1. Conceptual Framework is a body of interrelated objectives and fundamentals.

The objectives identify the

goals and purposes of financial reporting and the fundamentals are the underlying concepts that help achieve
those objectives. Those concepts provide guidance in selecting transactions, events, and circumstances to be
accounted for, how they should be recognized and measured, and how they should be summarized and
reported.
2. The basic purposes of the framework are:
a) To assist the Board in the development of future IFRSs and in its review of existing IFRSs
b) To assist the Board 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 IFRSs
c) To assist national standard-setting bodies in developing national standards;
d) To assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet
to form the subject of an IFRS
e) To assist auditors in forming an opinion on whether financial statements comply with IFRSs
f) To assist users of financial statements in interpreting the information contained in financial
statements prepared in compliance with IFRSs
g) To provide those who are interested in the work of the IASB with information about its approach to
the formulation of IFRSs.
3. Nothing in the Framework overrides any Standard or any requirement in a Standard. In case of rare conflict,
the requirements of PFRS prevail over the Conceptual Framework.
4. Primary users are present and potential investors, lenders and other creditors. Investors will want to know
what to expect from their investment, and whether or not to invest further or sell their current holdings. Lenders
want information to help them understand if their loans will be repaid when due, and whether or not to issue
new loans to the entity. Other creditors want to know whether or not to sell goods or services on credit to the
entity.
5. Other users include employees, customers, governments, market regulators and the public. Employees will
want to know whether they will be rightfully compensated. Customers want to know whether the company will
survive long enough in the future. Government needs information for taxation purposes, market regulators for
regulation purposes. The public would want to know about the products and employment opportunities for
citizens.
6. Scope of conceptual framework:
a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. Definition, recognition and measurement of the elements from which financial statements are
constructed
d. Concepts of capital and capital maintenance
7. Financial reporting is the provision of financial information about an entity to external users that is useful to
them in making economic decisions and for assessing the effectiveness of the entity’s management.
8. Financial reports include not only financial statements but also other means of communicating information
that relates directly or indirectly to the financial accounting process. Financial reports also include nonfinancial
information. 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. Financial statements are often
used to communicate financial health to outside entities.
9. The overall objective of 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.
10. Specific objectives of financial reporting are:
a. To provide information useful in making decisions about providing resources to the entity
b. To provide information useful in assessing the prospects of future net cash flows to the entity.
c. To provide information about entity resources, claims and changes in resources and claims.
11. Qualitative characteristics are the qualities or attributes that make financial accounting information useful to
the users.
12. The fundamental qualitative characteristics relate to the content or substance of financial information.
13. The two fundamental qualitative characteristics are relevance and faithful representation.
14. The most efficient and effective process of applying the fundamental qualitative characteristics are:
a. Identify an economic phenomenon that has the potential to be useful.
b. Identify the type of information about the economic phenomenon.
c. Determine whether the information is available.
15. Relevance is the capacity of information to influence or make a difference in the decisions made by the
users.
16. The two ingredients of relevance are predictive value and feedback/confirmatory value.
17. Predictive Value – Information can help users increase the likelihood of correctly predicting or forecasting
the outcome of certain events.
18. Feedback/Confirmatory Value – Information can help users confirm or correct earlier expectations.
19. Materiality is a practical rule in accounting which dictates that strict adherence to GAAP is not required
when the items are not significant enough to affect the evaluation, decision and fairness of the financial
statements.
20. Information is material if omitting it or misstating it could influence decisions that users make on the basis
of financial information about a specific reporting entity. In other words, 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.
21. The elements of financial statements refer to the quantitative information reported in the statement of
financial position and income statement. They are the building blocks from which financial statements are
constructed. These elements are the broad classes of events or transactions that are grouped according to
their economic characteristics.
22. The elements directly related to the measurement of financial position are asset, liability and equity.
23. The elements directly related to the measurement of financial performance are income and expense.
24. Recognition is the process of capturing for inclusion in the statement of financial position or the
statement(s) of financial performance an item that meets the definition of an asset, a liability, equity, income or
expenses.
25. An asset is a present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.
26. An asset is recognized when it is probable that future economic benefits will flow to the entity and the asset
has a cost or value that can be measured reliably.
27. 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 be a productive one that is part of the
operating activities of the entity. It may also take the form of convertibility into cash or cash equivalents or a
capability to reduce cash outflows, such as when an alternative manufacturing process lowers the costs of
production.
28. The cost principle requires that assets should be recorded initially at original acquisition cost.
29. A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
An obligation is a duty or responsibility that the entity has no practical ability to avoid.
30. A liability is recognized when it is probable that an outflow of resources embodying economic benefits will
be required for the settlement of a present obligation and the amount of the obligation can be measured
reliably.
31. B
32. D
33. B
34. C
35. D
36. C
37. A
38. A
39. D
40. B