FINANCIAL ACCOUNTING & REPORTING

FAR.0702_Conceptual Framework of Accounting & Reporting FAR_702-Online

LECTURE NOTES
Background
The Conceptual Framework was issued by the IASB in September 2010. It
superseded the Framework for the Preparation and Presentation of Financial
Statements.

Structure of the Conceptual Framework

The Framework addresses:
• the objective of financial reporting (Chapter 1)
• the reporting entity (Chapter 2 to be added)
• the qualitative characteristics of useful financial information (Chapter 3)
• the definition, recognition and measurement of the elements from which financial
statements are constructed (Chapter 4 the remaining text of the 1989
Framework)
• concepts of capital and capital maintenance (Chapter 4 the remaining text of the
1989 Framework)

The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Framework flow logically
from the objective.

Purpose and Status of the Framework

The Framework describes the basic concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the
Framework is to:
(a) assist the FRSC in the development of future Philippine Financial Reporting
Standards (PFRSs) and in its review of existing PFRSs;
(b) assist the FRSC in promoting harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statements by
providing a basis for reducing the number of alternative accounting treatments
permitted by PFRSs;
(c) assist preparers of financial statements in applying PFRSs and in dealing with
topics that have yet to form the subject of an International Financial Reporting
Standard (IFRS);
(d) assist auditors in forming an opinion as to whether financial statements conform
with PFRSs;
(e) assist users of financial statements in interpreting the information contained in
financial statements prepared in conformity with PFRSs; and
(f) provide those who are interested in the work of FRSC with information about its
approach to the formulation of PFRSs.

The Framework serves as a guide in developing future PFRSs and as a guide to

resolving accounting issues that are not addressed directly in existing PFRSs.

In the absence of a Standard or an Interpretation that specifically applies to a

transaction, management must use its judgment in developing and applying an
accounting policy that results in information that is relevant and reliable. In making

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that judgment, PAS 8 requires management to consider the definitions, recognition

criteria, and measurement concepts for assets, liabilities, income, and expenses in
the Framework.

This Framework is not PFRS and hence does not define standards for any particular
measurement or disclosure issue. Nothing in this Framework overrides any specific
PFRS.

The FRSC recognizes that in a limited number of cases there may be a conflict
between the Framework and PFRS. In those cases where there is a conflict, the
requirements of the PFRS prevail over those of the Framework.

Chapter 1: The Objective of general purpose financial reporting

The objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources
to the entity.

Primary Users
The primary users of general purpose financial reporting are present and potential
investors, lenders and other creditors, who use that information to make decisions
about buying, selling or holding equity or debt instruments and providing or settling
loans or other forms of credit.

The primary users need information about the resources of the entity not only to
assess an entity's prospects for future net cash inflows but also how effectively and
efficiently management has discharged their responsibilities to use the entity's
existing resources (i.e., stewardship).

The Framework notes that general purpose financial reports cannot provide all the
information that users may need to make economic decisions. They will need to
consider pertinent information from other sources as well.

Other users
The Framework notes that other parties (including management, members of the
public, prudential and market regulators) may find general purpose financial reports
useful. However, they are not considered primary users and general purpose
financial reports are not primarily directed to them.

Users and Information Needs (1989 Framework)

The users of financial statements include present and potential investors,
employees, lenders, suppliers and other trade creditors, customers, governments
and their agencies and the public. They use financial statements in order to satisfy
some of their different needs for information. These needs include the following:

(a) Investors. The providers of risk capital and their advisers are concerned with
the risk inherent in, and return provided by, their investments. They need
information to help them determine whether they should buy, hold or sell.
Shareholders are also interested in information which enables them to assess
the ability of the entity to pay dividends.

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(b) Employees. Employees and their representative groups are interested in

information about the stability and profitability of their employers. They are
also interested in information which enables them to assess the ability of the
entity to provide remuneration, retirement benefits and employment
opportunities.
(c) Lenders. Lenders are interested in information that enables them to determine
whether their loans, and the interest attaching to them, will be paid when due.

(d) Suppliers and other trade creditors. Suppliers and other creditors are interested
in information that enables them to determine whether amounts owing to them
will be paid when due. Trade creditors are likely to be interested in an entity
over a shorter period than lenders unless they are dependent upon the
continuation of the entity as a major customer.

(e) Customers. Customers have an interest in information about the continuance of

an entity, especially when they have a long-term involvement with, or are
dependent on, the entity.

(f) Governments and their agencies. Governments and their agencies are
interested in the allocation of resources and, therefore, the activities of entities.
They also require information in order to regulate the activities of entities,
determine taxation policies and as the basis for national income and similar
statistics.

(g) Public. Entities affect members of the public in a variety of ways. For example,
entities may make a substantial contribution to the local economy in many ways
including the number of people they employ and their patronage of local
suppliers. Financial statements may assist the public by providing information
about the trends and recent developments in the prosperity of the entity and
the range of its activities.

Information about a reporting entity's economic resources, claims, and

changes in resources and claims
Economic resources and claims
Information about the nature and amounts of a reporting entity's economic
resources and claims assists users to assess that entity's financial strengths and
weaknesses; to assess liquidity and solvency, and its need and ability to obtain
financing. Information about the claims and payment requirements assists users to
predict how future cash flows will be distributed among those with a claim on the
reporting entity.

A reporting entity's economic resources and claims are reported in the statement of
financial position.

Changes in economic resources and claims

Changes in a reporting entity's economic resources and claims result from that
entity's performance and from other events or transactions such as issuing debt or
equity instruments. Users need to be able to distinguish between both of these
changes.

Financial performance reflected by accrual accounting

Information about a reporting entity's financial performance during a period,

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representing changes in economic resources and claims other than those obtained
directly from investors and creditors, is useful in assessing the entity's past and
future ability to generate net cash inflows. Such information may also indicate the
extent to which general economic events have changed the entity's ability to
generate future cash inflows.

The changes in an entity's economic resources and claims are presented in the
statement of comprehensive income.

Financial performance reflected by past cash flows

Information about a reporting entity's cash flows during the reporting period also
assists users to assess the entity's ability to generate future net cash inflows. This
information indicates how the entity obtains and spends cash, including information
about its borrowing and repayment of debt, cash dividends to shareholders, etc.

The changes in the entity's cash flows are presented in the statement of cash flows.

Changes in economic resources and claims not resulting from financial performance
Information about changes in an entity's economic resources and claims resulting
from events and transactions other than financial performance, such as the issue of
equity instruments or distributions of cash or other assets to shareholders is
necessary to complete the picture of the total change in the entity's economic
resources and claims.

The changes in an entity's economic resources and claims not resulting from
financial performance is presented in the statement of changes in equity.

Chapter 2: The Reporting entity

This chapter is a work in progress.

Chapter 3: Qualitative characteristics of useful financial information

The qualitative characteristics of useful financial reporting identify the types of
information are likely to be most useful to users in making decisions about the
reporting entity on the basis of information in its financial report. The qualitative
characteristics apply equally to financial information in general purpose financial
reports as well as to financial information provided in other ways.

Financial information is useful when it is relevant and represents faithfully what it

purports to represent. The usefulness of financial information is enhanced if it is
comparable, verifiable, timely and understandable.

Fundamental qualitative characteristics

Relevance and faithful representation are the fundamental qualitative characteristics
of useful financial information. Information must be both relevant and faithfully
represented if it is to be useful.

Relevance
Relevant financial information is capable of making a difference in the decisions
made by users. Financial information is capable of making a difference in decisions if
it has predictive value, confirmatory value, or both. The predictive value and
confirmatory value of financial information are interrelated.

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Materiality is an entity-specific aspect of relevance based on the nature or

magnitude (or both) of the items to which the information relates in the context of
an individual entity's financial report.

Faithful representation
General purpose financial reports represent economic phenomena in words and
numbers, To be useful, financial information must not only be relevant, it must also
represent faithfully the phenomena it purports to represent. This fundamental
characteristic seeks to maximize the underlying characteristics of completeness,
neutrality and freedom from error.

Enhancing qualitative characteristics

Timeliness, verifiability, understandability and comparability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented.

Timeliness
Timeliness means that information is available to decision-makers in time to be
capable of influencing their decisions.

Verifiability
Verifiability helps to assure users that information represents faithfully the economic
phenomena it purports to represent. Verifiability means that different
knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful
representation.

Understandability
Classifying, characterizing and presenting information clearly and concisely makes it
understandable. While some phenomena are inherently complex and cannot be
made easy to understand, to exclude such information would make financial reports
incomplete and potentially misleading. Financial reports are prepared for users who
have a reasonable knowledge of business and economic activities and who review
and analyze the information with diligence.

Comparability
Information about a reporting entity is more useful if it can be compared with a
similar information about other entities and with similar information about the same
entity for another period or another date. Comparability enables users to identify
and understand similarities in, and differences among, items.

Applying the enhancing qualitative characteristics

Enhancing qualitative characteristics should be maximized to the extent necessary.
However, enhancing qualitative characteristics (either individually or collectively)
cannot render information useful if that information is irrelevant or not represented
faithfully.

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by general
purpose financial reporting. Reporting such information imposes costs and those
costs should be justified by the benefits of reporting that information. The IASB
assesses costs and benefits in relation to financial reporting generally, and not

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solely in relation to individual reporting entities. The IASB will consider whether
different sizes of entities and other factors justify different reporting requirements in
certain situations.

Chapter 4: The Framework: the remaining text

Chapter 4 contains the remaining text of the Framework approved in 1989. As the
project to revise the Framework progresses, relevant paragraphs in Chapter 4 will
be deleted and replaced by new Chapters in the IFRS Framework. Until it is
replaced, a paragraph in Chapter 4 has the same level of authority within IFRSs as
those in Chapters 1-3.

Underlying Assumption
The Framework states that the going concern assumption is an underlying
assumption. Thus, the financial statements presume that an entity will continue in
operation indefinitely or, if that presumption is not valid, disclosure and a different
basis of reporting are required.

The Elements of Financial Statements

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 the elements of financial statements.

The elements directly related to financial position (balance sheet) are:

• Assets
• Liabilities
• Equity

The elements directly related to performance (income statement) are:

• Income
• Expenses

The cash flow statement reflects both income statement elements and some
changes in balance sheet elements.

Definitions of the elements relating to financial position

• An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.

• A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.

• Equity is the residual interest in the assets of the entity after deducting all its
liabilities.

Definitions of the elements relating to performance

• Income is increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.

• Expenses are decreases in economic benefits during the accounting period in the

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form of outflows or depletions of assets or incurrences of liabilities that result in

decreases in equity, other than those relating to distributions to equity
participants.

The definition of income encompasses both revenue and gains. Revenue arises in
the course of the ordinary activities of an entity and is referred to by a variety of
different names including sales, fees, interest, dividends, royalties and rent. Gains
represent other items that meet the definition of income and may, or may not, arise
in the course of the ordinary activities of an entity. Gains represent increases in
economic benefits and as such are no different in nature from revenue. Hence, they
are not regarded as constituting a separate element in the Framework.

The definition of expenses encompasses losses as well as those expenses that arise
in the course of the ordinary activities of the entity. Expenses that arise in the
course of the ordinary activities of the entity include, for example, cost of sales,
wages and depreciation. They usually take the form of an outflow or depletion of
assets such as cash and cash equivalents, inventory, property, plant and
equipment. Losses represent other items that meet the definition of expenses and
may, or may not, arise in the course of the ordinary activities of the entity. Losses
represent decreases in economic benefits and as such they are no different in
nature from other expenses. Hence, they are not regarded as a separate element in
this Framework.

Recognition of the Elements of Financial Statements

Recognition is the process of incorporating in the balance sheet or income statement
an item that meets the definition of an element and satisfies the following criteria
for recognition:
• It is probable that any future economic benefit associated with the item will flow
to or from the entity; and
• The item's cost or value can be measured with reliability.

Based on these general criteria:

• An asset is recognized in the balance sheet when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that can
be measured reliably.

• A liability is recognized in the balance sheet when it is probable that an outflow of

resources embodying economic benefits will result from the settlement of a
present obligation and the amount at which the settlement will take place can be
measured reliably.

• Income is recognized in the income statement when an increase in future

economic benefits related to an increase in an asset or a decrease of a liability has
arisen that can be measured reliably. This means, in effect, that recognition of
income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable).

• Expenses are recognized when a decrease in future economic benefits related to a

decrease in an asset or an increase of a liability has arisen that can be measured
reliably. This means, in effect, that recognition of expenses occurs simultaneously

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with the recognition of an increase in liabilities or a decrease in assets (for

example, the accrual of employee entitlements or the depreciation of equipment).

Measurement of the Elements of Financial Statements

Measurement involves assigning monetary amounts at which the elements of the
financial statements are to be recognized and reported.

The Framework acknowledges that a variety of measurement bases are used today
to different degrees and in varying combinations in financial statements, including:

• Historical cost. Assets are recorded at the amount of cash or cash equivalents
paid or the fair value of the consideration given to acquire them at the time of
their acquisition. Liabilities are recorded at the amount of proceeds received in
exchange for the obligation, or in some circumstances (for example, income
taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy
the liability in the normal course of business.

• Current cost. Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or an equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.

• Realizable (settlement) value. Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the asset in an orderly
disposal. Liabilities are carried at their settlement values; that is, the
undiscounted amounts of cash or cash equivalents expected to be paid to satisfy
the liabilities in the normal course of business.

• Present value. Assets are carried at the present discounted value of the future
net cash inflows that the item is expected to generate in the normal course of
business. Liabilities are carried at the present discounted value of the future net
cash outflows that are expected to be required to settle the liabilities in the
normal course of business.

Historical cost is the measurement basis most commonly used today, but it is
usually combined with other measurement bases. The Framework does not include
concepts or principles for selecting which measurement basis should be used for
particular elements of financial statements or in particular circumstances. Individual
standards and interpretations do provide this guidance, however.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

Concepts of Capital
A financial concept of capital is adopted by most entities in preparing their financial
statements. Under a financial concept of capital, such as invested money or
invested purchasing power, capital is synonymous with the net assets or equity of
the entity. Under a physical concept of capital, such as operating capability, capital
is regarded as the productive capacity of the entity based on, for example, units of
output per day.

Concepts of Capital Maintenance and the Determination of Profit

• Financial capital maintenance. Under this concept a profit is earned only if the
financial (or money) amount of the net assets at the end of the period exceeds

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the financial (or money) amount of net assets at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.
Financial capital maintenance can be measured in either nominal monetary units
or units of constant purchasing power.

• Physical capital maintenance. Under this concept a profit is earned only if the
physical productive capacity (or operating capability) of the entity (or the
resources or 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.

- done -

REVIEW QUESTIONS

REVIEW QUESTION: MULTIPLE CHOICE THEORY

1. Which of the following is the foundation of the Conceptual Framework?
a. The objective of general purpose financial reporting.
b. A reporting entity concept.
c. The qualitative characteristics of, and the constraint on, useful financial
information.
d. The elements of financial statements.

2. The Conceptual Framework includes all of the following except:

a. Objective of financial reporting.
b. Supplementary information
c. Elements of financial statements.
d. Qualitative characteristics of accounting information.

3. The Conceptual Framework

a. Is an accounting standard that defines standards for a particular measurement
or disclosure issue.
b. Is concerned with special purpose reports, for example, prospectuses and
computations prepared for taxation purposes.
c. Applies to the financial statements of all commercial, industrial and business
reporting enterprises, whether in the public or private sector.
d. All of the above

4. Which of the following statement(s) regarding the conceptual framework is (are)

incorrect?
a. The framework applies to financial statements of business reporting
enterprises both in the private sector and in the public sector
b. In cases where there is conflict between the framework and PFRS, the
requirement of the framework will prevail
c. Both a and b
d. Neither a nor b

5. Which is not a specific purpose of the conceptual framework?

a. To assist preparers of financial statement in applying the accounting
standards.
b. To assist FRSC in the development of future Philippine Financial Reporting
Standards (PFRSs) and in its review of existing PFRSs.

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c. To assist users of financial statements in interpreting the information

contained in financial statements.
d. To assist the Board of Accountancy in promulgating rules and regulations
affecting the practice of accountancy in the Philippines.

6. What is the objective of financial reporting as indicated in the conceptual

framework?
a. Provide information that is useful to those making investing and credit
decisions.
b. Provide information that is useful to management.
c. Provide information about those investing in the entity.
d. All of the above.

7. The underlying theme of the conceptual framework is

a. Decision usefulness c. Reliability
b. Understandability d. Comparability

8. The “Primary users” of financial information include

I. Existing and potential investors
II. Existing and potential lenders and other creditors
III. User group such as employees, customers, government and their agencies,
and the public
a. I only b. I and II only c. I and III only d. I, II and III

9. Which statements is false concerning users and their information needs?

a. Lenders are interested in information that enables them to determine whether
their loans and the interest on these loans will be paid when due.
b. The providers of risk capital and their advisers are concerned with the with the
risk of inherent in return provided by their investment
c. Government and its agencies have an interest in information about the
continuance of an enterprise especially when they have long-term involvement
or are dependent on the enterprise.
d. Employees and their representative groups are interested in information about
the stability and profitability of the entity.

10. The users of financial statements who are interested in information that
enables them to determine whether the amounts owing to them will be paid
when due
a. Lenders c. Customers
b. Investors d. Suppliers and other trade creditors

11. They are interested in information about trends and recent developments in
the prosperity of the enterprise and the range of its activities
a. Investors b. Lenders c. Public d. Customers

12. Which statement is incorrect regarding general purpose financial statements?

a. General purpose financial statements are those intended to meet the needs of
users who are not in a position to require an entity to prepare reports tailored
to their particular information needs.
b. Many existing and potential investors, lenders and other creditors are the
primary users to whom general purpose financial reports are directed.

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c. General purpose financial reports do not and cannot provide all of the
information that existing and potential investors, lenders and other creditors
need.
d. General purpose financial reports are designed to show the value of a
reporting entity since they provide information to help existing and potential
investors, lenders and other creditors to estimate the value of the reporting
entity.

13. The statement of changes in equity presents

a. A reporting entity's economic resources and claims.
b. The changes in an entity's economic resources and claims.
c. The changes in the entity's cash flows.
d. The changes in an entity's economic resources and claims not resulting from
financial performance.

14. Which of the following statements about financial statements is(are) incorrect?
a. They show the results of the stewardship of management of the resources
entrusted to it by the capital providers.
b. They are the primary responsibility of both management and the external
auditor after audit.
c. They are prepared at least annually and are directed to the common
information needs of a wide range of statement users.
d. All of the above

15. They are the attributes that make the information provided in financial
statements useful to users
a. Basic features c. Basic assumptions
b. Basic elements d. Qualitative characteristics

16. 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.

17. The “fundamental” qualitative characteristics are

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

18. Which of the following statements about the qualitative characteristics are
incorrect?
I. Faithful representation is the capacity of information to make a difference in
decision by helping users form prediction about outcome of past, present and
future events or confirm/correct prior expectations
II. The quality of relevance assures readers that the financial information is free
from bias and faithfully represents what it purports to show, including
adequate disclosure of significant information
III. Under the IASB Conceptual Framework, conservatism is not a concept that is
recognized as a qualitative characteristic.

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a. I and II only b. I and III only c. II and III only d. I,II and III

19. Accounting information is considered to be 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.

20. What qualitative characteristic is met if information influences the economic

decisions of users by helping them evaluate past, present or future events or
confirming or correcting their past evaluations?
a. Understandability c. Reliability
b. Relevance d. Comparability

21. What is an entity-specific aspect of relevance based on the nature or

magnitude (or both) of the items to which the information relates in the context
of an individual entity's financial report?
a. Predictive value c. Materiality
b. Confirmatory value d. Timeliness

22. The ingredients of faithful representation are

a. Completeness and neutrality
b. Completeness and free from error
c. Completeness, neutrality and free from error
d. Completeness, neutrality, free from error and conservatism

23. Information is neutral if it

a. Is free from bias toward a predetermined result
b. Would have no impact on a decision maker
c. Provides benefits which are at least equal to the costs of its preparation
d. Can be compared with similar information about an enterprise at other points
in time

24. The enhancing qualitative characteristics of financial information are

a. Comparability and understandability
b. Verifiability and timeliness
c. Comparability, understandability and verifiability
d. Comparability, understandability, verifiability and timeliness

25. Which statement relates to comparability?

a. Information is available to decision-makers in time to be capable of influencing
their decisions.
b. Different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a
faithful representation.
c. Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the information
with diligence.
d. Enables users to identify and understand similarities in, and differences
among, items.

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26. Comparability of financial information depends on

a b c d
Consistency yes yes no no
Regular reporting periods no yes no yes

27. The conceptual framework includes a cost-benefit constraint. 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.

28. Which of the following are benefits of providing financial information?

a. Potential litigation. c. Disclosure to competition.
b. Auditing. d. Improved allocation of resources.

29. All of the following represent costs of providing financial information except
a. Preparing b. Disseminating c. Accessing capital d. Auditing

30. What is the only underlying assumption mentioned in the new Conceptual
Framework for Financial Reporting?
a. Going concern c. Time period
b. Accounting entity d. Monetary unit

31. The assumption that an enterprise will continue in operation for the
foreseeable future is based on
a. Going concern c. Prudence
b. Accounting entity d. Materiality

32. Are the following statements regarding “recognition” true or false?

i. An accountable item is deemed “recognized” if it is recorded in the journals
and ledgers.
II. Recognition is the process of determining the amounts at which the elements
of the financial statements are recognized.
III. Recognition is the process of incorporating in the FS an item that meets the
definition of an element and the criteria for recognition.
Statement I Statement II Statement III
a. False False True
b. True True False
c. True False True
d. True True True

33. When should an item that meets the definition of an element be recognized,
according to the Framework?
a. When it is probable that any future economic benefit associated with the item
will flow to or from the entity
b. When the element has a cost or value that can be measured with reliability
c. When the entity obtains control of the rights or obligations associated with the
item

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d. When it is probable that any future economic benefit associated with the item
will flow to or from the entity and the item has a cost or value that can be
measured with reliability

34. To meet the probability criterion, in relation to recognition of assets and

liabilities, the expectation that future economic benefits will flow to or from an
entity must be
a. Certain c. Sufficiently certain
b. Virtually certain d. Not uncertain

35. The future economic benefit embodied in an asset is the potential to

contribute, directly or indirectly, to the flow of cash and cash equivalents to the
entity. The potential may
a. Be a productive one that is part of the operating activities of the entity
b. Take the form of convertibility into cash or cash equivalents
c. Take the form of a capability to reduce cash outflows, such as when an
alternative manufacturing process lowers the costs of production
d. Any of the above.

36. Which of the following is (are) essential to the existence of an asset?

a. Legal right b. Physical form c. Both a and b d. Neither a nor b

37. An entity made an unusually high profit for the current year because it
negotiated a significantly lower cost price for its main raw material at a time
when the selling price of its products was rising sharply. Management does not
want to make public the unusually high profit because they believe that
knowledge of the entity’s profitability would result in their customers seeking to
negotiate lower selling prices when purchasing goods from the entity.
Consequently, management would like to decrease profit for the year by
recognizing a provision for unforeseen possible expenses.
a. Because creation of the provision is prudent, it is acceptable accounting.
b. Because creation of the provision is common practice in the jurisdiction in
which the entity operates, it is acceptable accounting.
c. Because they do not satisfy the definition of a liability, the entity cannot create
a provision for unforeseen possible expenses.
d. Provided the reason for creating the provision is explained in the notes, it is
acceptable accounting.

38. The process of determining the monetary amounts at which the elements of
the financial statements are to be recognized is known as
a. Measurement b. Recognition c. Footing d. Extension

39. Which of the following measurement attributes is not currently used in

practice?
a. Present value c. Current replacement cost
b. Net realizable value d. Inflation-adjusted cost

40. Historical cost is

a. The amount of cash or cash equivalent paid or the consideration to acquire an
asset.
b. The amount of cash or cash equivalent that would have to be paid if the same
or an equivalent asset is acquired currently.

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c. The amount of cash or cash equivalent that could currently be obtained by

selling the asset in an orderly disposal.
d. The discounted value of the future net cash inflow that an asset is expected to
generate in the normal course of business.

41. It is the undiscounted amount of cash or cash equivalent expected to be paid

to satisfy the liabilities in the normal course of business
a. Present value b. Current cost c. Settlement value d. Historical cost

42. Under this concept, a profit is earned only if the financial (money) amount of
the net assets at the end of the period exceeds the financial (money) amount of
net assets at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period.
Under this concept, a profit is earned only if the physical productive capacity (or
operating capability) of the enterprise (or the resources or 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.
First statement Second statement
a. Physical capital Financial capital
b. Financial capital Physical capital
c. Financial capital Financial capital
d. Physical capital Physical capital

43. Contributions from and distributions to owners are considered as income and
expenses, respectively, under
a. The financial capital concept c. Both a and b
b. The physical capital concept d. Neither a nor b

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