OVERVIEW OF ACCOUNTING

1. History of Accounting
Historical records show that the beginnings of record keeping or storing information dates back some 76,000 years ago in
the Blombos caves of Africa.

Accounting In Ancient Egypt, China, Greece and Rome

 Government accounting records in Egypt show “in kind” tax payments.
 China used Accounting as a means of evaluating the efficiency of governmental programs
 Legislation on financial matters in Greece (5th century BC) included control of receipts and expenditures of public
monies through the oversight of “public accountants” chosen by lot
 In its thousand years of existence, these records showed simple list-making only, similar to single-entry bookkeeping
 Early financial records in the Roman Empire include the Account, (listed public revenues); the Treasury, (which
listed amounts of cash in the provincial tax officials and in the hands of the public contractors). The records
included not only cash and commodities but also the names of freed men and slaves, especially the records
Roman army.
 Medieval Europe (13th century) –introduction of double-entry bookkeeping. The chief objective was to keep
track of amounts owed by customers (debtors) and amounts owed to creditors. Debit is Latin for 'he owes' and
credit is Latin for 'he trusts'.
 The Messari (Italian for Treasurer’s accounts, of the city of Genoa 1340) is the oldest discovered record of a
complete double-entry system. These accounts csontain debits and credits journalized in a bilateral form.

Luca Pacioli and Double-entry System of Bookkeeping

 Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità," published in Venice in 1494,
included a 27-page, 36 short chapters on bookkeeping.
 Books of accounts used by Luca Pacioli
o The memorandum (a daybook) – for chronological recording of business transactions as they occurred
o The journal – the merchant's private account book
o The ledger – the money and date columns were almost identical to those in modern ledgers, with
entries consisting of brief paragraphs
 The trial balance is the end of Pacioli's accounting cycle. Debits from the old ledger are listed on the left side of
the balance sheet and credits on the right. If the two totals are equal, the old ledger is considered balanced. If
not (in balance), says Pacioli, "that would indicate a mistake in your ledger, which mistake you will have to look
for diligently with the industry and intelligence God gave you."
 The objective of Luca Pacioli’s keeping records is to give traders prompt information as to his assets and liabilities.
 The Summa is the first known printed treatise on bookkeeping and was translated into different languages. It is
widely believed to be the forerunner of modern bookkeeping practice.
 Thus, it can be said that Luca Pacioli systematized record keeping through the double-entry bookkeeping system.

Professional Accountancy Travels across the Globe

 1880: Institute of Chartered Accountants in England and Wales (ICAEW) brought together all the accountancy
organizations in those countries
 1887: the first national accounting society of the United States was formed, the American Association of Public
Accountants (predecessor of the AICPA)
Accounting in the Internet Era
 The act of accounting is usually defined as the act of collecting information on resource usage for the purpose of
trend analysis, auditing, billing, or cost allocation.
o For example when a user uses a connectivity service paid with a pay-per-view approach the accounting
process is based on a metering of the resource usage by the user (usually time spent with an
active connection or the amount of data transferred using that connection). The accounting is hence
the recording of this connectivity service consumption for subsequent charging of the service itself.

Recent Trends and Developments in Accounting

 Cloud Accounting
 Automation (Artificial Intelligence)
 Data Analytics
 Environmental Accounting
 Standardization and Harmonization
2. Definition, Nature, and Purpose of Accounting
 Definition: 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 decisions.

Accounting is the art of recording, classifying, 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.

Nature:
 Accounting as Science and Art – Accounting is a social science with a body of knowledge which has been
systematically gathered, classified, and organized. It is influenced by, and interacts with, economic, social and
political environments. Accounting is a practical art which requires the use of creative skill and judgment.
 Accounting as an Information System – Accounting identifies and measures economic activities, processes
information into financial reports and communicates these reports to decision makers.

Purpose: To provide quantitative information1 about economic entities2 intended to be useful in making economic decisions.

1 – Types of information provided by accounting

 Quantitative information – expressed in numbers, quantities or units
 Qualitative information – expressed in words or descriptive form
 Financial information – expressed in terms of money

2 – Economic entity vs business entity

 Economic entity – is a separately identifiable combination of persons and property that uses or controls
economic or scarce resources to achieve certain goals or objectives. Scarce resources have one significant
characteristic: because of their limited nature, they command a price.
o Business entity is an economic entity that produces and distributes goods or services primarily for profit.
o Not-for-profit or non-profit entity is one that carries out some socially desirable needs of the
community or its members whose activities are not directed towards making profit.

3. Functions of Accounting
a. Identification – the accounting process of recognition or non-recognition of business activities as “accountable
events” or whether they have accounting relevance.
b. Measurement – the accounting process of assigning of peso amounts or numbers to the economic transactions and
events. The unit of measure of accounting is money, expressed in prices.
c. Communication – the accounting process of preparing and distributing accounting reports to potential users of
accounting information and interpreting the significance of this processed information. The three aspects of
communicating are:
i. Recording – the process of systematically committing to writing business transactions and events in books of
account in a systematic and chronological manner according to accounting rules and regulation.
ii. Classifying – the grouping of similar and interrelated items into their respective classes.
iii. Summarizing – expressing in condensed or brief form the recorded and classified information in financial
statements.

4. Branches of Accounting
a. Financial Accounting – the recording of transactions, preparation of financial statements and communication of
financial information to external user groups. (Focus: general purpose reports)
b. Auditing – the examination of financial statements by independent certified public accountant for the purpose of
expressing an opinion on the fairness of presentation of financial statements. (Focus: audit report)
c. Management Accounting (or Management Services) – the accumulation and communication of information for use
by internal parties or management. This includes services to clients on matters of accounting, finance, business
policies, organization procedures, product costs, distribution, and many other phases of business conduct and
operations. (Focus: advisory services; consultancy)
d. Government Accounting – accounting for the national government and its instrumentalities, focusing attention on the
custody of public funds and the purpose or purposes to which such funds are committed.
e. Tax Accounting – involves the preparation of tax returns and rendering of tax advice, such as determination of tax
consequences of certain proposed business endeavors. (Focus: Tax advisory services)
f. Fiduciary Accounting – handling of accounts managed by a person entrusted with the custody and management of
property for the benefit of another.
g. Social Responsibility Accounting – reporting of programs and projects that have to do with the upliftment of the
 welfare of the people of a community or of the nation.
h. Environmental Accounting – the area of accounting that focuses on programs, activities and projects that are focused
on care for Mother Earth. One example is carbon accounting which is a process of encouraging reductions in
greenhouse gas emissions.
i. Price-level Accounting (Accounting for Hyperinflationary Economies) – is accounting that recognizes in the financial
statements changes in the purchasing power of money. This is in contrast to traditional accounting which assumes a
stable monetary unit when it reports financial information.

5. Financial Accounting vs. Management Accounting

Financial Accounting Management Accounting
o Basically concerned with income o Basically concerned with decision-making
determination and asset valuation o Prepares statements in accordance with
o Prepares statements in accordance with management needs
GAAP o Prepares special purpose reports for
o Prepares general purpose statements internal users
that can be used by external and internal
users o Future-oriented
o Historical in nature o Makes use of subjective data as long as it
o Emphasizes objective data is relevant

6. Areas of Professional Accounting Practice

a. Public Accounting – composed of individual practitioners, accounting firms and large multinational organizations that
render independent expert financial services to the public on a professional fee basis. Public accountants usually offer
three kinds of services: assurance and audit, taxation, and management advisory services.
b. Private Accounting – composed of individuals employed in business enterprises on salary basis. The major objective of
private accounting is to assist management in planning and controlling the enterprise’s operations.
c. Government Accounting – composed of accountants employed in the different branches of government, such us the
BIR, COA, SEC, and GBEs. The focus of government accounting is custody and administration of public funds.
d. Accounting Education – composed of CPAs who are professors of accounting in various colleges and universities. Their
task is to prepare entrants into the accountancy profession.

7. Environment of Accounting
Financial accounting is shaped to a significant extent, by the environment, and in particular, all of the following:
 The economic activities in society
 The means of measurement of economic activity
 The financial statement users and their information needs

Economic Activities and their Classification

a. Production – the process of converting economic resources into outputs of goods and services that are
intended to have greater utility than the required inputs
b. Exchange – the process of trading resources or obligations for other resources or obligation
c. Income distribution – the process of allocating rights to the use of output among individuals and groups in society
d. Consumption – the process of using the final output of the production process
e. Investment – the process of using current inputs to increase the stock of resources available for output as
opposed to immediately consumable output
f. Savings – the process by which individuals and groups set aside rights to present consumption in exchange
for rights to future consumption

Accountable Events – are events that are quantifiable and has an effect on assets, liabilities and equity. Also known as
economic activities, these are the subject matter of accounting.
 Only economic activities are emphasized and recognized in accounting. Sociological and psychological
matters are not recognized.
 Criteria for an accountable event
o It must affect a financial element of accounting (increasing or decreasing asset, liability or equity
(probability criterion)
o It is a result of a past activity
o Its cost can be measured reliably (measurability criterion)
Types of Accountable Events
1. External Events – events wherein another party participates
a. Transfers – there is flow of economic resources
i. Exchanges – two-way
ii. Non-reciprocal Transfers – one-way
b. External Events other than Transfers – no flow of economic resources
2. Internal Events – those wherein only the entity participates
a. Production
b. Casualties

Measurement of Accountable Events (to be discussed in Conceptual Framework)

1. Historical Cost
2. Current Cost
3. Realizable (Settlement) Value
4. Present Value

QUIZZER 1 – OVERVIEW OF ACCOUNTING

History of Accounting
1. Are the following statements about the history of Accounting true or false?
I. According to the history of accounting, debit means “he owes” and “credit” means “he trusts”.
II. Frater Luca Bartolomes Pacioli did not invent accounting but his treatise, “De Computis et Scripturis is said to
have laid the foundation for double-entry bookkeeping as it is practiced today.
III. The earliest accounting records date back to the 14th Century and were found in the Roman Empire.
Statement I Statement II Statement III
a. True False True
b. False True False

c. True True False

d. False False True

2. Which of the following statements pertaining to Luca Pacioli’s bookkeeping system is (are) true?
I. The books of accounts included a Memorandum, a Journal and a Ledger
II. The objective of Luca Pacioli’s keeping records is to give traders prompt information as to his assets and liabilities.
III. Luca Pacioli’s accounting cycle is basically the same as the accounting cycle as practiced today.

a. Statements I and II c. Statements II and III are true

are true d. All statements are true
b. Statements I and III
are true

3. Which of the following statements is (are) true?

I. Accountancy is a communication service profession.
II. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information
needed by management to plan, evaluate, and control an organization's operations.
III. Financial statements are the principal means through which financial information is communicated to those
outside an enterprise.
a. Statements I and c. Statements II and III only
II only d. Statements I, II and III
b. Statements I and
III only

4. Which of the following statements is not a proper description of accounting as a communication profession?
a. Financial statements can be expressed in any national language.
b. Financial statements can be expressed in any dialect of a country.
c. Financial statements should use terminology within the level of understanding of the statement user.
d. Financial statements, as far as possible, should show information that can be verified from documentary
evidence in order to gain the confidence of statement users
5. Which of the following statements about accounting information is (are) true? (answer, statement II only)
I. Accounting provides quantitative and financial
information only. II.Accounting provides quantitative,
qualitative and financial information
III. Information in the financial statements are sourced only from the books of account.
a. I and II only b. II and III only c. II and III only d. I, II and III

6. Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.

7. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant c. Promotes productivity
information d. (a) and (b)
b. Encourages innovation

8. The information provided by financial reporting pertains to

a. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as
consumers.
b. Business industries, rather than to individual enterprises or an economy as a whole or to members of society as
consumers.
c. Individual business enterprises, industries, and an economy as a whole, rather than to members of society as
consumers.
d. An economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.

9. Which of the following represents a form of communication through financial reporting but not through financial
statements?
a. Statement of financial c. Income statement
position d. Notes to financial statements
b. President's letter

10. Qualitative information is found

a b c d
Only in the face of the financial statements yes no
yes no In
the face of the financial statements and
the accompanying notes yes yes no no

11. In which of the following situations is the science aspect of accounting demonstrated?
I. The accountant makes use of the rules of debit and credit in recording transactions of
the business II.Transactions and events are processed using the steps of the accounting
cycle.
III. A provision for doubtful accounts was estimated by the accountant on the basis of recorded data and the
collection experience of the company
a. I only b. I and II only c. II and III only d. I, II and III

12. The art aspect of accounting is applied in which of the following circumstances?
I. The accountant records a purchased equipment at cost plus expenses in acquisition and putting it available for use.
II.The external auditor gives an unqualified opinion that the financial statements are fairly presented in
conformity with generally accepted accounting principles.
III. The accountant selects the reliable fair value at which a consumable biological asset will be recognized and
measured in the books of account.
a. Statement I c. Statements II and III
only d. Statements I, II and III
b. Statements
I and II
13. Which of the following statements is (are) true?
I. Not all quantitative information is also financial in nature.
II.Measurement is the process of assigning numbers to objects such as inventories or plant assets and to
events such as purchases or sales.
III. Management decisions are oriented to the future whereas the decisions of external users are oriented to the past.
a. I and c. I and III only
II d. I, II and III
only
b. II and
III
only

14. Which of the following features of an asset closely links its definition to the science of Economics?
a. An asset is controlled by an entity c. An asset can command a price
b. An asset can provide future benefits to d. An asset is exclusively owned by an entity
an entity

15. Which of the following is not an economic c. Polytechnic University of the Philippines
entity? d. Janet, a filipino citizen who owns JLN Piggery
a. Aldo, Baldo, Calvo & Associates, a law
office
b. Luna Sangre Group of Companies

16. Which of the following is an economic entity but not a business entity?
a. Golden Acres, a charitable c. Rustan’s supermarket
institution d. ABC Co., a stock corporation
b. Consolidated Foods
Corporation

17. It is the process of recognition and non-recognition of business activities as “accountable events” or whether
they have accounting relevance
a. Identi c. Communication
ficatio d. Summarization
n
b. Measu
remen
t

18. The accounting process of assigning peso amounts or numbers to relevant objects and events is known as
a. Identi c. Communication
ficatio d. Summarization
n
b. Measu
remen
t

Branches of Accounting / Areas of Professional Practice

19. Which of the following branches of accounting focuses on general purpose reports on financial position
and results of operations, known as financial statements?
a. Financial accounting c. Management advisory services
b. Auditing d. Bookkeeping

20. The process of analyzing, recording, classifying, summarizing and communicating all transactions involving state
funds and property is known as
a. government accounting c. fiduciary accounting
b. estate accounting d. receivership accounting

21. An independent appraisal function established within an organization to examine and evaluate its activities as a
 service to the organization.
a. external auditing c. fiduciary accounting
b. internal auditing d. management accounting

22. The process of identifying, measuring and communicating financial information used for planning , evaluation,
and control within the organization
a. financial accounting c. social responsibility accounting
b. estate accounting d. management accounting

23. Handling of accounts for fiduciaries who wind up the affairs of a deceased person.
a. estate accounting c. receivership accounting
b. fiduciary accounting d. macro accounting.

24. The process of measuring and disclosing the performance of a firm in terms of community involvement and related
criteria.
a. macro accounting c. social responsibility accounting
b. enterprise accounting d. community accounting

25. Accounting for not-for-profit entities other than the government

a. Estate accounting c. Receivership accounting
b. Institutional accounting d. Enterprise accounting

26. The practice of accounting by one whose principal employment is confined to a single enterprise
a. single-proprietorship accounting c. estate accounting
b. enterprise accounting d. private accounting

27. Branch of accounting which deals with rendering of services to the public for compensation.
a. Private Accounting c. Public Accounting
b. Government Accounting d. Enterprise Accounting
28. It is an independent examination intended to support the expression of an impartial, professional opinion on the
reliability of the financial statements
a. External Auditing c. Internal auditing
b. Management accounting d. Fiduciary accounting

29. Which of the following applies to financial accounting?

a b c d
Information meets specific needs of particular statement users yes no yes no
Emphasizes objective data Yes yes no no
Basically concerned with income determination and asset valuation no yes no yes
Primarily historical in nature no yes yes yes

30. Accounting that recognizes changes in the purchasing power of money is known as
a. Price-level c. Current value accounting
accounting d. Traditional accounting
b. Historical
accounting QUIZZER 2 – ENVIRONMENT OF ACCOUNTING

The Environment of Accounting / Economics Concepts

1. Financial accounting is shaped to a significant extent, by the environment, and in particular, all of the following, except:
a. The economic activities in society
b. The financial statement users and their information needs
c. The means of measurement of economic activity
d. The characteristics and limitations of financial accounting and financial statements

2. Which of the following is not a fundamental economic activity in society?

a. Consumption c. Income recognition
b. Income distribution d. Investment

3. This is an economic activity which involves trading resources and obligations for other resources or obligations.
a. Production c. Non-reciprocal transfer
b. Exchange d. Distribution

4. This is the process of converting economic resources into outputs of goods and services that are intended to have
greater utility than the required inputs.
a. Production c. Investment
b. Exchange d. Distribution

5. The process of using the final output of the production process is

a. Investment c. Distribution
b. Savings d. Consumption

6. It is the process of using current inputs to increase the stock of resources available for future output as opposed to
immediately consumable output
a. Exchange c. Consumption
b. Investment d. Savings

Economic Resources/Economic Obligations/Residual Equity

7. These are the scarce means (limited in supply relative to desired uses) available for carrying on economic activities of
a business enterprise:
a. Economic resources c. Production resources
b. Economic obligations d. Property

8. Economic resources include

a. Money c. Products
b. Claims to receive money d. All of these

9. Productive resources include all of the following except

a. tangible productive resources of the enterprise
 b. intangible productive resources of the enterprise
c. contractual rights to the use of resources of other entities
d. ownership interests in other enterprises

10.Which of the following is not among the economic resources of a business enterprise?
a. Money c. Obligations to pay money
b. Products or output of the entity d. Ownership interest in other enterprises

11.These represent an enterprise’s present responsibilities to transfer economic resources or provide service to other
entities in the future:
a. Economic resources c. Residual interest in resources
b. Economic obligations d. None of these

12.The interest in the economic resources of an enterprise that remains after deducting economic obligations is called
a. Residue c. Residual Interest
b. Stockholders’ Equity d. Owners’ Equity

13.The economic activities of a business enterprise increase or decrease its (the)

Assets Liabilities Owner’s Equity
a. Yes No Yes
b. Yes Yes Yes
c. Yes No No
d. No No No

Events and Transactions / Accountable Events

14.These are events and transactions that affect the enterprise and in which other entities participate.
a. External events c. Exchange transactions
b. Internal events d. Production

15.These are events in which only the entity participates

a. External event c. Non-reciprocal event
b. Internal events d. Accountable event

16.These are reciprocal transfers of resources or obligations between the enterprise and other entities in which the
enterprise either sacrifices resources or incurs obligations in order to obtain other resources or satisfy other
obligations
a. Exchanges c. Manufacturing
b. Production d. Investment

17.These are changes in economic resources by actions of other entities that do not involve transfers of enterprise
resources and obligations
a. Transfers c. Internal events
b. External events other than transfers d. Production

18.Some events involve the transfer of resources in only one direction, either from the enterprise to other entities, or
from other entities to the enterprise. These are called
a. Nonmonetary transactions c. Nonreciprocal transfers
b. Arms-length exchanges d. Executory contracts

19.External events are those that affect the enterprise and in which other entities participate. One example is when
a. A manufacturing company transfers goods from one production department to another
b. The expired portion of prepaid insurance is taken up as expense
c. Loss of inventory due to fire
d. Issuance of promissory note in settlement of an account
e. Manufacture of a product out of raw materials

20.The following are classified as external events except

a. Payment of money borrowed c. Government grant
b. Purchase of supplies d. Casualty loss
21.Safe Corp. discovered a material amount of loss from theft. The value of the loss should be classified as
a. A non-reciprocal transfer c. An exchange
b. A reciprocal transfer d. A casualty

22. Purchases or sale of merchandise on account is classified as

a. Exchanges c. Production
b. External events other than transfers d. Nonreciprocal transfer

23. These are sudden, substantial, unanticipated reductions in enterprise resources not caused by other entities
a. Internal events c. Casualties
b. Production d. Exchanges

24. Fire, tornado, and volcanic eruption are examples of accountable events classified as

a. Pro c. Events other than transfers

duc d. Casualties
tio
n
b. Exc
han
ge

25.Which of the following is (are) classified as nonreciprocal transfer?

I. Imposition of fines
II. Loss from theft
III. Declaration of dividends
a. I only c. II and III only
b. I and II only d. I, II and III
 26.Which of the following is (are) classified as external events other than transfers
I. Exchange of assets with no commercial substance
II. Transfer of materials from one stage of production to another
III. Technological changes caused by other entities
IV. General price level changes
a. I and II only c. II, III and IV only
b. III and IV only d. I, III and IV only

27.In the classification of accountable events, vandalism is an event that

a. is classified as an external event other than transfer
b. cannot be recorded
c. is classified as a nonreciprocal transfer
d. is classified as a casualty

28.Which of the following criteria should be met before a particular action, condition, or set of circumstances qualifies as an
accountable event?
a. It has already happened.
b. It affects the financial position of individual business entities.
c. It can be measured in monetary terms with a reasonable degree of precision.
d. All of the above.

29.Which of the following will not qualify as an accountable event in financial statements according to current generally accepted
accounting principles (assume all amounts are material)?
a. Receipt of a stock split
b. Decline in market value of trading securities held
c. Increase in market value of investment property
d. Revaluation of property

30. Which of the following is not a transaction in a strict sense?

a. Enterprise’s charitable contributions to flood victims
b. Loss of assets due to theft
c. Additional investment by owner
d. Depreciation of property and equipment

CONCEPTUAL FRAMEWORK OF FINANCIAL ACCOUNTING

Definition: A conceptual framework is a coherent system of interrelated basic concepts and propositions that prescribe objectives,
limits, and other fundamentals of financial accounting and serves as a basis for developing and evaluating accounting principles and
resolving accounting and reporting controversies (FASB).

Preface to the Philippine Financial Reporting Standards

1. Institutions, Professional Bodies and Standard-Setting Due Process
The FRSC
The Financial Reporting Standards Council (FRSC) was established by the Board of Accountancy (BOA or the Board) in 2006 under the
implementing Rules and Regulations of the Philippine Accountancy Act of 2004 to assist the Board in carrying out its power and
function to promulgate accounting standards in the Philippines.

Composition: Appointed by BOA

A Chairman and members that include sectoral representatives from the Philippine Institute of Certified Public Accountants (PICPA),
the Board of Accountancy, the Securities and Exchange Commission, (SEC), Bangko Sentral ng Pilipinas (BSP), Financial Executives
Institute of the Philippines (FINEX) and Philippine Institute of Certified Public Accountants (PICPA), Commission on Audit (COA) and
Bureau of Internal Revenue (BIR)

The FRSC is the successor of the Accounting Standards Council (ASC), which was created on November 18, 1981 by the Philippine
Institute of Certified Public Accountants to establish generally accepted accounting principles in the Philippines.

Responsibility of FRSC: The approval of Philippine Financial Reporting Standards (PFRSs), Philippine Interpretations and related
documents such as the Framework for the Preparation and Presentation of Financial Statements, exposure drafts, and other
discussion documents.
 Once it was established, the FRSC resolved that all Standards and Interpretations issued by the ASC continue to be
applicable unless and until they are amended or withdrawn by the FRSC.
 The Philippine Interpretations Committee (PIC) was formed by FRSC in November 2006 to assist the FRSC in establishing
and improving financial reporting standards in the Philippines. The role of the PIC is principally to issue implementation
guidance on PFRSs. The PIC replaced the former Interpretations Committee created by the ASC in 2000.
Objectives of the FRSC:
(1) The main function of the FRSC is to establish generally accepted accounting principles in the Philippines. In achieving the
objective the FRSC considers Standards issued by the IASB.
(2) The FRSC carries on the decision made by the ASC to converge Philippine accounting standards and international accounting
standards issued by the IASB. The objectives of FRSC in this respect are:
a) To develop, in the public interest a single set of high quality, understandable and enforceable accounting standard that
require, high quality, transparent and comparable information in financial statements and other financial reporting to
help participants in the various capital markets and other users of the information to make economic decisions
b) To promote the use and rigorous application of those standards; and
c) To work for the convergence of Philippine accounting standards with international Financial Reporting Standards
(PFRSs) issued by the IASB.

Scope and Authority of PFRSs

1) The FRSC issues its Standards in a series of pronouncements called Philippine Financial Reporting Standards (PFRSs). These
consist of:
(a) Philippine Financial Reporting Standards (PFRSs) (these correspond to the International Financial Reporting Standards
(IFRSs)
(b)Philippine Accounting Standards (PASs) (these correspond to International Accounting Standards (IASs); and
(c) Philippine Interpretations (these correspond to Interpretations of the IFRIC and the Standing Interpretations Committee
(SIC) of the IASC. (These also include Interpretations developed by the PIC)

2) The FRSC achieves its objectives primarily by developing and issuing Philippine Financial Reporting Standards (PFRSs) and
promoting the use of these standards in general purpose financial statements and other financial reporting.

3) PFRSs sets out the recognition, measurement, presentation and disclosure requirements dealing with transactions and
events that are important in general purpose financial statements. They may also set out such requirements for the
transactions and events that arise mainly in specific industries. The Framework also provides a basis for the use of judgment
in resolving accounting issues.

4) PFRSs are designed to apply the general purpose financial statements and other financial reporting of all profit-oriented
entities. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether
organized in corporate or any other forms. They include organizations such as mutual insurance companies and other
mutual cooperative entities that provide dividends or other economic benefits directly and proportionately to their owners,
members or participants. Although PFRSs are not designed to apply to not-for profit activities in private sector, public
sector or government, entities with such activities may find them appropriate

5) PFRSs apply to all general purpose financial statements. These financial statements are directed towards the common
information needs of a wide range of users, for example, shareholders, creditors, employees and the public at large.

The objective of financial statements is to provide information about the financial position, performance and cash flows of
an entity that is useful to those users in making economic decisions.

6) A complete set of financial statements include a statement of financial position (or balance sheet), a statement of
comprehensive income , a statement showing either all changes in equity or changes in equity other than those arising from
capital transactions with owners and distribution to owners, a cash flow statement, and accounting policies and
explanatory notes.

7) Interpretations of PFRSs are intended to give authoritative guidance on issues that are likely to receive divergent or
unacceptable treatment in the absence of such guidance.

Philippine Due Process in Accounting Standard-Setting

PFRSs are developed through a due process that includes members of PICPA, financial executives, regulatory authorities, academics,
and other interested individuals and organizations. Due process for projects normally, but not necessarily includes the following
steps:
a) Consideration of pronouncements of the IASB;
b) Formation of a task force, when deemed necessary, to give advice to the FRSC;
c) Issuing for comment an exposure draft approved by a majority of the FRSC members, comment period will be at least 60 days
unless a shorter period (not less than 30 days) is considered appropriate by FRSC.
d) Consideration of all comments received within the comment period and, when appropriate, preparing a comment letter to
the IASB; and
e) Approval of the standard or an interpretation by a majority of the FRSC members.
f) Approval of the Standard by majority of the members of the Board of Accountancy.
g) Final approval of the Accounting standard or Interpretation by the Professional Regulation Commission
h) Publication in the PRC Official Gazette

FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

CONCEPTUAL FRAMEWORK LEVEL 1

1. Purpose and Status

The FRSC Framework for the Preparation and Presentation of Financial Statements identifies the following purposes:
a) Assists the FRSC in the development of future Philippine Financial Reporting Standards and its review of existing Philippine
accounting standards.
b) Assists preparers of financial statements in applying the Statements of Financial Accounting Standards and in dealing with
topics that have yet to form the subject of a Philippine Financial Reporting Standard
c) Assists auditors in forming an opinion as whether financial statements conform with Philippine Financial Reporting Standards.
d) Assists users of financial statements in interpreting the information contained in financial statements prepared in conformity
with Philippine Financial Reporting Standards, and
e) Provides those who are interested in the work of FRSC with information about its approach to the formulation of Statements
of Philippine Financial Accounting Standards.

This framework is not a PFRS. However, when developing an accounting policy in the absence of a standard or an Interpretation that
specifically applies to an item, an entity’s management is required to refer to, and consider the applicability of the concepts of the
Framework. (see PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors).

In a limited number of cases where there may be a conflict between the Framework and the requirements within the Standard or
Interpretation, the Standard or Interpretation should prevail over those of framework.

. Scope
1) The framework deals with:
(a) The objective of financial statements:
(b) The qualitative characteristics that determine the usefulness of information in financial statements.
(c) The definition, recognition and measurement of the elements from which financial statements are constructed; and
(d) Concepts of capital and capital maintenance

A complete set of financial statements normally include:

 A statement of financial position
 A statement of comprehensive income
 A statement of changes in financial position (which could be presented in many ways, like a statement of cash flows), and
 Those notes and other statements and explanatory material that are an integral part of the financial statements. They may
also include supplementary schedules and information based on, or derived from and expected to be read with such (ex:
financial information about industrial and geographical segment, and disclosures about the effects of changing prices.

3. Special purpose financial statements are outside of the scope of this Framework.

4. Applicability: Financial statements of all commercial, industrial, and business reporting enterprises whether public or private
sector. A reporting enterprise is an enterprise for which there are users who rely on the financial statements as their major
source of financial information about the enterprise.

5. Users and their Information Needs

Users of the financial statements have different needs for the information which are as follows:
a. Investors – The provider 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
 to assess the ability of the enterprise to pay dividends
b. Employees – Employees and their representative groups need information about the stability and profitability of their
employers. They need information that will enable them:
 to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.
c. Lenders – Lenders are interested in the information that enables them:
 to determine whether their loans, and the interest attaching to them will be paid when due.
d. Suppliers and other trade creditors – They are interested in information that enable them:
 to determine whether the amounts owing to them will be paid when due.
 Trade creditors are likely to be interested in an enterprise over a shorter period of time than lenders unless they are
dependent upon the continuation of the enterprise as a major customer.
e. Customers – They need information that enable them to:
 to know about the continuance of the enterprise, especially when they have a long term involvement with, or are
dependent on, the enterprise.
f. Government and their agencies – They are interested in the allocation of resources and activities of the enterprise. They require
information:
 to regulate the activities of the enterprises,
 to determine taxation policies and as the basis for national income and similar statistics.
g. Public – Enterprises affect the members of the public in a variety ways. For example the enterprises may make a substantial
contribution to the local economy in many ways, including the number of people they employ and their patronage of the local
suppliers. The public need financial statements in order to assists them
 to determine trends and recent developments in the prosperity of the enterprise and the rank of its activities.

The basic financial statements are designed to meet the common needs of all users. As investors are providers of risk capital to
the enterprise, the provision of financial statements that meet their needs will also meet most of the needs of other users.

6. Responsibility for the Financial Statements

 The management of an enterprise has the primary responsibility for the preparation and presentation of the financial
statements of the enterprise.

7. Objective of Financial Statements

The objective of financial statements is to provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making economic decisions.
Financial statements prepared for this purpose:
 Meet the common needs of most users.
 Also show the results of the stewardship of management, or accountability of management for the resources entrusted to
it.
 Do not, however provide all the information that users may need to make decisions since they largely portray the financial
effects of past events and do not necessarily provide non-financial information.

A. Financial position – The financial position of an enterprise is affected by the economic resources it controls, its financial structure,
it liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates. This is primarily provided in
the Statement of Financial Position (or Balance Sheet). It answers the following questions:
 What assets does the entity own?
 What does it owe?
 What are the residual equity interests in the entity’s net assets?

Other important information provided by the statement of financial position are as follows:
 Financial structure – is the source of financing for the assets of the enterprise. It indicates what amount of assets has been
financed by creditors, which is borrowed capital, and what amount of assets has been financed by owners, which is
invested capital.
Significance: (1) Useful in predicting future borrowing needs and how future profits and cash flows will be distributed
among those with an interest in the enterprise
(2) Useful in predicting how successful the enterprise is likely to be raising further finance.
 Liquidity – refers to the availability of cash in the near future after taking account of financial commitments over this
period.
Significance: Useful in predicting the ability of the enterprise to meet its short-term financial commitments as they fall
due
 Solvency – refers to the availability of cash over the longer term to meet financial commitments as they fall due
Significance: Useful in predicting the ability of the enterprise to meet its long-term financial commitments as they fall
due
 Capacity for adaptation – the ability of the enterprise to use its available cash for unexpected requirements and investment
opportunities. This is also known as financial flexibility. It can be accomplished by raising cash at a short notice either
through borrowing or issuance of securities or by disposal of assets without disrupting normal operations.
Significance: Information about the economic resources controlled by the enterprise and its capacity for adaptation is
useful in predicting the ability of the enterprise to generate cash and cash equivalents in the future

B. Financial performance reflected by accrual accounting

Performance of an enterprise – comprises its revenue, expenses, net income or loss for a period of time. It is the level of income
earned by the enterprise through efficient and effective use of its resources. Information about the performance of an enterprise, in
particular its profitability, is important in assessing potential changes in the economic resources that it is likely to control in the
future. Information about performance is primarily provided in a statement of comprehensive income.

Accrual accounting recognizes transactions and other events of a reporting entity in the periods in which those effects occur, even if
the resulting cash receipts and payments occur in a different period.

Current financial reporting standards provide that all increases and decreases in equity other than from owner – related
transactions, that is, income, expense, realized and unrealized gains and losses should be reported in the overall performance
report.

Changes in financial position – refers to the changes in the economic resources and obligation of an enterprise. In constructing a
statement of changes in financial position, funds can be defined in various ways, such as all financial resources, working capital,
liquid assets or cash. .

Information about changes in financial position is provided in the financial statement by means of a separate statement.
Significance: (1) Useful in assessing investing, financing and operating activities during the reporting period.
(2) Useful in providing the user with a basis to assess the ability of the enterprise to generate cash and cash
equivalents and the needs of the enterprise to utilize those cash flows.

Fundamentally related financial statements – The component parts of the financial statements interrelate because they reflect
different aspects of the same transactions or other events. Although each statement provides information that is different from the
others, none is likely to serve only a single purpose or provide all the information necessary for particular needs of users.
Notes and Supplementary Schedules
The financial statements also contain notes and supplementary schedules and other information. For example, they may contain
additional information that is relevant to the needs of users about the items in the balance sheet and income statement. They may
include:
 Disclosures about risks and uncertainties affecting the enterprise and
 Any resources and obligations not recognized in the balance sheet (mineral reserves)
 Information about geographical and industry segments and the effect on the enterprise of changing prices

CONCEPTUAL FRAMEWORK LEVEL 2

Qualitative Characteristics of Financial Statements

If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent. The usefulness of
financial information is enhanced if it is comparable, verifiable, timely and understandable.

A. Fundamental Qualitative Characteristics

The fundamental qualitative characteristics are
1. relevance and
2. faithful representation

(1) Relevance
Relevant financial information is capable of making a difference in the decisions made by users. Information has the quality of
relevance when it influences the economic decisions of users by helping them to evaluate, past, present, or future events or
confirming, or correcting, their past evaluations.

Financial information is capable of making a difference in decisions if it has predictive value or confirmatory value, or both.
(a) Predictive value - Financial information has predictive value if it can be used as an input to processes employed by users to
predict future outcomes. Thus, the information can help users increase the likelihood of correctly predicting or forecasting
outcome of events. For instance, information about financial position and past performance is frequently used in predicting
dividend and wage payments, and the ability of the enterprise to meet maturing commitments
(b) Confirmatory value (or feedback) - Financial information has confirmatory value if it provides feedback about (confirms or
changes) previous evaluations. Information with feedback value enables users to confirm or correct expectations.
The predictive value and confirmatory value of financial information are interrelated.

Materiality
Materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information
relates in the context of an individual entity’s financial report. Materiality provides a threshold or cut-off point rather than being a
primary qualitative characteristic which information must have to be useful. The relevance of information is affected by its nature
and materiality. Information is material if its omission or misstatement could influence the economic decisions.

(2) Faithful Representation

Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only
represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent.

Characteristics of faithful representation:

a) Completeness - A complete depiction includes all information necessary for a user to understand the event or information
being presented, including all necessary descriptions and explanations.
b) Neutrality - A neutral presentation of information is one without bias. A neutral information is one that is not manipulated to
increase the probability that financial information will be received favorably or unfavorably by users.
c) Freedom from error - means there are no errors or omissions in the description of the phenomenon, and the process used to
produce the reported information has been selected and applied with no errors in the process.

Faithful representation does not mean accurate in all respects. In this context, free from error does not also mean perfectly accurate
in all respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate.
However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the
nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an
appropriate process for developing the estimate.

B. Enhancing Qualitative Characteristics

The usefulness of information that is relevant and faithfully represented is enhanced by the qualitative characteristics of
comparability, verifiability, timeliness and understandability
(1) Comparability - is the qualitative characteristic that enables users to identify and understand similarities in, and differences
among, items. Unlike the other qualitative characteristics, comparability does not relate to a single item. A comparison
requires at least two items.

Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one reporting
entity or another. Consequently, information about a reporting entity is more useful if it can be compared with similar information
about other entities and with similar information about the same entity for another period or another date.

Consistency, is not the same as comparability. Consistency refers to the use of the same methods for the same items, either from
period to period within a reporting entity or in a single period across entities.

Comparability is the goal; consistency helps to achieve that goal.

(2) Verifiability – means that different knowledgeable and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation. Verifiability helps assure users that information
faithfully represents the economic phenomena it purports to represent.

Verification can be direct or indirect. Direct verification means verifying an amount or other representation through direct
observation, for example, by counting cash. Indirect verification means checking the inputs to a model, formula or other
technique and recalculating the outputs using the same methodology.

(3) Timeliness – means having information available to decision-makers in time to be capable of influencing their decisions.
Generally, the older the information is the less useful it is. However, some information may continue to be timely long after the
end of a reporting period because, for example, some users may need to identify and assess trends.

(4) Understandability – means classifying, characterizing, and presenting information clearly and concisely. Some phenomena are
inherently complex and cannot be made easy to understand. However, excluding this information from the financial reports
may render these reports be incomplete and therefore 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 diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to
understand information about complex economic phenomena.

C. Cost Constraint
Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information
imposes costs, and it is important that those costs are justified by the benefits of reporting that information.

Providers of financial information expend most of the effort involved in collecting, processing, verifying and disseminating financial
information, but users ultimately bear those costs in the form of reduced returns. Users of financial information also incur costs of
analyzing and interpreting the information provided. If needed information is not provided, users incur additional costs to obtain
that information elsewhere or to estimate it.

In applying the cost constraint, there is a need to assess whether the benefits of reporting particular information are likely to justify
the costs incurred to provide and use that information.

VI. The Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to
their economic characteristics. These are termed the elements of financial statements. Elements directly related to measurement of
financial position are Assets, Liabilities and Equity while elements directly related to measurement of performance are Income and
Expenses.

The statement of changes in financial position usually reflects income statement elements and changes in balance sheet elements;
accordingly, this Conceptual Framework identifies no elements that are unique to this statement. The presentation of these
elements in the balance sheet and the income statement involves a process of sub-classification. For example, assets and liabilities
may be classified by their nature or function in the business of the entity in order to display information in the manner most useful
to users for purposes of making economic decisions.

QUIZZER 4 CONCEPTUAL FRAMEWORK LEVELS 1 and 2

The IASB, FASB, FRSC AND “DUE PROCESS”

1. The IASB conceptual framework is intended to establish
a. Generally accepted accounting principles in financial reporting by business enterprises
b. The meaning of “present fairly in accordance with generally accepted accounting principles”
c. The objectives and concepts for use in developing standards of financial accounting and reporting
d. The hierarchy of sources of generally accepted accounting principles.

2. The purpose of the International Accounting Standards Board is to

a. Issue enforceable standards which regulate the financial accounting and reporting of multinational companies
b. Develop a uniform currency in which the financial transactions of companies throughout the world would be
measured
c. Develop a single set of high quality IFRS.
d. Arbitrate accounting disputes between auditors and international companies

3. Which of these statements regarding the IFRS and US GAAP is correct?

a. US GAAP is considered to be “principles-based” and more detailed than IFRS
b. US GAAP is considered to be “rules-based” and less detailed than IFRS
c. IFRS is considered to be “principles-based” and less detailed than US GAAP
d. Both US GAAP and IFRS are considered “rules-based”, but US GAAP tends to be more complex
4. Which of the following is not included in the scope of the IASB’s conceptual framework?
a. Qualitative characteristics of useful financial accounting information
b. Definition, recognition & measurement of the elements
c. Concepts of capital and capital maintenance
d. Generally accepted accounting principles
 5. What is due process in the context of standard setting at the IASB?
a. IASB and FASB operates in full view of the public
b. Public hearings are held on proposed accounting standards
c. Interested parties can make their views known
d. All of these

6. The following published documents are part of the “due process” system used by the IASB in the evolution of a typical IASB
Standard
1. Exposure Draft
2. IASB Standard
3. Discussion Paper
The chronological order in which these items are released is as follows:
a. 1, 2, 3 b. 1, 3, 2 c. 2, 3, 1 d. 3, 1, 2

7. Which one of the following bodies is responsible for reviewing accounting issues that are likely to receive divergent or
unacceptable treatment in the absence of authoritative guidance with a view to reaching a consensus as to the appropriate
accounting treatment?
a. International Financial Reporting Interpretations Committee (IFRIC)
b. Standards Advisory Council (SAC)
c. International Accounting Standards Board (IASB)
d. International Accounting Standards Committee Foundation (IASCF)

8. Which of the following are parts of the “due process” of the IASB in issuing a new International Financial Reporting
Standard?
(1) Establishing an advisory committee to give advice
(2) Reviewing compliance and enforcement procedures
(3) Issuing an interpretation as authoritative interim guidance
(4) Developing and publishing a discussion document for public comment
a. (1) and (4) b. (2) and (3) c. (2) and (4) d. ( 1) and (3)

The Financial Reporting Standards Council

9. The main function of this body is to establish and improve accounting standards that will be generally accepted in the
Philippines
a. Board of Accountancy c. Professional Regulation Commission
b. Philippine Institute of CPAS d. Financial Reporting Standards Council

10. You are given the following statements relating to the FRSC and standard setting process in the Philippines. Which of these
is (are) true?
I. All members of the FRSC should be CPAs.
II. The Financial Reporting Standards Council (FRSC) Board of Accountancy (BOA) and Professional Regulation
Commission (PRC) are all involved in the standard setting process, with PRC as the final approving authority.
a. Only I is true c. I and II are true
b. Only II is true d. I and II are false

11. Which of the following is a characteristic of the Financial Reporting Standards Council (FRSC)?
a. FRSC members must come from CPA firms
b. FRSC members are required to render service on full-time basis
c. All four sectors of the Accountancy profession are represented in the FRSC
d. All members should be CPAs

12. Which of the following are parts of the “due process” of the IASB in issuing a new International Financial Reporting
Standard?
(1) Establishing an advisory committee to give advice
(2) Reviewing compliance and enforcement procedures
(3) Issuing an interpretation as authoritative interim guidance
(4) Developing and publishing a discussion document for public comment
a. (1) and (4) b. (2) and (3) c. (2) and (4) ( 1) and (3)

13. Which of the following is (are) part of the financial reporting standard setting process in the Philippines?
I. Consideration of pronouncements of the IASB;
II. Creation of a task force by the standard setting body to study the proposed accounting standard
III. Distribution of the exposure draft for comment to CPA professionals and other interested parties.
IV. Approval by the Financial Reporting Standards Council and eventually by the Professional Regulation Commission
V. Publication in the Official Gazette and in a newspaper of general circulation
a. I and IV only c. I, II, III and IV only
b. II, III and V only d. I, II, III, IV and V

14. Once the FRSC has established an accounting standard

a. The standards are continually reviewed to see if modifications or amendments are necessary
 b. The standards are not reviewed unless the SEC makes a complaint
c. The task of reviewing the standard to see if modification is necessary is given to PICPA
d. The standard should never be modified to conform with the principle of consistency

15. As an assistance to the FRSC, Philippine Accountancy profession and the public it serves, which of the following should the
Philippine Interpretations Committee (PIC) consider issuing an interpretation?
I. Newly identified financial reporting issues in the Philippines not specifically Addressed in PFRSs
II. Narrow industry-specific issues arising in the international business scene
III. Philippine accounting and reporting issues when unsatisfactory or conflicting interpretations have developed or seem
likely to develop
a. I and II only c. II and III only
b. I and III only d. I, II and III

Nature/Purpose/Scope
16. A conceptual framework is
a. An International Financial Reporting Standard
b. An underlying accounting assumption
c. A theoretical foundation which guides the accounting standard-setters, the prepares and users of financial accounting
information in the preparation and presentation of financial statements
d. A financial statement

17. Which is not a basic purpose of a conceptual framework?

a. Assist preparers of financial statements in applying FRSC accounting standards
b. Assist accounting standard-setting body in reviewing and adopting International Accounting Standards
c. Assist accounting standard setting body in developing accounting standards
d. A assist the Board of Accountancy in promulgating rules and regulations affecting the practice of accountancy in the
Philippines

18. A soundly developed conceptual framework of concepts and objectives should

a. Increase financial statement users’ understanding of and confidence in financial reporting
b. Enhance comparability among companies’
c. Allow new and emerging practical problems to be more quickly solved
d. All of these

19. In the conceptual framework for financial reporting, what provides the “why” – the goals and purposes of accounting?
a. Measurement and recognition concepts such as assumptions principles and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial accounting
d. Objective of financial reporting

20. The underlying theme of the conceptual framework is c. Reliability

a. Decision usefulness d. Comparability
b. Understandability

21. The accounting standard setting body in the Philippines is currently known as
a. The Accounting Standards Council
b. The Financial Reporting Standards Council
c. The Auditing Standards and Practices Council of the Philippines
d. The Auditing and Assurance Standards Council

22. The conceptual framework applies to all financial statements of reporting enterprises described as
a. Industrial enterprise c. Business enterprise
b. Commercial enterprise d. All of these

23. Which of the following statements regarding the Conceptual Framework of accounting is (are) correct?
I. The Framework deals with the qualitative characteristics of financial statements
II. The Framework normally prevails over International Accounting Standards where there is a conflict between the two
III. The Framework deals with the objectives of financial statements and the users of financial information
a. Only I is true c. I and III are true
b. I and II are true d. All statements are true

Users of Financial Information

24. Which users need financial information to enable them to assess the ability of the enterprise to pay dividends?
a. Employees c. Suppliers
b. Lenders d. Investors
25. Which users need financial information to assess trends and recent developments in the prosperity of an enterprise?
a. Customers c. Government & their agencies
b. Public in general d. Employees
 26. Which of the following financial statement users need to determine whether obligations due them, usually over a short
period of time, will be paid when due?
a. Employees c. Suppliers and other trade creditors
b. Lenders d. Customers

27. Which of the following users will need financial information to regulate activities of an enterprise and determine taxation
policies?
a. Lenders c. Management
b. Government and their agencies d. Public

28. Which of the following statement users will use financial information to anticipate price changes, seek alternative sources of
supply, and assess ability of enterprise to operate as a going-concern?
a. Public in general c. Lenders
b. Customers d. Employees

29. Which of the following statement users need to determine whether the obligations due them for loans granted and the
related interest will be paid when due?
a. Lenders c. Suppliers and other trade creditors
b. Customers d. Investors
30. Which users need financial information to enable them to assess the ability of the enterprise to provide remuneration and
retirement benefits and employment opportunities?
a. Employees c. Customers
b. Government and its agencies d. Investors

Basic Features/Assumptions of Accounting

31. According to FRSC Conceptual Framework, the following may be considered among the basic features of accounting that
have a direct relationship with preparation and presentation of financial statements.
a. Accounting Entity and Time Period c. Going Concern and Exchange Price
b. Accrual and Going Concern d. Timeliness and Neutrality

32. The following statements, are applications of the basic features of financial accounting except
a. A parent corporation and its subsidiaries are treated as a single enterprise.
b. Estimates used in accounting are based on informed judgment.
c. Economic activities that can be quantified are emphasized in financial accounting.
d. Financial information should be presented in a way that facilitates understanding and avoids erroneous implications.

33. Clarence, Inc. is a company whose securities are traded on over-the-counter market. It controls Sherwin Corp. Consolidated
financial statements are prepared in recognition of the accounting concept of
a. Economic entity c. Legal entity
b. Materiality d. Flexibility

34. The following statements relate to basic assumptions of financial accounting. Which is false?
a. An enterprise is not viewed as a going concern if liquidation appears imminent.
b. The life of an enterprise is divided into equal time segments at the end of which financial statements are prepared.
c. The basic financial statements contain the same underlying data and made use of the same measurement rules, and
are therefore fundamentally related.
d. Financial accounting measurements are primarily based on current values.

35. This assumption states that the determination of periodic income and financial position depends on the measurement of
economic resources and obligations and changes in them as the changes occur rather than simply on receipt or and
payments of cash.
a. Accrual c. Monetary Unit
b. Going concern d. Time period

36. When a parent company and subsidiary relationship exists, consolidated financial statements are prepared in recognition of
a. Legal entity c. Stable monetary unit
b. Economic entity d. Time period

37. Which underlying concept serves as the basis for preparing financial statements at regular intervals of time?
a. Accounting entity c. Accounting period
b. Going concern d. Stable monetary unit

38. Past experience indicates that continuation of operations is highly probable for most enterprises although continuation
cannot be known with certainty.
a. Going concern c. Periodicity
b. Accounting entity d. Monetary unit
39. The accounting function is to account for nominal pesos only and not for changes in purchasing power
a. Accrual c. Separate entity
b. Monetary unit d. Time period
 40. The concept that justifies the classification of assets and liabilities in the balance sheet as to current and non-current is
a. Going concern c. Monetary postulate
b. Accounting entity d. Periodicity

Basic Financial Statements

41. The general objective of financial statements is
a. To provide financial information to assist users make economic decisions
b. To disclose the market value of the firm’s assets and liabilities
c. To determine compliance with tax laws
d. To make forecasts about the economy

42. Financial statements include a statement of financial position, a statement of cash flows and a statement of changes in
equity. Which TWO of the following are also included in basic financial statements?
(1) A statement of comprehensive income (3) Accounting policies
(2) A statement of retained earnings (4) An income statement
a. (1) and (2) c. (1) and (3)
b. (3) and (4) d. (2) and (4)

43. It is generally referred to as the financial flexibility of an enterprise c. Financial structure

a. Liquidity d. Capacity for adaptation
b. Solvency

44. It is the level of income earned by an enterprise through efficient and effective utilization of resources.
a. Financial position c. Positive cash flows
b. Performance d. Negative cash flows

45. This statement shows information about the operating, investing and financing activities of the enterprise during a period of
time.
a. Statement of Receipts and Disbursements c. Statement of Cash Flows
b. Statement of Financial Position d. Statement of Changes in Owner’s Equity

46. This refers to the availability of cash over a long term to meet financial commitments when they fall due.
a. Liquidity c. Financial flexibility
b. Solvency d. Financial structure

47. This indicates what amount of assets has been financed by creditors (borrowed capital) and how much has been financed by
owners (equity/invested capital)
a. Solvency c. Financial position
b. Financial structure d. Financial flexibility

48. Which of the following statements about the financial statements is true?
a. A prediction of events and transactions that will give rise to cash inflows and cash outflows is best seen in the
Statement of Cash Flows.
b. A statement of Comprehensive Income shows only realized gains and losses for the period.
c. The Statement of Changes in Equity shows information about owner-related transactions and events as well as results
of profit – directed activities including realized and unrealized gains and losses for a time-period.
d. Notes to financial statements are necessary because there are significant transactions and events that are non-
quantifiable but are important in making economic decisions.

Qualitative Objectives/Constraints
49. Which of the following is not considered a qualitative objective of financial accounting or aspect of these objectives?
a. Objectivity c. Consistency
b. Freedom from bias d. Conservatism

50. Which one of the following is not a fundamental qualitative objective of financial accounting?
a. b. c. d.
Relevance yes yes no no
Comparability yes no no yes
Faithful representation no yes yes no

51. Which of these are not enhancing qualitative characteristics? c. Timeliness and verifiability
a. Relevance and prudence d. Comparability and timeliness
b. Understandability and comparability

52. Which of the following is (are) an attribute of the fundamental qualitative characteristic of relevance?
a b. c. d.
Timeliness Yes No No Yes
Predictive value Yes No Yes No
Confirmatory value Yes No Yes No
 53. Comparability of financial information depends on
a. b. c. d.
Consistency Yes Yes No No
Regular reporting periods No Yes No Yes

54. It is the capacity of information to make a difference in decision by helping users form predictions about outcome of past,
present and future events or conform and correct prior expectations.
a. Relevance c. Comparability
b. Understandability d. Reliability

55. Which of the following is (are) the quality of information that assures readers that the information is representationally
faithful?
a b. c. d.
Freedom from error Yes No Yes No
Freedom from bias Yes Yes No No
Completeness Yes No No Yes

56. It is the ability to bring together for the purpose of noting similarities and dissimilarities.
a. Relevance c. Reliability
b. Understandability d. Comparability

57. Some accounting measures are more easily verified than others. Which of the following is the least verifiable measure?
a. Cost of machinery c. Salaries paid for the period
b. Amount of cash d. Net realizable value of accounts receivable

58. Objectivity is assumed to be achieved when an accounting transaction

a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c. Involves an arm’s length transaction
d. Allocate revenues or expenses in a rational manner

59. If accounting information is neutral, complete, and free from error, then such information is
a. Relevant c. Comparable
b. Representationally faithful d. Understandable

60. The consistency standard of reporting requires that

a. Expenses are charged against the period in which they are incurred.
b. Whenever there is a change in an accounting method from one that was previously used by an enterprise, such change
must be justifiable and must be disclosed in the financial statements.
c. Extraordinary gains and losses should not appear in the income statement
d. Accounting procedures be adopted which give a consistent rate of net income

61. Which of the following terms are least properly matched? c. Neutrality and freedom of bias
a. Comparability and consistency d. Neutrality and prudence
b. Verifiability and objectivity

62. Which of the following is the threshold of recognition as to what information is relevant to be displayed in the balance sheet
or the income statement
a. Materiality c. Prudence
b. Timeliness d. Understandability

63. This accounting concept means that in case there is a conflict between economic substance and legal form, the economic
substance should prevail
a. Substance and form c. Form over substance
b. Substance over form d. Faithful representation

64. What is meant by comparability when discussing financial information?

a. Information has predictive or feedback value
b. Information is reasonably free from error
c. Information that is measured and reported in similar fashion across companies
d. Information is timely

65. What is meant by consistency when discussing financial accounting information?

a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely
c. Information is measured similarly across the industry
d. Information is verifiable
66. Which of the following is not a proper condition for comparability within a single enterprise?
a. The contents of the statements are identical
b. Accounting principles should not be changed, or if they are changed, the financial effects need not be disclosed.
c. The presentation of the financial statements are in the same form
d. Changes in the circumstances or in the nature of underlying transactions are disclosed.

67. Under the revised Conceptual Framework of 2010, which of the following is a constraint when implementing accounting
procedures to achieve the qualitative objectives of relevance and reliability as set forth in the FRSC conceptual framework?
a. Cost c. Materiality
b. Timeliness d. Balance between qualitative characteristics

68. Financial reporting is concerned only with information that is significant enough to affect evaluation or decision.
a. Timeliness c. Materiality
b. Cost and benefit d. Comparability
69. Which of the following is not an element of faithful representation?
a. Influence on the economic decisions of users
b. Neutral presentation of financial information
c. Freedom from material error
d. Completeness of information

70. Which of the following situations violates the concept of reliability?

a. Financial statements were issued nine months late
b. Report on segments having the same expected risks and growth rates to analysts estimating future periods
c. Financial statements included property with a carrying amount increased to management’s estimate of market
value
d. Management reports to stockholders regularly refer to new projects undertaken, but the financial
statements never report project results.

END OF MODULE 1