CPART The Framework serves as a guide in developing future

CABRiA REVIEW CENTER PFRSs and as a guide to resolving accounting issues that are
FAR 401 (Conceptual Framework for Financial Reporting)
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 It superseded the Framework for the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)
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 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.

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• the definition, recognition and measurement of the

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Chapter 1: The Objective of general purpose financial
elements from which financial statements are constructed

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reporting
(Chapter 4 the remaining text of the 1989 Framework)

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The objective of general purpose financial reporting
• concepts of capital and capital maintenance (Chapter 4 the is to provide financial information about the reporting entity

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remaining text of the 1989 Framework) that is useful to existing and potential investors, lenders and
rs e other creditors in making decisions about providing resources
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The objective of general purpose financial reporting forms to the entity.
the foundation of the Conceptual Framework. Other aspects
of the Conceptual Framework flow logically from the Primary Users
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objective.
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The primary users of general purpose financial

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Purpose and Status of the Framework
The Framework describes the basic concepts that
underlie the preparation and presentation of financial
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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.

statements for external users. The purpose of the Framework

is to:
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The primary users need information about the

(a) assist the FRSC in the development of future Philippine resources of the entity not only to assess an entity's
Financial Reporting Standards (PFRSs) and in its review of prospects for future net cash inflows but also how effectively
and efficiently management has discharged their
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existing PFRSs;
(b) assist the FRSC in promoting harmonization of responsibilities to use the entity's existing resources (i.e.,
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regulations, accounting standards and procedures stewardship).

relating to the presentation of financial statements by
providing a basis for reducing the number of alternative The Framework notes that general purpose financial
accounting treatments permitted by PFRSs; reports cannot provide all the information that users may
(c) assist preparers of financial statements in applying PFRSs need to make economic decisions. They will need to consider
and in dealing with topics that have yet to form the pertinent information from other sources as well.
subject of an International Financial Reporting Standard
(IFRS); Other users
(d) assist auditors in forming an opinion as to whether
financial statements conform with PFRSs; The Framework notes that other parties (including
management, members of the public, prudential and market
(e) assist users of financial statements in interpreting the
information contained in financial statements prepared regulators) may find general purpose financial reports useful.
in conformity with PFRSs; and However, they are not considered primary users and general
(f) provide those who are interested in the work of FRSC purpose financial reports are not primarily directed to them.
with information about its approach to the formulation
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of PFRSs.
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.)
(b) Employees. Employees and their representative groups
are interested in information about the stability and
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profitability of their employers. They are also interested
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in information which enables them to assess the ability
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of the entity to provide remuneration, retirement
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benefits and employment opportunities.
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(c)
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Lenders. Lenders are interested in information that
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enables them to determine whether their loans, and the
interest attaching to them, will be paid when due.
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(d) Suppliers and other trade creditors. Suppliers and other
creditors are interested in information that enables them
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to determine whether amounts owing to them will be
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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
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as a major customer.
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(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
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on, the entity.
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(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
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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, 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.
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Fundamental qualitative characteristics
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Relevance and faithful representation are the
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fundamental qualitative characteristics of useful financial
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information. Information must be both relevant and faithfully
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represented if it is to be useful.
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Relevance
Relevant financial information is capable of making a
difference in the decisions made by users. Financial
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information is capable of making a difference in decisions if it
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has predictive value, confirmatory value, or both. The
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predictive value and confirmatory value of financial
information are interrelated.
Materiality is an entity-specific aspect of relevance
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based on the nature or magnitude (or both) of the items to
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which the information relates in the context of an individual
entity's financial report.
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Faithful representation
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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.
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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 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
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classes according to their economic characteristics. These
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broad classes are termed the elements of financial statements.
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The elements directly related to financial position (balance
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sheet) are:
• Assets rs e
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• Liabilities
• Equity
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The elements directly related to performance (income
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statement) are:
• Income
• Expenses
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The cash flow statement reflects both income
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statement elements and some changes in balance sheet
elements.
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Definitions of the elements relating to financial position
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• 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.
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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 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
• 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

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A financial concept of capital is adopted by most
reliably. This means, in effect, that recognition of expenses

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entities in preparing their financial statements. Under a
occurs simultaneously with the recognition of an increase in

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financial concept of capital, such as invested money or
liabilities or a decrease in assets (for example, the accrual of

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invested purchasing power, capital is synonymous with the net
employee entitlements or the depreciation of equipment).
assets or equity of the entity. Under a physical concept of

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capital, such as operating capability, capital is regarded as the
rs e productive capacity of the entity based on, for example, units
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Measurement of the Elements of Financial Statements
of output per day.
Measurement involves assigning monetary amounts at
which the elements of the financial statements are to be
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recognized and reported. The Framework acknowledges that a

Concepts of Capital Maintenance and the Determination of
variety of measurement bases are used today to different
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degrees and in varying combinations in financial statements, Profit

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including: • Financial capital maintenance. Under this concept a profit is

earned only if the financial (or money) amount of the net
• Historical cost. Assets are recorded at the amount of cash or assets at the end of the period exceeds the financial (or
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cash equivalents paid or the fair value of the consideration money) amount of net assets at the beginning of the period,
after excluding any distributions to, and contributions from,
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given to acquire them at the time of their acquisition.

Liabilities are recorded at the amount of proceeds received owners during the period. Financial capital maintenance can
in exchange for the obligation, or in some circumstances be measured in either nominal monetary units or units of
(for example, income taxes), at the amounts of cash or cash constant purchasing power.
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equivalents expected to be paid to satisfy the liability in the

normal course of business. • Physical capital maintenance. Under this concept a profit is
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earned only if the physical productive capacity (or operating

• 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.
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.

• 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
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be paid to satisfy the liabilities in the normal course of
business.
 REVIEW QUESTION: MULTIPLE CHOICE THEORY 6. What is the objective of financial reporting as indicated in
the conceptual framework?
1. Which of the following is the foundation of the Conceptual a. Provide information that is useful to those making
Framework? investing and credit decisions.
b. Provide information that is useful to management.
a. The objective of general purpose financial reporting.
c. Provide information about those investing in the entity.
b. A reporting entity concept.
d. All of the above.
c. The qualitative characteristics of, and the constraint on,
useful financial information.
d. The elements of financial statements. 7. The underlying theme of the conceptual framework is
a. Decision Usefulness c. Reliability
2. The Conceptual Framework includes all of the following b. Understandability d. Comparability
except:
a. Objective of financial reporting. 8. The “Primary users” of financial information include
b. Supplementary information I. Existing and potential investors
c. Elements of financial statements.
II. Existing and potential lenders and other creditors
d. Qualitative characteristics of accounting information.
III. User group such as employees, customers,
3. The Conceptual Framework government and their agencies, and the public
a. Is an accounting standard that defines standards for a a. I only c. I and III only

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particular measurement or disclosure issue. b. I and II only d. I, II and III

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b. Is concerned with special purpose reports, for example,

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prospectuses and computations prepared for taxation 9. Which statements is false concerning users and their
purposes. information needs?

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c. Applies to the financial statements of all commercial,
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industrial and business reporting enterprises, whether in
a. Lenders are interested in information that enables them
to determine whether their loans and the interest on
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the public or private sector. these loans will be paid when due.
d. All of the above b. The providers of risk capital and their advisers are
concerned with the with the risk of inherent in return
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4. Which of the following statement(s) regarding the provided by their investment

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conceptual framework is (are) incorrect? c. Government and its agencies have an interest in
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a. The framework applies to financial statements of information about the continuance of an enterprise
business reporting enterprises both in the private sector especially when they have long-term involvement or are
and in the public sector dependent on the enterprise.
b. In cases where there is conflict d. between
Employeesthe and framework
their and
representativePFRS, the requiremen
groups are
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c. Both a and b interested in information about the stability and

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d. Neither a nor b profitability of the entity.

5. Which is not a specific purpose of the conceptual 10. The users of financial statements who are interested in
framework?
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information that enables them to determine whether the

a. To assist preparers of financial statement in applying the amounts owing to them will be paid when due
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accounting standards. a. Lenders c. Customers

b. Investors d. Suppliers & other trade cr.
b. To assist FRSC in the development of future Philippine
Financial Reporting Standards (PFRSs) and in its review of
existing PFRSs. 11. They are interested in information about trends and
recent developments in the prosperity of the enterprise
c. To assist users of financial statements in interpreting the and the range of its activities
information contained in financial statements. a. Investors c. Public
d. To assist the Board of Accountancy in promulgating rules b. Lenders d. Customers
and regulations affecting the practice of accountancy in
the Philippines.

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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.
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

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qualitative characteristic.

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13. The statement of changes in equity presents a. I only c. II and III only

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a. A reporting entity's economic resources and claims. b. I and III only d. I, II and III

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b. The changes in an entity's economic resources and claims.

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19. Accounting information is considered to be relevant when
c. The changes in the entity's cash flows.
d. rs e
The changes in an entity's economic resources and claims
it
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a. Can be depended on to represent the economic conditions
not resulting from financial performance. and events that it is intended to represent.
b. Is capable of making a difference in a decision.
14. Which of the following statements about financial
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c. Is understandable by reasonably informed users of

statements is(are) incorrect? accounting information.
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a. They show the results of the stewardship of management d. Is verifiable and neutral.
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of the resources entrusted to it by the capital providers.

b. They are the primary responsibility of both management 20. What qualitative characteristic is met if information
and the external auditor after audit. influences the economic decisions of users by helping them
c. They are prepared at least annually and are directed to the
ed d

evaluate past, present or future events or confirming or

common information needs of a wide range of statement correcting their past evaluations?
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users. a. Understandability c. Reliability

d. All of the above b. Relevance d. Comparability
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15. They are the attributes that make the information

21. What is an entity-specific aspect of relevance based on the
provided in financial statements useful to users
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nature or magnitude (or both) of the items to which the

a. Basic Features c. Basic Assumptions
information relates in the context of an individual entity's
b. Basic Elements d. Qualitative Characteristics
financial report?
a. Predictive Value c. Materiality
16. In the Conceptual Framework, qualitative characteristics b. Confirmatory Value d. Timeliness
a. Are considered either fundamental or enhancing.
b. Contribute to the decision-usefulness of financial reporting 22. The ingredients of faithful representation are
information. a. Completeness and neutrality
c. Distinguish better information from inferior information b. Completeness and free from error
for decision-making purposes. c. Completeness, neutrality and free from error
d. All of the choices are correct. d. Completeness, neutrality, free from error and
conservatism

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23.Information is neutral if it 29. All of the following represent costs of providing financial
a. Is free from bias toward a predetermined result information except
a. Preparing c. Accessing Capital
b. Would have no impact on a decision maker
b. Disseminating d. Auditing
c. Provides benefits which are at least equal to the costs of its
preparation 30. What is the only underlying assumption mentioned in
d. Can be compared with similar information about an the new Conceptual Framework for Financial Reporting?
enterprise at other points in time a. Going Concern c. Time Period
b. Accounting Entity d. Monetary Unit
24. The enhancing qualitative characteristics of financial
information are 31. The assumption that an enterprise will continue in
a. Comparability and understandability operation for the foreseeable future is based on
b. Verifiability and timeliness a. Going Concern c. Prudence
c. Comparability, understandability and verifiability b. Accounting Entity d. Materiality
d. Comparability, understandability, verifiability and
timeliness 32. Are the following statements regarding “recognition” true
or false?
25. Which statement relates to comparability?
a. Information is available to decision-makers in time to be I. An accountable item is deemed “recognized” if it is

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recorded in the journals and ledgers.

er as
capable of influencing their decisions.
b. Different knowledgeable and independent observers could II. Recognition is the process of determining the amounts

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reach consensus, although not necessarily complete at which the elements of the financial statements are
agreement, that a particular depiction is a faithful recognized.

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representation.
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c. Financial reports are prepared for users who have a
III. Recognition is the process of incorporating in the FS an
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reasonable knowledge of business and economic activities item that meets the definition of an element and the
and who review and analyze the information with criteria for recognition.
diligence. Statement 1 Statement 2 Statement 3
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d. Enables users to identify and understand a. False False True

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similarities in, and differences among, items. b. True True False

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c. True False True

26. Comparability of financial information depends on d. True True True
a b c d 33. When should an item that meets the definition of an
Consistency Yes Yes No No element be recognized, according to the Framework?
ed d

Regular Reporting no yes no yes a. When it is probable that any future economic benefit
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associated with the item will flow to or from the entity

b. When the element has a cost or value that can be
27. The conceptual framework includes a cost-benefit measured with reliability
constraint. c. When the entity obtains control ofWhich of or
the rights the following
obligations
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a. The benefits of the information must be greater than the associated with the item.
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d. When it is probable that any future economic benefit

costs of providing it.
associated with the item will flow to or from the entity and
b. Financial information should be free from cost to users of the item has a cost or value that can be measured with
the information. reliability
c. Costs of providing financial information are not always
evident or measurable, but must be considered. 34. To meet the probability criterion, in relation to recognition
d. All of the choices are correct. of assets and liabilities, the expectation that future
economic benefits will flow to or from an entity must be
a. Certain c. Sufficiently Certain
28. Which of the following are benefits of providing financial b. Virtually Certain d. Not Uncertain
information?
a. Potential Litigation
b. Auditing
c. Disclosure to competition
d. Improved allocation of resources
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 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.
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.

36. Which of the following is (are) essential to the existence of 41. It is the undiscounted amount of cash or cash equivalent
an asset? expected to be paid to satisfy the liabilities in the normal
a. Legal Right c. Both a and b course of business
b. Physical Form d. Neither a nor b a. Present Value c. Settlement Value
b. Current Cost d. Historical Cost
37. An entity made an unusually high profit for the current
year because it negotiated a significantly lower cost price

m
42. Under this concept, a profit is earned only if the financial
for its main raw material at a time when the selling price of

er as
(money) amount of the net assets at the end of the period
its products was rising sharply. Management does not

co
exceeds the financial (money) amount of net assets at the
want to make public the unusually high profit because they

eH w
beginning of the period, after excluding any distributions
believe that knowledge of the entity’s profitability would
to, and contributions from, owners during the period.

o.
result in their customers seeking to negotiate lower selling
Under this concept, a profit is earned only if the physical
prices when purchasing goods from the entity.
rs e productive capacity (or operating capability) of the
ou urc
Consequently, management would like to decrease profit
enterprise (or the resources or funds needed to achieve
for the year by recognizing a provision for unforeseen
that capacity) at the end of the period exceeds the physical
possible expenses.
productive capacity at the beginning of the period, after
o

a. Because creation of the provision is prudent, it is excluding any distributions to, and contributions from,
aC s

acceptable accounting. owners during the period.

vi y re

b. Because creation of the provision is common practice in First Statement Second Statement
the jurisdiction in which the entity operates, it is a. Physical Capital Financial Capital
acceptable accounting. b. Financial Capital Physical Capital
ed d

c. Because they do not satisfy the definition of a liability, the c. Financial Capital Financial Capital
ar stu

entity cannot create a provision for unforeseen possible d. Physical Capital Physical Capital
expenses.
d. Provided the reason for creating the provision is explained
43. Contributions from and distributions to owners are
sh is

in the notes, it is acceptable accounting.

considered as income and expenses, respectively, under
Th

38. The process of determining the monetary amounts at a. The financial capital concept
which the elements of the financial statements are to be b. The physical capital concept
recognized is known as c. Both a and b
a. Measurement c. Footing d. Neither a nor b
b. Recognition 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

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