Professional Documents
Culture Documents
CHAPTER 1 Framework Accounting
CHAPTER 1 Framework Accounting
FRAMEWORK OF ACCOUNTING
QUESTION 1-1
Define accounting.
ANSWER 1-1
Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decision.
The Committee on Accounting Terminology of the American Institute of Certified Public Accountants
defines accounting as follows:
Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are in part at least of a financial character and interpreting the
results thereof.
The American Accounting Association in its statement of Basic Accounting Theory defines accounting as
follows:
Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
QUESTION 1-2
What are the three important activities in the accounting process as embodied in the accounting
definition?
ANSWER 1-2
The accounting definition provides three important activities in the accounting process, namely:
a. Identifying
b. Measuring
c. Communicating
QUESTION 1-3
Identifying means the recognition or nonrecognition of “accountable” events. Not all business activities
are accountable.
An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other
words, the subject matter of accounting is economic activity or the measurement of economic resources
and economic obligations. Only economic activities are emphasized and recognized in financial
accounting. Sociological and psychological matters are beyond the province of accounting.
QUESTION 1-4
ANSWER 1-4
Economic activities of an entity are referred to as transactions which may be classified as external and
internal.
External transactions or exchange transactions are those economic events involving one entity and
another entity. Purchase of merchandise from a supplier, borrowing money from a bank, sale of
merchandise to customer and payment of salaries to employees are examples of external transactions.
Internal transactions are economic events involving the entity only. These are economic activities that
take place entirely within the entity. Production and casualty loss are examples of internal transactions.
QUESTION 1-5
ANSWER 1-5
Measuring or measurement is the process of determining the monetary amounts at which the elements
of the financial statements are to be recognized and carried in the balance sheet and income statement.
The measurement bases are historical cost, current cost, realizable value and present value. Historical
cost is the most common.
QUESTION 1-6
ANSWER 1-6
Communicating is the process of preparing and distributing accounting reports to potential users of
accounting information.
Identifying and measuring are pointless if the information contained in the accounting records cannot
be communicated in some form to potential users, like the investors, owners, managers, creditors and
other interested parties.
Actually, it is for this reason that accounting has been called the “language of business”.
Implicit in the communication process are the recording, classifying and summarizing aspects of
accounting.
Recording or journalizing is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.
Classifying is the sorting or grouping of similar and interrelated economic transactions into their
respective class. Actually, classifying is accomplished by posting to the ledger.
Summarizing is the preparation of financial statements which include the statement of financial
position, income statement, statement of comprehensive income, statement of cash flows and
statement of changes in equity.
QUESTION 1-7
ANSWER 1-7
The basic purpose of accounting is to “provide quantitative financial information about a business that is
useful to statement users particularly owners and creditors, in making economic decisions. “
An accountant’s primary task therefore is to supply information to help users, such as shareholders,
bankers and managers make informed judgment and better decision.
QUESTION 1-8
ANSWER 1-8
Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines. This law is
known as the “Philippine Accountancy Act of 2004”.
Accountancy has developed as a profession attaining a status equivalent to that of law and medicine.
In the Philippines, in order to qualify to practice the accountancy profession, a person must finish a
degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by
the Board of Accountancy.
Incidentally, the Board of Accountancy is the body authorized by law to promulgate rules and
regulations affecting the practice of the accountancy profession in the Philippines.
QUESTION 1-9
ANSWER 1-9
Certified Public Accountants, firms and partnership of certified public accountants, including partners
and staff members thereof, are required to register with the Board of Accountancy and Professional
Regulation Commission for the practice of public accountancy.
The PRC upon favorable recommendation of the Board of Accountancy shall issue the Certificate of
Registration to practice public accountancy which shall be valid for 3 years and renewable every 3 years
upon payment of required fees.
Certified Public Accountants generally practice their profession in three main areas, namely public
accounting, private accounting and government accounting.
QUESTION 1-10
ANSWER 1-10
Single practitioners and partnerships for the practice of public accountancy shall be registered certified
public accountants in the Philippines.
A certificate of accreditation shall be issued to certified public accountants in public practice only upon
showing in accordance with rules and regulations promulgated by the Board of Accountancy and
approved by the Professional Regulation Commission that such registrant has acquired a minimum of
three years of meaningful experience in any of the areas of public practice including taxation.
The Securities and Exchange Commission shall not registerany corporation organized for the practice of
public accountancy.
QUESTION 1-11
ANSWER 1-11
Public accounting, in essence, is the practice of the accountancy profession. Individual practitioners,
small accounting firms and large multinational organizations render independent and expert financial
services to the public such as auditing, taxation and management advisory services.
QUESTION 1-12
Explain briefly the three kinds of services rendered by a public accountant.
ANSWER 1-12
1. Auditing has traditionally been the primary service offered by most public accounting
practitioners.
Auditing or specifically external auditing is the “examination of financial statements by
independent certified public accountant for the purpose of expressing opinion as to the fairness
with which the financial statements are prepared”.
2. Taxation service includes the preparation of annual income tax returns and determination of tax
consequences of certain proposed business endeavors. The CPA not infrequently represents the
client in tax investigations.
3. Management advisory service has become increasingly important in recent years, although
audit and tax services are undoubtedly the mainstay of public accountants.
The term “management advisory service” has no precise coverage but is used generally to refer
to services to clients on matters of accounting, finance, business policies, organization
procedures, product costs, distribution and many other phases of business conduct and
operations.
QUESTION 1-13
ANSWER 1-13
Private accounting means that Certified Public Accountants are employed in business entities in various
capacity as accounting staff, chief accountant, internal auditor and controller. The highest accounting
officer in a business entity is the controller.
The major objective of the private accountant is to assist management in planning and controlling the
entity’s operations. This will include maintaining the records, producing the financial reports, preparing
the budgets and controlling and allocating the cost of the business.
The private accountant has also the responsibility for the determination of the various taxes the
business is obliged to pay.
QUESTION 1-14
ANSWER 1-14
Many Certified Public Accountants are employed in many branches of the government, more
particularly the Bureau of Internal Revenue, Commission on Audit, Department of Budget and
Management, Securities and Exchange Commission and even in a police agency like the National Bureau
of Investigation.
QUESTION 1-15
ANSWER 1-15
Financial accounting is primarily concerned with the recording of business transactions and the eventual
preparation of financial statements. Financial accounting focuses on general purpose reports known as
financial statements. These financial statements are intended for internal and external users.
Financial accounting is the area of accounting that emphasizes reporting to creditors and investors.
Managerial Accounting is the accumulation and preparation of financial reports for internal users only.
In other words, managerial accounting is the area of accounting that emphasizes developing accounting
information for use within an entity.
QUESTION 1-16
ANSWER 1-16
Generally accepted accounting principles (GAAP) encompass the conventions, rules and procedures
necessary to define what accepted accounting practice is.
Generally accepted accounting principles are conventional- that is, they become generally accepted by
agreement often tacit agreement rather than by formal derivation from a set of postulates and basic
concepts. The principles have developed on the basis of experience, reason, custom, usage, and
practically necessity.
Simply stated, generally accepted accounting principles represent the “rules, procedures, practice and
standards followed in the preparation and presentation of financial statements.”
Generally accepted accounting principles are like laws that must be followed in financial reporting.
In the Philippines, the development of generally accepted accounting principles is formalized initially
through the creation of the Accounting Standards Council. The accounting standards promulgated by
the Accounting Standards Council constitute the generally accepted principles in the Philippines.
The approved statements of the ASC are called previously as “Statement of Financial Accounting
Standards” or SFAS.
These ASC statements of Financial Accounting Standards are now known as Philippine Accounting
Standards or PAS and Philippine Financial Reporting Standards or PFRS.
QUESTION 1-17
ANSWER 1-17
The overall purpose of accounting standards is to identify proper accounting practices for the
preparation and presentation of financial statements.
Accounting standards create a common understanding between preparers and users of financial
statements particularly on how items, for example the valuation of assets, are treated.
Financial statements shall therefore comply with all applicable accounting standards.
QUESTION 1-18
ANSWER 1-18
The FRSC is the accounting standard setting body created by the Professional Regulation Commission
upon recommendation of the Board of Accountancy to assist the Board of accountancy in carrying out
its powers and functions provided under R.A. Act No. 9298.
The main function is to establish and improve accounting standards that will be generally accepted in the
Philippines.
The FRSC is composed of 15 members with a chairman who had been or is presently a senior accounting
practitioner and 14 representatives from the following:
Board of Accountancy 1
Securities and exchange Commission 1
Bangko Sentral ng Pilipinas 1
Bureau of Internal Revenue 1
Commission on Audit 1
Major organization of preparers and users
of financial statements 1
Accredited national professional organization of CPAs:
Public Practice 2
Commerce and Industry 2
Academe or Education 2
Government 2
Total 14
The Chairman and members of the FRSC shall have a term of 3 years renewable for another term. Any
member of the ASC shall not be disqualified from being appointed to the FRSC.
QUESTION 1-19
ANSWER 1-19
The Philippine Interpretations Committee or PIC has replaced the Interpretations Committee or IC
formed by the Accounting Standards Council in May 2000.
The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and in the context of
the framework, to provide timely guidance on financial reporting issues not specifically addressed in
current PFRS.
In other words, interpretations are intended to give “authoritative guidance” on issues that are likely to
receive divergent or unacceptable treatment because the standards do not provide specific and clear cut
rules and guidelines.
The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations
committee or IFRSC which has already replaced the Standing Interpretations Committee or SIC.
QUESTION 1-20
ANSWER 1-20
The IASC is an independent private sector body, with the objective of achieving uniformity in the
accounting principles which are used by business and other organizations for financial reporting around
the world.
It was formed I June 1973 through an agreement made by professional accountancy bodies from
Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland,
and the United States of America.
The IASC subsequently expanded to include representatives from over 100 countries and by year 2000
the membership included 143 bodies in 104 countries representing over two million accountants. The
IASC is headquartered in London, United Kingdom.
QUESTION 1-21
ANSWER 1-21
a. To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and
observance.
b. To work generally for the improvement and harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements.
The approved statements of the IASC are known as International Accounting Standards or IAS.
QUESTION 1-22
What are the factors considered by the Philippines in deciding to move totally to international
accounting standards?
ANSWER 1-22
QUESTION 1-23
ANSWER 1-23
The International Accounting Standards Board or IASB now replaces the International Accounting
Standards Committee or IASC. The IASB publishes its standards in a series of pronouncements called
“International Financial Reporting Standards” or IFRS.
However, the IASB has adopted the body of standards issued by the IASC. The pronouncements of the
IASC continue to be designated as “International Accounting Standards” or IAS.
The IASB’s objective is to raise the quality and consistency of financial reporting and to have a platform
of high quality and improved standards.
The IFRS is a global phenomenon intended to bring about greater transparency and a higher degree of
comparability in financial reporting, both of which will benefit the investors and are essential to achieve
the goal of one uniform and globally accepted financial reporting standards.
QUESTION 1-24
ANSWER 1-24
Accounting assumptions are the basic notions or fundamental premises on which the accounting
process is based. Accounting assumptions are the “givens” and they exist without saying.
Like a building structure that requires a solid foundation to avoid or prevent future collapse and provide
room for expansion, and so with accounting.
QUESTION 1-25
ANSWER 1-25
1. Accrual
2. Going concern
3. Accounting entity
4. Time period
5. Monetary unit
The Framework for the Preparation and Presentation of Financial Statements mentions two underlying
assumptions, namely accrual and going concern.
However, implicit in accounting are the basic assumptions of accounting entity, time period and
monetary unit.
QUESTION 1-26
ANSWER 1-26
The preparation of financial statements every accounting period is usually based on accrual accounting.
Accrual accounting means that income is recognized when earned regardless of when received and
expense is recognized when incurred regardless of when paid.
Under this basis, the effects of transactions and other events are recognized when they occur and not as
cash or its equivalent is received or paid, and they are recorded in the accounting records and reported
in the financial statements of the period to which they relate.
The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid
expenses, accrued expenses, deferred income, and accrued income.
QUESTION 1-27
ANSWER 1-27
Going concern assumption means that the accounting entity is viewed as continuing in operation
indefinitely in the absence of evidence to the contrary.
In other words, financial statements are prepared normally on the assumption that the entity shall
continue in operation for the foreseeable future.
Thus, assets are normally recorded at original acquisition cost. As a rule, market values are ignored.
However, the new standards require measurement of certain assets at fair value.
This postulate is the very foundation of the cost principle. It is also known as the continuity assumption.
QUESTION 1-29
ANSWER 1-29
The time period assumption requires that “the indefinite life of an entity is subdivided into time periods
or accounting periods which are usually of equal length for the purpose of preparing financial reports on
financial position, financial performance, and cash flows.”
The accounting period or fiscal period is one year or a period of twelve months. The “one-year period” is
traditionally the accounting period because usually it is after one year that government reports are
required.
The accounting period may be a calendar year or a natural business year. A calendar year is a twelve-
month period that ends on December 31. A natural business year is a twelve-month period that ends on
any month when the business is at the lowest or experiencing slack season.
QUESTION 1-30
ANSWER 1-30
The monetary unit assumption has two aspects, namely quantifiability and stability of the peso. The
quantifiability aspect means that the assets, liabilities, equity, income and expenses should be stated in
terms of a unit of measure which is the peso in the Philippines.
How awkward to see financial statements without any common unit of measure. Such statements would
be largely unintelligible and incomprehensible.
The stable peso postulate is actually an amplification of the going concern assumptions so much so that
the adjustments are unnecessary to reflect any changes in purchasing power.
The accounting function is to account for pesos only and not for changes in purchasing power.
In today’s world, the assumption that the peso is a stable measure over time is not necessarily valid.
Consider an equipment that was imported 10 years ago from the united States for $100, 00 when the
exchange rate was P35 to $1 or an equivalent of P3,500,000.
If the same equipment is purchased now and assuming there is no change in the $100,000 purchase
price, the replacement cost in terms of pesos would be in the vicinity of P4, 800, 00, considering a
current exchange rate of P48 to $1.
Obviously, there is a significant gap between historical cost and current replacement cost.
In this regard, PAS 16 provides that an entity shall choose either the cost model or revaluation model as
its accounting policy to an entire class of property, plant and equipment.
On the other hand, US GAAP encourages entities to make supplementary disclosures relating to the
impact of changing prices.
QUESTION 1-31
What do you understand by the by the framework for the Preparation and Presentation of financial
statements?
ANSWER 1-31
The framework for the Preparation and Presentation of financial statements is promulgated by the
International Accounting Standards Board and adopted by the local Financial Reporting Standards
Council.
The Framework is a summary of the terms and concepts that underlie the preparation and presentation
of financial statements. It is the underlying theory for the development of accounting standards and
revision of previously issued accounting standards.
The Framework is an attempt to provide an overall theoretical foundation for accounting which will
guide standard-setters, preparers and users of financial information in the preparation and presentation
of statements.
In other words, the concepts are the foundation on which financial statements are constructed, and
provide a platform from which accounting standards are developed and revised.
The Framework is concerned with general-purpose financial statements, including consolidated financial
statements.
The financial statements are prepared at least annually and are directed toward the common needs of a
wide range of users.
QUESTION 1-32
ANSWER 1-32
a. To assist the Financial Reporting Standards Council in developing accounting standards that
represents Philippine GAAP.
b. To assist preparers of financial statements in applying accounting standards and in dealing with
issues not yet covered by GAAP.
c. To assist the Financial Reporting Standards Council in its review and adaption of International
Accounting Standards.
d. To assist users of financial statements in interpreting the information contained in the financial
statements.
e. To assist auditors in forming an opinion as to whether financial statements conform with Philippine
GAAP.
f. To provide information to those interested in the work of the Financial Reporting Standards Council
in the formulation of Philippine Financial Reporting Standards.
QUESTION 1-33
ANSWER 1-33
However, it is to be stated that the Framework is not a Philippine Financial Reporting Standard and
hence does not define standard for any particular measurement or disclosure issue.
Nothing in the Framework overrides any specific Philippine Financial Reporting Standard.
In case where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall
prevail over the Framework.
QUESTION 1-34
ANSWER 1-34
The Framework is applies to the financial statements of all commercial, industrial and business reporting
entities, whether in the public or private sector.
However, special purpose financial reports, for example, prospectuses and computations prepared for
taxation purposes, are outside the scope of the Framework.
QUESTION 1-35
ANSWER 1-35
The objective of financial statements is to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide range of users in making economic
decisions.
QUESTION 1-36
ANSWER 1-36
The financial position of an entity comprises its assets, liabilities and equity at a particular date.
The financial position pertains to the economic resources, liquidity, solvency, financial structure and
capacity for adaptation of an entity. Such information is pictured in the statement of financial position.
QUESTION 1-37
1. Economic Resources
2. Liquidity
3. Solvency
4. Financial structure
5. Capacity for adaptation
ANSWER 1-37
1. Economic resources simply refer to the assets owned by the entity. Information about the
economic resources controlled by the entity and its capacity to modify these resources is useful
in predicting the ability of the entity to generate cash and cash equivalents in the future.
2. Liquidity is the availability of cash in the near future to cover currently maturing obligations.
3. Solvency is the availability of cash over a long term to meet financial commitments when they
fall due.
Information about liquidity and solvency is useful in predicting the ability of the entity to comply
with its future financial commitments.
4. Financial structure is the source of financing for the assets of the entity.
Financial structure indicates what amount of assets has been financed by creditors which is the
borrowed capital, and how much has been financed by owners which is the invested or equity
capital.
5. Capacity for adaptation is the ability of the entity to use its available cash for unexpected
requirements and investment opportunities.
This may be accomplished by raising cash at a short notice through borrowing and issuance of
securities or by raising cash through disposal of assets without disrupting normal operations.
Capacity for adaptation is also known as financial flexibility.
QUESTION 1-38
ANSWER 1-38
The financial performance of an entity comprises its revenue, expenses and net income or loss for a
period of time.
Financial performance is the level of income earned by the entity through the efficient and effective use
of its resources.
The financial performance of an entity is also known as result of operations and is portrayed in the
income statement and statement of comprehensive income.
Information about performance is useful in predicting the capacity of the entity to generate cash flows
from its operations. It is also useful in forming judgment about the effectiveness of the entity in
employing additional resources.
QUESTION 1-39
What is financial reporting?
ANSWER 1-39
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.
The principal way of providing financial information to external users is through the annual financial
statements.
However, financial reporting encompasses not only financial statements but also other information
such as financial highlights, summary of important financial figures, analysis of financial statements and
significant ratios.
Financial reports also include nonfinancial information such as descriptions of major products and a
listing of corporate officers and directors.
QUESTION 1-40
ANSWER 1-40
The overall objective of financial reporting is to provide information that is useful for decision making.
Specifically, the AICPA Financial Accounting Standards Board in its Statement of financial Accounting
Concepts enumerates the following objectives of financial reporting:
QUESTION 1-41
Explain the following concepts in conjunction with the objective of financial statements.
1. Entity theory
2. Proprietary theory
3. Residual equity theory
4. Fund theory
ANSWER 1-41
1. Entity theory- The accounting objective is geared toward proper income determination. Proper
matching of cost against revenue is the ultimate end.
Thus, the entity theory emphasizes the importance of the income statement. This is explained
by the equation:
Assets= Liabilities + Capital
2. Proprietary theory- The accounting objective is directed toward proper valuation of assets.
Thus, this theory emphasizes the importance of the balance sheet. It is exemplified by the
equation:
Assets- Liabilities= Capital
3. Residual equity theory- The accounting objective is also proper valuation of assets. This is
applicable where there are two classes of shareholders, ordinary and preference. Thus, the
equation is:
Assets- Liabilities- Preference Shareholders’ Equity= Ordinary Shareholders’ Equity
4. Fund theory- The accounting objective is neither proper income determination nor proper
valuation of assets but the custody and administration of funds.
The objective is directed toward cash flows exemplified by the formula “cash inflows minus cash
outflows equals fund.”
Government accounting and fiduciary accounting are examples of the application of this
concept.
QUESTION 1-42
ANSWER 1-42
a. Investors- The providers of risk capital and their advisers are concerned with the risk inherent in
and return provided by their investments.
Investors 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.
b. Employees- Employees are interested in information about the stability and profitability of the
entity.
The employees are 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 which enables them to determine whether their
loans and interest thereon will be paid when due.
d. Suppliers and other trade creditors- These users are interested in information which enables
them to determine whether amounts owing to them will be paid on maturity.
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. Government and its agencies- Government and its agencies are interested in the allocation of
resources and therefore the activities of the entity.
These users require information to regulate the activities of the entity, determine taxation
policies and as a basis for national income and similar statistics.
g. Public- Entities affect members of the public in a variety of ways.
For example, entities make substantial contributions to the local economy in many ways
including the number ofpeople 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.
1. Accounting is a service activity and its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decision. This accounting definition is given by
a. Accounting Standards Council
b. AICPA Committee on Accounting terminology
c. American Accounting Association
d. Board of Accountancy
2. The Basic purpose of accounting is
a. To provide the information that the managers of an economic entity need to control its
operations.
b. To provide information that the creditors of an economic entity can use in deciding whether
to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making
rational economic decision.
3. These are the events that affect the entity and in which other entities participate.
a. Internal events
b. External events
c. Summarizing
d. Interpreting
4. The “communicating” process of accounting includes all of the following, except
a. Recording
b. Classifying
c. Summarizing
d. Interpreting
5. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
6. It is the body authorized by law to promulgate rules and regulations affecting the practice of the
accountancy profession in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
c. Securities and exchange Commission
d. Financial Reporting Standards Council
7. Accountants employed in entities in various capacity as accounting staff, chief accountant or
controller are said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
8. It is the accounting standard setting body created by PRC upon recommendation the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and functions under
R.A No.9298.
a. Accounting Standards Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards Council
9. Which is not required to be represented in the FRSC?
a. Bangko Sentral ng Pilipinas
b. Bureau of Internal Revenue
c. Commission on Audit
d. Department of Budget and Management
10. Which statement is true about the Philippine Interpretations Committee?
I. The role of the Philippine Interpretations Committee is to prepare interpretations of
PFRS for approval by the Financial Reporting Standards Council and in the context of the
framework, to provide timely guidance on financial accounting issues not specifically
addressed in current PFRS.
II. The interpretations are intended to give “authoritative guidance” on issues that are
likely to receive divergent or unacceptable treatment because standards do not provide
specific clear cut rules and guidelines.
a. I only
b. II only
c. Both I and II
d. Neither I or II
ANSWER 1-43
1. a 6. a
2. d 7. b
3. b 8. d
4. d 9. d
5. a 10. c
ANSWER 1-44
1. a
2. c
3. b
4. d
5. d
QUESTION 1-45
ANSWER 1-45
1. d 6.c
2. b 7. c
3. d 8. c
4. d 9. b
5. a 10.a
b. In accordance with the unit of measure assumption, the changing purchasing power of money
due to inflation or deflation.
c. In accordance with the going concern assumption, the life of an entity is presumed to be
indefinite.
ANSWER 1-46
1. A 6. D
2. C 7. D
3. A 8. C
4. D 9. A
5. B 10. B
2. When a parent and subsidiary relationship exists, consolidated financial statements are
prepared in recognition of
a. Legal entity
b. Economic entity
c. Stable monetary unit
d. Time period
3. The valuation of a promise to receive cash in the future at present value is valid because of the
accounting concept of
a. Entity
b. Time period
c. Going concern
d. Monetary unit
4. This accounting concept justifies the usage of accruals and deferrals.
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit
5. During the lifetime of an entity accountants produce financial statements at arbitrary points in
time in accordance with which basic accounting concept?
a. Accrual
b. Periodicity
c. Unit of measure
d. Continuity
ANSWER 1-47
1. D
2. B
3. C
4. A
5. B
1. The Framework for the Preparation and Presentation of Financial Statements should
a. Lead to uniformity of financial statements among entities within the same industry.
b. Eliminate alternative accounting principles and methods.
c. Guide the PICPA in developing generally accepted auditing standards.
d. Define the basic objectives, terms and concepts of accounting.
a. I and II only
b. I and III only
c. II and III only
d. I, II and III
II. Special purpose financial reports, for example, prospectuses, are within the scope of
the Framework.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
10. As regards the relationship between PFRS and the Framework, which of the following
statements is true?
I. The Framework is a reporting standard.
II. In case of conflict, the requirements of the Framework prevail over those of the
relevant PFRS.
a. I only.
b. II only
c. Both I and II
d. Neither I nor II
ANSWER 1-48
1. D 6. C
2. D 7. B
3. B 8. C
4. D 9. D
5. C 10. D
a. Board of Directors
b. Shareholder in the entity
c. Holder of the entity’s bonds
d. Creditor with long term contracts with the entity
2. These users require information on risk and return on investment and hence an entity’s ability
to pay dividends.
a. Investors
b. Employees
c. Lenders
d. Customers
3. These users are interested in information about the profitability and stability of an entity in
order to assess the ability of the entity to provide remuneration, retirement benefits and
employment opportunities.
a. Customers
b. The public
c. Government and their agencies
d. Employees
4. These users are interested in information that enables them to determine whether amounts
owing to them will be paid when due.
5. These users are interested in information about the profitability and stability of an entity in
order to assess whether an entity is able to repay loans and related interest when the loans fall
due.
a. Lenders
b. Borrowers
c. Trade creditors
d. Owners
6. These users are interested in information about the continuance of an entity, especially when
they have a long-term involvement with or are dependent on the entity.
a. Customers
b. Employees
c. Trade unions
d. Suppliers
7. These users are interested in information in order to regulate the activities of an entity,
determine taxation policies and provide a basis for national statistics.
8. These users are interested in information on trends and recent developments where an entity
makes a substantial contribution to the local economy providing employment and using local
suppliers.
a. The public
b. Governments and their agencies
c. Finance entities
d. Private entities
a. I only
b. Ii only
c. Both I and II
d. Neither I and II
II. As investors are providers of risk capital to the entity, the provision of financial
statements that meet their needs will also meet most of the needs of other users that
financial statements can satisfy.
a. I only
b. II only
c. Both I and II
d. Neither I and II
ANSWERS 1-49
1. A 6. A
2. A 7. A
3. D 8. A
4. A 9. C
5. A 10. C
1. The theory of accounting which best describes the accounting equation expressed “assets +
equity” is the
a. Entity theory
b. Fund theory
c. Proprietary theory
d. Residual equity theory
2. What theory of ownership equity is enumerated by the following equation: assets minus
liabilities minus preference share equity equals ordinary share equity?
a. Fund
b. Entity
c. Proprietary
d. Residual equity
a. Entity
b. Proprietary
c. Residual equity
d. Fund
4. The primary accounting objective is fair presentation of the financial performance of the entity.
a. Entity
b. Proprietary
c. Residual equity
d. Fund
a. Entity theory
b. Proprietary theory
c. Residual equity theory
d. Fund theory
ANSWER 1-50
1. A
2. D
3. C
4. A
5. D
2. Which of the following statements concerning the objective of financial reporting is correct?
a. Future borrowing needs and how future profits and cash flows will be distributed among
those with an interest in the entity
b. The ability of the entity to meet its financial commitments as they fall due over a longer
term.
c. The ability of the entity to use its available cash for unexpected requirements and
investment opportunities.
d. The capacity of the entity to generate cash flows from its operations.
4. Which of the following statements best describes the term “financial position”?
a. The revenue, expenses and net income or loss for a period of an entity.
b. The assets, liabilities and equity of an entity
c. The total assets minus total liabilities
d. The total cash inflow minus cash outflows
ANSWER 1-51
1. A
2. D
3. A
4. D
5. A
3. During a period when an entity is under the direction of a particular management, financial
reporting will directly provide information about
4. Which one of the following items is not listed as major objectives of the financial reporting?
a. Financial reporting shall provide information about entity resources, claims to those
resources and changes in them.
b. Financial reporting shall provide information useful in evaluating management’s
stewardship.
c. Financial reporting shall provide information useful in investment, credit and similar
decisions.
d. Financial reporting shall provide information useful in assessing cash flow prospects.
5. Which of the following statements is not normally an objective of financial reporting?
a. To provide information about an entity’s assets and claims against those assets.
b. To provide information that is useful in assessing an entity’s sources and uses of cash.
c. To provide information that is useful in lending and investing decisions.
d. To provide information about an entity’s liquidation value
ANSWER 1-52
1. D
2. A
3. C
4. B
5. D
1. The principles which constitute the ground rules for financial reporting are termed “generally
accepted accounting principles”. To qualify as “generally accepted,” an accounting principle
must
a. Income and expenses, assets and liabilities are measured based on the occurrences of
changes in the economic resources and obligations
b. Assets and liabilities are measures on the basis of their liquidation value.
c. Income and expenses are recognized on the basis of cash receipts and payments, including
depreciation of property, plant and equipment.
d. Financial position and financial performance are measured on the basis of cash received and
cash paid.
3. The four phases of accounting are recording, classifying, summarizing and interpreting. The
phase whereby the liquidity, solvency and profitability of an entity are significantly portrayed is
known as
a. Summarizing
b. Classifying
c. Recording
d. Interpreting
4. Four types of money prices are used in measuring resources in financial accounting. The
measurement which uses such concepts as present value, discounted cash flow and value in
use is known as
a. Sale of merchandise
b. Borrowing from bank
c. Donation received from shareholder
d. Casualty loss caused by flood, earthquake or other natural disaster
ANSWER 1-53
1. d
2. a
3. d
4. c
5. d