INTERMEDIATE ACCOUNTING 3

ACTIVITY

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.
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.
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.
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.

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. b. Auditing.
 c. Disclosure to competition. 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
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.
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

b. The physical capital concept
c. Both a and b
d. Neither a nor b