t*e notes to t*e financial
statements.
c. is demonstrated %, t*e use of supplementar, information e1plainin" t*e effects of
financin" arran"ements.
d. re6uires t*at t*e financial statements %e consistent and compara%le.
2 ( :=
Conceptual Framework <nderl,in" Financial !ccountin"
+#. E*ic* of t*e followin" is an ar"ument a"ainst usin" *istorical cost in accountin"F
a. Fair values are more relevant.
%. ;istorical costs are %ased on an e1c*an"e transaction.
c. ;istorical costs are relia%le.
d. Fair values are su%&ective.
+'. E*en is revenue "enerall, reco"ni2edF
a. E*en cas* is received.
%. E*en t*e warrant, e1pires.
c. E*en production is completed.
d. E*en t*e compan, satisfies t*e performance o%li"ation.
+(. E*ic* of t*e followin" is a component of t*e revenue reco"nition principleF
a. Cas* is received and t*e amount is material.
%. )eco"nition occurs w*en t*e performance o%li"ation is satisfied.
c. 4roduction is complete and t*ere is an active market for t*e product.
d. Cas* is reali2ed or reali2a%le and production is complete.
++. ! compan, *as a performance o%li"ation w*en it a"rees to
a. perform a service for a customer and receives cas* pa,ment.
%. sell a product to a customer after receivin" pa,ment.
c. perform a service or sell a product to a customer.
d. None of t*e answer c*oices are correct.
1--. E*ic* of t*e followin" is not a re6uired component of financial statements prepared in
accordance wit* "enerall, accepted accountin" principlesF
a. 4residentDs letter to s*are*olders.
%. .alance s*eet.
c. Income statement.
d. Notes to financial statements.
1-1. E*at is t*e "eneral approac* as to w*en product costs are reco"ni2ed as e1pensesF
a. In t*e period w*en t*e e1penses are paid.
%. In t*e period w*en t*e e1penses are incurred.
c. In t*e period w*en t*e vendor invoice is received.
d. In t*e period w*en t*e related revenue is reco"ni2ed.
1-2. Not ad&ustin" t*e amounts reported in t*e financial statements for inflation is an e1ample
of w*ic* %asic principle of accountin"F
a. 0conomic entit,.
%. /oin" concern.
c. ;istorical cost.
d. Full disclosure.
1-3. )eco"nition of e1pense related to amorti2ation of an intan"i%le asset illustrates w*ic*
principle of accountin"F
a. 01pense reco"nition.
%. Full disclosure.
c. )evenue reco"nition.
d. ;istorical cost.
2 ( :>
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
1-4. E*en s*ould an e1penditure %e recorded as an asset rat*er t*an an e1penseF
a. Never.
%. !lwa,s.
c. If t*e amount is material.
d. E*en future %enefit e1ists.
1-5. E*ic* accountin" assumption or principle is %ein" violated if a compan, reports its
corporate *ead6uarter %uildin" at its fair value on t*e %alance s*eetF
a. /oin" concern.
%. 7onetar, unit.
c. ;istorical cost.
d. Full disclosure.
1-#. E*ic* accountin" assumption or principle is %ein" violated if a compan, is a part, to
ma&or liti"ation t*at it ma, lose and decides not to include t*e information in t*e financial
statements %ecause it ma, *ave a ne"ative impact on t*e compan,Ds stock priceF
a. Full disclosure.
%. /oin" concern.
c. ;istorical cost.
d. 01pense reco"nition.
1-'. E*ic* assumption or principle re6uires t*at all information si"nificant enou"* to affect a
decision of reasona%l, informed users s*ould %e reported in t*e financial statementsF
a. 7atc*in".
%. /oin" concern.
c. ;istorical cost.
d. Full disclosure.
1-(. ! compan, *as a factor, %uildin" t*at ori"inall, cost t*e compan, I25-B---. T*e current
fair value of t*e factor, %uildin" is I3 million. T*e president would like to report t*e
difference as a "ain. T*e write3up would represent a violation of w*ic* accountin"
assumption or principleF
a. )evenue reco"nition.
%. /oin" concern.
c. ;istorical cost.
d. 7onetar, unit.
1-+. E*ic* of t*e followin" is a constraint in presentin" financial informationF
a. Cost3%enefit relations*ip.
%. Full disclosure.
c. )elevance.
d. Consistenc,.
11-. !ll of t*e followin" represent costs of providin" financial information e1cept
a. preparin".
%. disseminatin".
c. accessin" capital.
d. auditin".
2 ( 2@
Conceptual Framework <nderl,in" Financial !ccountin"
111. E*ic* of t*e followin" is a %enefit of providin" financial informationF
a. 4otential liti"ation.
%. !uditin".
c. 5isclosure to competition.
d. Improved allocation of resources.
112. E*ere is materialit, not used in providin" financial informationF
a. !ppl,in" t*e revenue reco"nition principle.
%. 5eterminin" w*at items to include in t*e financial statements.
c. !ppl,in" t*e "oin" concern assumption.
d. 5eterminin" t*e level of disclosure.
113. E*at is prudence or conservatismF
a. <nderstatin" assets and net income.
%. E*en in dou%tB reco"ni2in" t*e option t*at is least likel, to overstate assets and
income.
c. )eco"ni2in" t*e option t*at is least likel, to overstate assets and income.
d. )eco"ni2in" revenue w*en earned and reali2ed.
114. 01pensin" t*e cost of cop, paper w*en t*e paper is ac6uired is an e1ample
a. materialit,.
%. e1pense reco"nition.
c. conservatism.
d. industr, practices.
115. E*ic* of t*e followin" statements concernin" t*e cost3%enefit relations*ip is not trueF
a. .usiness reportin" s*ould e1clude information outside of mana"ementDs e1pertise.
%. 7ana"ement s*ould not %e re6uired to report information t*at would si"nificantl, *arm
t*e compan,Ds competitive position.
c. 7ana"ement s*ould not %e re6uired to provide forecasted financial information.
d. If needed %, financial statement usersB mana"ement s*ould "at*er information not
included in t*e financial statements t*at would not ot*erwise %e "at*ered for internal
use.
11#. E*ic* of t*e followin" relates to %ot* relevance and fait*ful representationF
a. Cost constraint
%. 4redictive value
c. Cerifia%ilit,
d. Neutralit,
11'. C*ar"in" off t*e cost of a waste%asket wit* an estimated useful life of 1- ,ears as an
e1pense of t*e period w*en purc*ased is an e1ample of t*e application of t*e
a. consistenc, c*aracteristic.
%. e1pense reco"nition principle.
c. materialit, 6ualit,.
d. *istorical cost principle.
2 ( 2:
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
11(. E*ic* of t*e followin" statements a%out materialit, is correctF
a. !n item must make a difference or it need not %e disclosed.
%. 7aterialit, is a matter of relative si2e or importance.
c. !n item is material if its inclusion or omission would influence or c*an"e t*e &ud"ment
of a reasona%le person.
d. !ll of t*ese answers are correct.
11+. E*ic* of t*e followin" is considered a pervasive constraint %, Statement of Financial
Accounting Concepts No. 8F
a. Conservatism
%. Timeliness
c. Cerifia%ilit,
d. Cost3constraint
12-. T*e %asic accountin" concept t*at refers to t*e tendenc, of accountants to resolve
uncertaint, in favor of understatin" assets and revenues and overstatin" lia%ilities and
e1penses is known as
a. prudence or conservatism.
%. t*e materialit, concept.
c. t*e su%stance over form principle.
d. t*e industr, practices concept.
121. T*e second level of t*e conceptual framework includes eac* of t*e followin" e1cept
a. elements.
%. principles.
c. en*ancin" 6ualities.
d. fundamental 6ualities.
122. Trade3offs %etween t*e c*aracteristics t*at make information useful ma, %e necessar, or
%eneficial. Issuance of interim financial statements is an e1ample of a trade3off %etween
a. relevance and fait*ful representation.
%. fait*ful representation and periodicit,.
c. timeliness and materialit,.
d. understanda%ilit, and timeliness.
123. !llowin" firms to estimate rat*er t*an p*,sicall, count inventor, at interim 86uarterl,9
periods is an e1ample of a trade3off %etween
a. verifia%ilit, and fait*ful representation.
%. fait*ful representation and compara%ilit,.
c. timeliness and verifia%ilit,.
d. neutralit, and consistenc,.
4
124. In matters of dou%t and "reat uncertaint,B accountin" issues s*ould %e resolved %,
c*oosin" t*e alternative t*at *as t*e least favora%le effect on net incomeB assetsB and
ownersD e6uit,. T*is "uidance comes from
a. t*e cost constraint.
%. t*e industr, practices constraint.
c. prudence or conservatism.
d. t*e full disclosure principle.
2 ( 22
Conceptual Framework <nderl,in" Financial !ccountin"
Muti&e C"oi%e Ans*ers)Con%e&tua
Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans'
21. c 3'. c 53. a #+. d (5. d 1-1. d 11'. c
22. d 3(. a 54. c '-. c (#. c 1-2. c 11(. d
23. c 3+. % 55. d '1. d ('. d 1-3. a 11+. d
24. d 4-. d 5#. % '2. c ((. d 1-4. d 12-. a
25. d 41. a 5'. % '3. % (+. d 1-5. c 121. %
2#. d 42. d 5(. d '4. % +-. c 1-#. a 122. a
2'. a 43. a 5+. d '5. a +1. % 1-'. d 123. c
2(. d 44. c #-. c '#. c +2. % 1-(. c 124. c
2+. a 45. % #1. c ''. c +3. % 1-+. a
3-. a 4#. % #2. d '(. d +4. % 11-. c
31. a 4'. d #3. % '+. a +5. c 111. d
32. % 4(. c #4. d (-. % +#. a 112. c
33. c 4+. d #5. % (1. a +'. d 113. %
34. c 5-. % ##. a (2. d +(. % 114. a
35. a 51. d #'. % (3. d ++. c 115. d
3#. d 52. c #(. a (4. a 1--. a 11#. a
olutions to t*ose 7ultiple C*oice 6uestions for w*ic* t*e answer is Jnone of t*ese answers are
correct.K
55. a compan, c*an"es its inventor, met*od ever, few ,ears in order to ma1imi2e reported
income 8ot*er answers are possi%le9.
5(. compara%ilit,.
#2. c*an"e in e6uit, of an entit, durin" a period from transactions and ot*er events and
circumstances from nonowner sources.
(2. "oin" concern assumption.
('. t*e performance o%li"ation is satisfied.
MULTIPLE CHOICE)CPA A#a&te#
125. !ccordin" to t*e F!.Ds conceptual frameworkB predictive value is an in"redient of
)elevance Fait*ful )epresentation
a. Hes No
%. Hes Hes
c. No Hes
d. No No
12#. !ccordin" to t*e F!.Ds conceptual frameworkB w*ic* of t*e followin" relates to %ot*
relevance and fait*ful representationF
Compara%ilit, Neutralit,
a. Hes Hes
%. Hes No
c. No Hes
d. No No
2 ( 21
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
12'. T*e F!.Ds conceptual framework classifies "ains and losses %ased on w*et*er t*e, are
related to an entit,Ds ma&or on"oin" or central operations. T*ese "ains or losses ma, %e
classified as
Nonoperatin" $peratin"
a. Hes No
%. Hes Hes
c. No Hes
d. No No
12(. !ccordin" to t*e F!.Ds conceptual frameworkB earnin"s
a. is t*e same as compre*ensive income.
%. e1cludes certain "ains and losses t*at are included in compre*ensive income.
c. includes certain "ains and losses t*at are e1cluded from compre*ensive income.
d. includes certain losses t*at are e1cluded from compre*ensive income.
12+. !ccordin" to t*e F!.Ds conceptual frameworkB compre*ensive income includes w*ic* of
t*e followin"F
$peratin" Income Investments %, $wners
a. Hes No
%. Hes Hes
c. No Hes
d. No No
13-. !ccordin" to t*e F!.Ds conceptual frameworkB t*e calculation of compre*ensive income
includes w*ic* of t*e followin"F
Income from 5istri%utions
Continuin" $perations to $wners
a. No No
%. Hes No
c. Hes Hes
d. No Hes
131. !ccordin" to t*e F!.Ds conceptual frameworkB compre*ensive income includes w*ic* of
t*e followin"F
/ross 7ar"in $peratin" Income
a. No Hes
%. No No
c. Hes No
d. Hes Hes
132. <nder tatements of Financial !ccountin" ConceptsB compre*ensive income includes
w*ic* of t*e followin"F
/ains /ross 7ar"in
a. No No
%. No Hes
c. Hes No
d. Hes Hes
2 ( 25
Conceptual Framework <nderl,in" Financial !ccountin"
133. E*ic* of t*e followin" is an application of t*e principle of rational and s,stematic
allocationF
a. !morti2ation of intan"i%le assets.
%. ales commissions.
c. )esearc* and development costs.
d. $fficers@ salaries.
Muti&e C"oi%e Ans*ers)CPA A#a&te#
Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans' Ite. Ans'
125. a 12'. % 12+. a 131. d 133. a
12#. % 12(. % 13-. % 132. d
,RIEF E2ERCISES
,E' 2(:15?:ualitative C*aracteristics.
!ccountin" information provides useful information a%out %usiness transactions and events.
T*ose w*o provide and use financial reports must often select and evaluate accountin"
alternatives. T*e F!. statement on 6ualitative c*aracteristics of accountin" information
e1amines t*e c*aracteristics of accountin" information t*at make it useful for decision3makin". It
also points out t*at various limitations in*erent in t*e measurement and reportin" process ma,
necessitate trade3offs or sacrifices amon" t*e c*aracteristics of useful information.
Instructions.
8a9 5escri%e %riefl, t*e followin" c*aracteristics of useful accountin" information.
819 )elevance 849 Compara%ilit,
829 Fait*ful representation 859 Consistenc,
839 <nderstanda%ilit,
8%9 For eac* of t*e followin" pairs of information c*aracteristicsB "ive an e1ample of a situation in
w*ic* one of t*e c*aracteristics ma, %e sacrificed in return for a "ain in t*e ot*er.
819 )elevance and fait*ful representation. 839 Compara%ilit, and consistenc,.
829 )elevance and consistenc,. 849 )elevance and understanda%ilit,.
8c9 E*at criterion s*ould %e used to evaluate trade3offs %etween information c*aracteristicsF
2 ( 26
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
olution 23134.
8a9 819 )elevance is one of t*e two fundamental 6ualities of useful accountin" information.
)elevant information is capa%le of makin" a difference in a decision. )elevant
information *elps users to make predictions a%out t*e outcomes of pastB presentB and
future eventsB or to confirm or correct prior e1pectations. 7aterialit, is a compan,3
specific aspect of relevance.
829 Fait*ful representation is one of t*e two fundamental 6ualities of useful accountin"
information. )elia%le information can %e depended upon to represent t*e conditions and
events t*at it is intended to represent. )epresentational fait*fulness is correspondence
or a"reement %etween accountin" information and t*e economic p*enomena it is
intended to represent stemmin" from completenessB neutralit,B and free from error.
839 <nderstanda%ilit, is an en*ancin" 6ualit, of information. Information is understanda%le
w*en it permits reasona%l, informed users to perceive its si"nificance. <nderstanda%ilit,
is a link %etween usersB w*o var, widel, in t*eir capacit, to compre*end or utili2e t*e
informationB and t*e fundamental 6ualities of information.
849 Compara%ilit, means t*at information a%out enterprises *as %een prepared and
presented in a similar manner. Compara%ilit, en*ances comparisons %etween
information a%out two different companies at a particular point in time.
859 Consistenc, means t*at unc*an"in" policies and procedures *ave %een used %, an
enterprise from one period to anot*er. Consistenc, en*ances comparisons %etween
information a%out t*e same compan, at two different points in time.
8%9 8Note to instru%tor> T*ere are a multitude of answers possi%le *ere. T*e su""estions %elow
are intended to serve as e1amples9.
819 Forecasts of future operatin" results and pro&ections of future cas* flows ma, %e *i"*l,
relevant to some decision makers. ;oweverB t*e, would not %e as free from error as
*istorical cost information a%out past transactions.
829 4roposed new accountin" met*ods ma, %e more relevant to man, decision makers t*an
e1istin" met*ods. ;oweverB if adoptedB t*e, would impair consistenc, and make trend
comparisons of an enterpriseDs results over time difficult or impossi%le.
839 T*ere presentl, e1ists muc* diversit, amon" accepta%le accountin" met*ods and
procedures. In order to facilitate compara%ilit, %etween enterprisesB t*e use of onl, one
accepted accountin" met*od for a particular t,pe of transaction could %e re6uired.
;oweverB consistenc, would %e impaired for t*ose firms c*an"in" to t*e new re6uired
met*ods.
849 $ccasionall,B relevant information is e1ceedin"l, comple1. Lud"ment is re6uired in
determinin" t*e optimum trade3off %etween relevance and understanda%ilit,. Information
a%out t*e impact of "eneral and specific price c*an"es ma, %e *i"*l, relevant %ut not
understanda%le %, all users.
8c9 !lt*ou"* trade3offs result in t*e sacrifice of some desira%le 6ualit, of informationB t*e overall
result s*ould %e information t*at is more useful for decision makin".
2 ( 2;
Conceptual Framework <nderl,in" Financial !ccountin"
,E' 2(:16?!ccountin" concepts?identification.
tate t*e accountin" assumptionB principleB information c*aracteristicB or constraint t*at is most
applica%le in t*e followin" cases.
1. !ll pa,ments less t*an I25 are e1pensed as incurred. 85o not use conservatism.9
2. T*e compan, emplo,s t*e same inventor, valuation met*od from period to period.
3. ! patent is capitali2ed and amorti2ed over t*e periods %enefited.
4. !ssumin" t*at dollars toda, will %u, as muc* as ten ,ears a"o.
5. )ent paid in advance is recorded as prepaid rent.
#. Financial statements are prepared eac* ,ear.
'. !ll si"nificant post3%alance s*eet events are reported.
(. 4ersonal transactions of t*e proprietor are distin"uis*ed from %usiness transactions.
Soution 2(:16
1. 7aterialit, c*aracteristic.
2. Consistenc, c*aracteristic.
3. 01pense reco"nition principle or "oin" concern assumption.
4. 7onetar, unit assumption.
5. 01pense reco"nition principle or "oin" concern assumption.
#. 4eriodicit, assumption.
'. Full disclosure principle.
(. 0conomic entit, assumption.
,E' 2(:1;?!ccountin" concepts?identification.
4resented %elow are a num%er of accountin" procedures and practices in )amire2 Corp. For
eac* of t*ese itemsB list t*e assumptionB principleB information c*aracteristicB or modif,in"
convention t*at is violated.
1. .ecause t*e compan,Ds income is low t*is ,earB a switc* from accelerated depreciation to
strai"*t3line depreciation is made t*is ,ear.
2. T*e president of )amire2 Corp. %elieves it is foolis* to report financial information on a ,earl,
%asis. InsteadB t*e president %elieves t*at financial information s*ould %e disclosed onl, w*en
si"nificant new information is availa%le related to t*e compan,Ds operations.
3. )amire2 Corp. decides to esta%lis* a lar"e loss and related lia%ilit, t*is ,ear %ecause of t*e
possi%ilit, t*at it ma, lose a pendin" patent infrin"ement lawsuit. T*e possi%ilit, of loss is
considered remote %, its attorne,s.
4. !n officer of )amire2 Corp. purc*ased a new *ome computer for personal use wit* compan,
mone,B c*ar"in" miscellaneous e1pense.
5. ! mac*ineB t*at cost I4-B---B is reported at its current market value of I45B---.
2 ( 2<
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
Soution 2(:1;
1. Consistenc,.
2. 4eriodicit,.
3. 01pense reco"nition 8alsoB conservatism9.
4. 0conomic entit,.
5. ;istorical cost 8alsoB revenue reco"nition9M.
M)eportin" t*e asset at FC of I45B--- implies t*e followin" entr,>
7ac*ine..................................................................................... 5B---
)evenue........................................................................ 5B---
E2ERCISES
EA' 2(:1<?!ccountin" concepts?matc*in".
Listed %elow are several information c*aracteristics and accountin" principles and assumptions.
7atc* t*e letter of eac* wit* t*e appropriate p*rase t*at states its application. 8Items a t*rou"* k
ma, %e used more t*an once or not at all.9
a. 0conomic entit, assumption ". 01pense reco"nition principle
%. /oin" concern assumption *. Full disclosure principle
c. 7onetar, unit assumption i. )elevance c*aracteristic
d. 4eriodicit, assumption &. Fait*ful representation c*aracteristic
e. ;istorical cost principle k. Consistenc, c*aracteristic
f. )evenue reco"nition principle
NNNNN 1. ta%le3dollar assumption 8do not use *istorical cost principle9.
NNNNN 2. T*e performance o%li"ation is satisfied.
NNNNN 3. Num%ers and descriptions matc* w*at reall, e1isted or *appened.
NNNNN 4. Hearl, financial reports.
NNNNN 5. !ccruals and deferrals in ad&ustin" and closin" process. 85o not use "oin" concern.9
NNNNN #. <seful standard measurin" unit for %usiness transactions.
NNNNN '. Notes as part of necessar, information to a fair presentation.
NNNNN (. !ffairs of t*e %usiness distin"uis*ed from t*ose of its owners.
NNNNN +. Compan, assumed to *ave a lon" life.
NNNNN1-. Caluin" assets at amounts ori"inall, paid for t*em.
NNNNN 11. !pplication of t*e same accountin" principles as in t*e precedin" ,ear.
NNNNN12. ummari2in" si"nificant accountin" policies.
NNNNN13. 4resentation of timel, information wit* predictive and confirmator, value.
Soution 2(:1<
1. c 4. d '. * 1-. e 13. i
2. f 5. " (. a 11. k
3. & #. c +. % 12. *
2 ( 2=
Conceptual Framework <nderl,in" Financial !ccountin" 2 ( 2>
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
EA' 2(:1=?!ccountin" concepts?fill in t*e %lanks.
Fill in t*e %lanks %elow wit* t*e accountin" principleB assumptionB or related item t*at best
completes t*e sentence.
1. NNNNNNNNNNNNNNNNNNNNNNNN and NNNNNNNNNNNNNNNNNNNNNNN are t*e two fundamental
6ualities t*at make accountin" information useful for decision makin".
2. Information t*at *elps users confirm or correct prior e1pectations *as NNNNNNNNNNNNNNNNN
NNNNNNNNNNNNNNNNNNN.
3. NNNNNNNNNNNNNNNNNNNNNNNN ena%les users to identif, t*e real similarities and differences
in economic events %etween companies.
4. NNNNNNNNNNNNNNNNN is t*e price t*at would %e received to sell an asset or paid to transfer
a lia%ilit, in an orderl, transaction %etween market participants at t*e measurement date.
5. Information is NNNNNNNNNNNNNNNNNNNNNNN if omittin" it or misstatin" it could influence
decisions t*at users make on t*e %asis of t*e reported financial information.
#. T*e NNNNNNNNNNNNNNNNNNNNNNNN c*aracteristic re6uires t*at t*e same accountin" met*od
%e used from one accountin" period to t*e ne1tB unless it %ecomes evident t*at an
alternative met*od will %rin" a%out a %etter description of a firmDs financial situation.
'. NNNNNNNNNNNNNNNNNNNN means w*en in dou%tB c*oose t*e solution t*at will %e least likel,
to overstate income and assets.
(. 4rovidin" information t*at is of sufficient importance to influence t*e &ud"ement and
decisions of an informed user is referred to as NNNNNNNNNNNNNNNNNNNNNNN.
+. Corporations must prepare accountin" reports at least ,earl, due to t*e NNNNNNNNNNNNNNN
assumption.
1-. NNNNNNNNNNNNNNNNN occurs w*en t*e performance o%li"ation is satisfied.
Soution 2(:1=
1. )elevanceO fait*ful representation #. consistenc,
2. confirmator, value '. 4rudence or conservatism
3. Compara%ilit, (. full disclosure
4. Fair value +. periodicit,
5. material 1-. )evenue reco"nition
EA' 2(:1>?.asic assumptions.
.riefl, e1plain t*e four %asic assumptions t*at underlie financial accountin".
2 ( 1@
Conceptual Framework <nderl,in" Financial !ccountin"
Soution 2(:1>
1. T*e economic entit, assumption states t*at economic activit, can %e identified wit* a
particular unit of accounta%ilit,.
2. T*e "oin" concern assumption assumes t*at a compan, will *ave a lon" life.
3. T*e monetar, unit assumption means t*at mone, is t*e common denominator of economic
activit, and provides an appropriate %asis for accountin" measurement and anal,sis. In
additionB t*e monetar, unit remains reasona%l, sta%le.
4. T*e periodicit, assumption implies t*at a compan, can divide its economic activities into
artificial time periods.
EA' 2(:5@?;istorical cost principle.
Cost as a %asis of accountin" for assets *as %een severel, critici2ed. E*at defense can ,ou %uild
for cost as t*e %asis for financial accountin"F
Soution 2(:5@
Cost is definite and verifia%le and not a matter for con&ecture or opinion. $nce esta%lis*edB cost is
fi1ed as lon" as t*e asset remains t*e propert, of t*e part, t*at incurred t*e cost. Cost is %ased
on factO t*at isB it is t*e result of an armDs len"t* transaction. Cost is also measura%le or
determina%le. $ver t*e ,earsB accountants *ave found cost to %e t*e most practical %asis for
record keepin". Financial statements prepared on a cost %asis provide %usiness enterprise
information *avin" a commonB accepted %asis from w*ic* eac* reader can make inferencesB
comparisonsB and anal,ses.
EA' 2(:5:?7atc*in" concept.
! concept is a "roup of related ideas. 7atc*in" could %e considered a concept %ecause it
includes ideas related to e1pense reco"nition. .riefl, e1plain t*e ideas in e1pense reco"nition.
Soution 2(:5:
T*e ideas in e1pense reco"nition include Ge1penseG and Gmatc*in"G>
1. 01penses are outflows of net assets durin" a period from deliverin" or producin" "oods or
services or ot*er activities t*at are t*e ma&or operations of t*e entit,.
2. 01penses are reco"ni2ed w*en t*e "oods or services 8efforts9 make t*eir contri%ution to
revenue.
T*e e1pense reco"nition principle is t*at e1penses are matc*ed wit* revenues. 01penses are
matc*ed t*ree wa,s>
1. E*en t*ere is an association wit* revenueB e1penses are matc*ed wit* revenues in t*e
period t*e revenues are reco"ni2ed.
2. E*en no association wit* revenue is evidentB e1penses are allocated on some s,stematic
and rational %asis.
3. E*en no association wit* revenue is evident and no future %enefits are e1pectedB
e1penses are reco"ni2ed immediatel,.
2 ( 1:
Test ,an- $or Inter.e#iate A%%ountin/0 Fi$teent" E#ition
IFRS 8UESTIONS
True B Fase
1. T*e I!. and t*e F!. are workin" on a &oint pro&ect to develop a common conceptual
framework.
2. <nder IF)B e1penses include losses t*at are not t*e result of ordinar, activities.
3. <nder IF)B it is mandator, to report propert,B plantB and e6uipment at *istorical cost.
4. T*e num%er of financial statement elements in t*e IF) conceptual framework is e6ual to
t*ose in /!!4.
5. T*e e1istin" conceptual frameworks underl,in" /!!4 and IF) are ver, similar.
#. It is unlikel, t*at t*e %asic concepts related to t*e e1istin" conceptual framework will c*an"e.
'. T*e I!. is considerin" a proposal to provide e1panded "uidance on estimatin" fair values.
(. /!!4 *as a concept statement to "uide estimation of fair values w*en market3related data is
not availa%le.
+. T*e monetar, unit assumption is a part of /!!4B %ut not IF).
1-. ! compan, incorporated in Lapan uses t*e dollar as its unit of measurement.
Ans*ers to True B Fase questionsC
1. True #. True
2. True '. True
3. False (. True
4. False +. False
5. True 1-. False
Muti&e C"oi%eC
11. T*e I!. and t*e F!. are workin" on a &oint pro&ect t*at *as an o%&ective of developin" a
conceptual framework t*at leads to standards t*at are>
a. rule3%ased and internall, consistent.
%. principle3%ased and internall, consistent.
c. rule3%ased and fle1i%le in nature.
d. principle3%ased and ri"id in nature.
12. In t*e first sta"e of creatin" conceptual frameworkB t*e I!. and t*e F!. a"reed on t*e
o%&ective of financial reportin" and a common set of desired NNNNNNNNN.
a. c*aracteristics of /!!4
%. 6uantitative c*aracteristics
c. 6ualitative c*aracteristics
d. rule3%ased c*aracteristics
13. E*ic* of t*e followin" is an element of financial statements identified under IF)F
a. Investment %, owners
%. Losses
c. Compre*ensive income
d. 06uit,
2 ( 12
Conceptual Framework <nderl,in" Financial !ccountin"
14. <nder IF)B a decrease in economic %enefit t*at results in a decrease in e6uit, is termed as
a8an9>
a. Loss of economic %enefit
%. Compre*ensive loss
c. 01pense
d. 5istri%utions to owners
15. 4*ase 5 of conver"ence pro&ect addresses t*e NNNNNNN.
a. elements and reco"nition
%. reportin" entit,
c. monetar, unit assumption
d. periodicit, assumption
Ans*ers to Muti&e C"oi%eC
11. %
12. c
13. d
14. c
15. %
S"ort Ans*erC
1#. E*at two assumptions are part of %ot* t*e IF) and /!!4 conceptual frameworkF
1. T*e monetar, unit assumption is part of eac* framework. ;oweverB t*e unit of measure
will var, dependin" on t*e currenc, used in t*e countr, in w*ic* t*e compan, incorporated.
T*e economic entit, assumption is also part of eac* frameworkB %ut some cultural differences
result in differences in its application.
1'. ;ow does t*e IF) conceptual framework differ from <.. /!!4@s frameworkF
2. E*ile t*ere is some a"reement t*at t*e role of financial reportin" is to assist users in
decision3makin"B t*e I!. framework *as *ad more of a focus on t*e o%&ective of providin"
information on mana"ement@s performance?often referred to as stewards*ip. It is likel, t*at
t*ere will %e muc* de%ate re"ardin" t*e role of stewards*ip in t*e conceptual framework.
2 ( 11