CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Part I. Multiple Choice

1. Comprises the principles, standards, conventions and assumptions used in the preparation and
presentation of financial statements.
a. Accounting assumptions
b. Accounting constraints
c. Generally accepted accounting principles
d. Generally accepted auditing standards
2. The body that developed accounting standards called International Accounting Standards (IASs)
which earned worldwide acceptance and observance
a. International Accounting Standards Board
b. International Accounting Standards Committee
c. International Financial Reporting Standards Council
d. Financial Accounting Standards Board
3. International Accounting Standards Board (IASB) is governed by
a. American Institute of CPAs (AICPA)
b. International Accounting Standards Committee (IASC)
c. IFRS Foundation
d. Financial Accounting Standards Board (IASB)
4. International Financial Reporting Standards is a collective terminology to refer to (choose the
exception)
a. standards developed by International Accounting Standards Committee
b. standards developed by International Accounting Standards Board
c. standards developed by Financial Accounting Standards Board
d. interpretations by Standing Interpretations Committee
5. In the Philippines, the body tasked to formulate accounting standards was the
a. Accounting Standards Council (ASC)
b. Financial Reporting Standards Council (FRSC)
c. Philippine Institute of CPAs (PICPA)
d. Board of Accountancy (BOA)
6. Prior to full adoption of international accounting standards, the Philippines considered the issuances
of US Financial Accounting Standards Board which are called
a. International American Accounting Standards (IAAS)
b. Standards on the Preparation and Presentation of Financial Statements (SPPFS)
c. Statement of Financial Accounting Standards (SFAS)
d. International Reporting Standards (IRS)
7. Financial Reporting Standards Council (FRSC) is
a. Created by the Board of Accountancy upon the recommendation of the Philippine Regulation
Commission
b. Created by the Philippine Regulation Commission upon the recommendation of the Board of
Accountancy
c. Created by the Board of Accountancy upon the recommendation of the Philippine Institute of
CPAs
d. Created by the Philippine Institute of CPAs upon the recommendation of the Board of
Accountancy
8. Which of the following bodies is not represented in the Financial Reporting Standards Council (FRSC)
a. Securities and Exchange Commission
b. Department of Trade and Industry
c. Commerce and Industry
d. Major organization of preparers and users of financial statements
9. The body created by Financial Reporting Standards Council (FRSC) to assist the latter in establishing
and improving financial reporting standards in the Philippines, is
a. Philippine Interpretations Committee
b. Philippine Council of Standards and Interpretations
c. Financial Reporting Interpretations Committee
d. Reporting Standards Interpretations Council
10. The generally accepted accounting principles (GAAP) observed in the Philippines are the following,
except
a. Philippine Accounting Standards
b. Philippine Financial Reporting Standards
c. Philippine Interpretations
d. Statement of Financial Accounting Standards
11. The fundamental qualitative characteristics of useful financial information are
a. Relevance and substance over form
b. Faithful representation and substance over form
c. Relevance and faithful representation
d. Relevance, substance over form, and faithful representation
12. Which is not an enhancing qualitative characteristics of useful financial information are?
a. Verifiability
b. Completeness
c. Understandability
d. Timeliness
13. Statement I: An irrelevant financial information will become relevant if all the enhancing qualitative
characteristics of useful financial information are present.
Statement II: The enhancing qualitative characteristics, as a group, can make information useful if
that information is irrelevant or not faithfully represented.
a. Both statements are true
b. Both statements are false
c. Only statement I is true
d. Only statement II is true
14. The ability of the information to influence a decision
a. Useful
b. Relevance
c. Understandable
d. Complete
15. To be useful, financial information must present relevant phenomena and the phenomena that it
purports to represent.
a. Relevance
b. Faith representation
c. Faithful presentation
d. Completeness
16. Financial statements can be used as an input to processes employed by users to predict outcomes,
although it need not be a prediction or a forecast.
a. Confirmatory value
b. Predictive value
c. Relevance
d. Faithful presentation
17. It includes all information necessary for a use to understand the phenomenon being depicted,
including all necessary descriptions and explanations.
a. Completeness
b. Confirmatory value
c. Faithful representation
d. Relevance
18. It means without bias in the selection or presentation of financial information.
a. Faithful presentation
b. Neutrality
c. Prudence
d. Completeness
19. It means there are no omissions in the description of the phenomenon, and the process used to
produce the reported information has been selected and applied with no errors in the process.
a. Verifiability
b. Completeness
c. Neutrality
d. Free from error
20. It means the information is not slanted, weighted, emphasized, de-emphasized or otherwise
manipulated to increase the probability that financial information will be received favorably or
unfavorably by users.
a. Free from error
b. Complete
c. Neutral
d. Verifiable
21. It is the qualitative characteristic that enables users to identify and understand similarities in, and
differences among, items.
a. Relevance
b. Comparability
c. Understandability
d. Completeness
22. It means that different knowledgeable and independent observers could reach consensus, although
not necessarily complete agreement, that a particular depiction is a faithful representation.
a. Comparability
b. Identifiability
c. Verifiability
d. Completeness
23. It means having information available to decision-makers in time to be capable of influencing their
decisions.
a. Timeliness
b. Presence
c. Usefulness
d. Availability
24. Classifying, characterizing and presenting information clearly and concisely makes it
a. Timely
b. Relevant
c. Understandable
d. Verifiable
25. Statement I: Enhancing qualitative characteristics should be maximized to the extent possible.
Statement II: The qualitative characteristics of useful financial information identify the types of
information that are likely to be most useful to the existing and potential investors, lenders and other
creditors for making decisions about the reporting entity on the basis of information in its financial
report (financial information).
a. Both statements are true.
b. Both statements are false.
c. Only Statement I is true.
d. Only Statement II is true.
26. What is meant by comparability when discussing financial accounting information?
a. Information has predictive or feedback value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across companies.
d. Information is timely
27. Company A issuing its annual financial reports within one month of the end of the year is an example
of which enhancing quality of accounting information?
a. Comparability.
b. Timeliness.
c. Understandability.
d. Verifiability.
28. Decision makers vary widely in the types of decisions they make, the methods of decision making
they employ, the information they already possess or can obtain from other sources, and their ability
to process information. Consequently, for information to be useful there must be a linkage between
these users and the decisions they make. This link is
a. relevance.
b. faithful representation.
c. understandability.
d. materiality.
29. The quality of information that means the numbers and descriptions match what really existed or
happened is
a. relevance.
b. faithful representation.
c. completeness.
d. neutrality.
30. The overriding criterion by which accounting information can be judged is that of
a. usefulness for decision making.
b. freedom from bias.
c. timeliness.
d. comparability.
31. Asset
a. is a resource owned by the entity arising from past transactions or events and from which future
economic benefits are expected to flow to the entity
b. is a resource controlled by the entity arising from past transactions or events and from which
future economic benefits are expected to flow from the entity
c. is a resource owned by the entity arising from past transactions or events and from which future
economic benefits are expected to flow from the entity
d. is a resource controlled by the entity arising from past transactions or events and from which
future economic benefits are expected to flow to the entity
32. Liability
a. is a past 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.
b. is a present obligation of the entity arising from present events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
c. is a present obligation of the entity arising from past events, the settlement of which is expected
to result in an inflow from the entity of resources embodying economic benefits.
d. 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.
33. Owner’s claim or equity
a. is the residual interest in the assets of the entity after deducting all its liabilities
b. is the residual interest in the liabilities of the entity after deducting all assets
c. is equal to assets plus liability
d. is equal to liability minus assets
34. An asset is recognized in the balance sheet when
a. it is probable that the future economic benefits will flow to the entity
b. the asset has a cost or value that can be measured reliably
c. either a nor b
d. both a and b
35. A liability is recognized in the balance sheet when
a. it is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation
b. the amount at which the settlement will take place can be measured reliably
c. either a or b
d. both a and b
36. Income is
a. increase in economic benefits during the accounting period in the form of increase assets and
liabilities that result in increases in equity, other than those relating to contributions from equity
participants
b. increase in economic benefits during the accounting period in the form increase of assets or
decreases of liabilities that result in increases or decrease in equity, other than those relating to
contributions from equity participants
c. increase in economic benefits during the accounting period in the form of increase of assets or
decreases of liabilities that result in increases in equity, including those relating to contributions
from equity participants
d. increase 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
37. Expense is
a. decrease in economic benefits during the accounting period in the 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
b. decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets and liabilities that result in decreases in equity, other than those relating
to distributions to equity participants
c. decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in increases in equity, other than
those relating to distributions to equity participants
d. decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, including
those relating to distributions to equity participants
38. Which of the following is true about income?
a. Income encompasses both revenue and gains
b. Revenue encompasses both income and gain
c. Revenue includes income but not gain
d. Income includes revenue but not gain
39. The elements involved in the preparation of statement of financial position are
a. Income and expense
b. Asset, liability and equity
c. Asset, liability, equity, income and expense
d. None of the above
40. The elements involved in the preparation of statement of comprehensive income are
a. Income and expense
b. Asset, liability and equity
c. Asset, liability, equity, income and expense
d. None of the above

Part II Match the information needs in Group A with the respective users in Group B.

Group A

41. Determine whether the enterprise could pay the goods or services provided to them
42. Assure safety and profitability of their shareholdings
43. Evaluate whether the enterprise has the ability to deliver the required goods and services
44. Determine ability of the enterprise to pay off its national and local taxes on time
45. Plan and control operations of the enterprise
46. Bargain for higher wages and improved benefits
47. Determine whether they should buy, hold or sell
48. Answer the question “do we lend funds to the enterprise?”
49. Determine the results of its stewardship for a particular accounting period
50. Evaluate whether based on their liquidity and solvency ratios, the enterprise can pay off its existing
debt

Group B

A. Government and its agencies

B. Present shareholders
C. Potential shareholders
D. Present creditors
E. Potential creditors
F. Management
G. Employees
H. Suppliers
I. Customers
Part III: From the following choices, determine which of the qualitative characteristics of useful financial
information was violated in the following situations.

A. Relevance (including materiality) D. Comparability

B. Faithful representation E. Understandability
C. Verifiability F. Timeliness

51. A company charges the cost of its new office equipment as expenses in the year of purchase
although the benefits from the new equipment are expected to be derived for more than one
accounting period.
52. A company uses the first-in, first-out (FIFO) in determining the cost of its inventories in the current
year, while using the weighted-average method in the previous year.
53. A company that decides to withhold terminologies such as “allowance for doubtful accounts” or
“accumulated depreciation” in order for the users who lack background in accounting and business
to comprehend the financial report.
54. The same inventory list is being used by both the company’s representative and the external
auditor as reference on their separate inventory counts. Both had a count that is different from
what is indicated in the inventory list.
55. Financial statements that is complete, free from error and any bias was not provided in time for an
important board meeting. The financial statements would have been used in making important
economic decisions.
56. A two-year statement of comprehensive income prepared at different covered periods (current
year is for a twelve-month period, whereas the previous year is only for a nine-month period).
57. A financial statements that fails to correlate its predictive and confirmatory roles.
58. A complete set of general purpose financial statements that caters only to the information needs of
the company’s shareholders.
59. A company did not recognize a loss from theft as it will make its profitability ratios unattractive to
investors.
60. Non-provision of quarterly interim reports by a company when it is required to do so.
61. Bonds payable was not recognized in the financial statements as some potential investors do not
know what bonds are.
62. The financial performance of a merchandising company was benchmarked to the financial
performance of a bank to determine whether it is efficient in utilizing its assets to generate
earnings for the company.
63. A company only provided its complete set of financial statements to its stockholders nine months
after the end of the reporting period.
64. The company with a total assets of P100 million present as a separate line item in its statement of
financial position, a prepaid expense amounting to P1,500.
65. The management deliberately overstate its revenues to meet their quota for year. It was
discovered that their year-end bonuses are dependent on the attainment of the quota.
66. The accountant of the entity records the company’s P500 trash bin as an asset in the books.
67. An entity changes its method of depreciating its building every year depending on what method
will yield the highest profit.
68. Inventories amounting to P150,000 became obsolete in the company’s warehouse. Fearing that it
will increase its costs during the year, the company still considered it as an asset at the end of the
reporting period.
69. The financial position of SM, a large retail conglomerate, was analyzed, in terms of monetary
values, with that of a sari-sari store.
70. A company classified its fund set aside for purchase of a building as a current asset in its statement
of financial position.

Part IV. If the statement is correct, write TRUE on the answer sheet. If it is incorrect, change the
underlined word or phrase to make the statement correct.

71. Reliable information provides both confirmatory and predictive value.

72. Management accounting serves the information needs of internal users.
73. The current accounting standard-setting body in the Philippines is called the Accounting Standards
Council (ASC).
74. The Board of Accountancy is the body that regulates the practice of accountancy in the Philippines
75. Auditing is a service activity whose function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decisions.
76. The means by which quantitative financial information and other relevant information are
communicated to the intended is through the financial statements.
77. The accounting standards adopted in the Philippines that originated from the works of the
International Accounting Standards Committee (IASC) is the PAS.
78. The accounting standards adopted in the Philippines that originated from the works of the
International Accounting Standards Board (IASB) is the PFRS.
79. Accounting deals with an independent examination of an enterprise’s financial statements to
determine whether these financial statements are prepared in accordance with the applicable
financial reporting standards.
80. Accounting is divided into two broad branches: Tax Accounting and Managerial Accounting.
81. Historical cost is the value of the costs incurred in acquiring or creating an asset.
82. Current cost is the amount of cash or cash equivalent that would have to be paid if the same asset
was acquired today.
83. Entry values are measurement bases on the date of measurement (subsequent to acquisition),
disposal, or settlement.
84. Historical cost and current cost are examples of exit values.
85. When users of financial statements are primarily concerned with the maintenance of nominal
invested capital or the purchasing power of invested capital, the financial concept of capital is to be
used.
86. When the users of the financial statements are more concerned with the operating capability of
the enterprise, the physical concept of capital is used.
87. Income refers to increases in the company’s equity, other than the contributions made by the
owners, that arises from incidental or peripheral transactions.
88. Expenses refers to decreases in the company’s equity, other than the distributions made to the
owners, that arises from the normal course of business.
89. Relevance and faithful representation pertain to the enhancing qualitative characteristics of useful
financial information.
90. Comparability and understandability are some of the fundamental qualitative characteristics of
useful financial information.
91. Materiality is affected by the size and nature of the item.
92. To be representationally faithful, the information must be comparative, neutral, and free from
error.
93. Information about the entity’s assets, liabilities and equity are presented in the statement of
comprehensive income
94. A verifiable information is impartial and is not biased towards the particular needs or desires of
specific users.
95. Comparability within the reporting entity for at least two reporting periods is called inter-
comparability.
96. Comparability between and among enterprises within the same industry is called intra-
comparability.
97. Physical form is not essential in order to recognize an asset.
98. A mere intention to acquire an asset in the future does not give rise to an asset.
99. A liability is a result of a past event, otherwise known as the obligating event.
100. A liability may arise from law or from an entity’s past actions.