CONCEPTUAL

FRAMEWORK
AND
ACCOUNTING
STANDARDS
A Reviewer

Rapote, Jeannica Ann L.

BSA-2107
 Conceptual Framework and Accounting Standards
Conrado T. Valix Jose F. Peralta Christian Aris M. Valix
1. In analyzing an entity's financial statements, which financial statement would a
potential investor primarily use to assess liquidity and financial flexibility?
a. Statement of financial position
b. Income statement
c. Statement of retained earnings
d. Statement of cash flows

2. Conceptually, asset valuation accounts are

a. Assets
b. Neither assets nor liabilities
c. Part of shareholders' equity
d. Liabilities

3. Working capital is
a. The group of assets needed to operate profitably.
b. Capital reinvested in business.
c. Unappropriated retained earnings.
d. Current assets less current liabilities.

4. As generally used, the term net assets represents

a. Retained earnings
b. Current assets less current liabilities
c. Total shareholders' equity
d. Total assets less total liabilities

5. The basis for classifying assets as current or noncurrent is the period of time normally
required to convert cash invested in
a. Inventory back into cash or 12 months, whichever is shorter.
b. Receivables back into cash or 12 months, whichever is longer.
c. Property, plant and equipment back into cash or 12 months, whichever is
longer.
d. Inventory back into cash or 12 months, whichever is longer.

6. Under IFRS, an entity can report interest paid on bank loan in the statement of cash
flows
a. In operating activities
b. Either in operating activities or financing activities
c. In financing activities
d. In investing activities or financing activities
7. Under IFRS, the dividend received from investments can be classified as
a. Either an operating activity or a financing activity
b. Either an operating activity or investing activity
c. Only as an investing activity
d. Only an operating activity

8. Under IFRS, dividend paid can be classified

a. Either as financing activity or operating activity
b. Either as operating activity or investing activity
c. Only as financing activity
d. Only as operating activity

9. Which classification of the cash flow arising from the proceeds from an earthquake
disaster settlement would be most appropriate?
a. Cash flow from operating activities
b. Cash flow from investing activities
c. Cash flow from financing activities
d. Does not appear in the statement of cash flows

10. Cash flows relating to asset held for rental to others are classified as
a. Operating
b. Investing
c. Financing
d. Either operating or investing

11. A change in accounting policy shall be made when

I. Required by an accounting standard.
II. The change will result in more relevant or reliable information about the
financial position, financial performance and cash flows of the entity.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

12. A change in accounting policy requires what kind of adjustment to the financial
statements?
a. Current period adjustment
b. Prospective adjustment
c. Retrospective adjustment
d. Current and prospective adjustment
13. A change in accounting policy should be reported as an adjustment to
a. Beginning balance of retained earnings
b. Net income for the current period.
c. Comprehensive income for the current period.
d. Shareholders' equity for the current period.

14. Which is a change in accounting policy?

a. Change from cost model to fair value model in measuring investment property
b. Change from cost model to revaluation model in measuring property, plant
and equipment
c. Change from FIFO to weighted average
d. All of these are considered change in accounting policy

15. When it is difficult to distinguish between a change in accounting estimate and a

change in accounting policy. the change is treated as
a. Change in accounting estimate with disclosure
b. Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no disclosure

16. Which event after the reporting period would require adjustment?
a. Loss of plant as a result of fire
b. Change in the market price of investment
c. Loss on inventory resulting from flood loss
d. Loss on a lawsuit the outcome of which was deemed uncertain at year end

17. Events that occur after the current year-end but before the financial statements are
issued and affect the realizability of accounts receivable should be
a. Discussed in the management annual report
b. Disclosed in the notes to financial statements.
c. Used to record an adjustment to bad debt expense
d. An adjustment directly to retained earnings.

18. Nonadjusting events include all, except

a. A major business combination after reporting period
b. Announcing a plan to discontinue an operation
c. Expropriation of major asset after reporting period
d. Destruction of a major production plant by a fire before the end of the
reporting period

19. Nonadjusting events include all, except

 a. The entity announced the discontinuation of an operation.
b. The entity entered into an agreement to purchase the leased building.
c. Destruction of a major production plant by fire.
d. A mistake in the calculation of allowance for uncollectible accounts receivable.

20. Which event after the end of the reporting period would generally require disclosure?
a. Retirement of key management personnel
b. Settlement of litigation when the event that gave rise to the litigation occurred
in a prior period
c. Strike of employees
d. Issue of a large amount of ordinary shares

21. Related parties include all of the following, except

a. Parent, subsidiary and fellow subsidiaries
b. Associates
c. Key management personnel and close family members of such key
management personnel
d. Two venturers simply because they share joint control over a joint venture

22. Unrelated parties include which of the following?

a. Providers of finance in the course of their normal dealings with an entity by
virtue only of those dealings.
b. Government agencies
c. Single customer with whom an entity transacts a significant volume of business
merely by virtue of the resulting economic dependence.
d. All of these are unrelated parties

23. The minimum disclosures about related party transactions include all of the following,
except
a. The amount of the transaction
b. Amount of outstanding balance
c. Allowance for doubtful accounts related to the outstanding balance
d. Nature of the relationship

24. An entity that entered into a related party transaction would be required to disclose
all of the following information, except
a. Nature of the relationship between the parties.
b. Nature of any future transactions planned between the parties and the terms
involved.
c. Peso amount of the transaction.
d. Amount due from or to related parties at the end of reporting period.
25. Which should be disclosed as related party transactions in the consolidated financial
statements?
a. Key management personnel compensation
b. Sales to affiliated entities
c. Key management personnel compensation and sales to affiliated entities
d. Neither key management personnel compensation nor sales to affiliated
entities

26. IFRS prohibits which of the following cost flow assumptions?

a. LIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions is allowed

27. Which inventory method measures most closely the current cost of inventory?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO

28. In a period of declining prices, the inventory method which tends to give the highest
amount of cost of goods sold is
a. Specific identification
b. Average cost
c. FIFO
d. LIFO

29. In a period of falling prices, which inventory method provides the lowest amount of
ending inventory?
a. Weighted average
b. FIFO
c. Moving average
d. Specific identification

30. In a period of rising prices, which inventory method provides the highest amount of
net income?
a. Weighted average
b. Moving average
c. FIFO
d. Specific identification
31. Which of the following shall not be capitalized as cost of property, plant and
equipment?
a. Cost of excess materials from a purchasing error
b. Cost of testing whether the asset works correctly
c. Initial delivery and handling cost
d. Cost of preparing the site for installation

32. The initial operating loss should be

a. Deferred and amortized over a reasonable period
b. Expensed and charged to the income statement
c. Capitalized as part of the cost of plant
d. Charged to retained earnings.

33. What is the proper treatment of freight and interest on the loan to fund the cost of
imported machinery?
a. Both expenses are capitalized.
b. Interest may be capitalized but freight is expensed
c. Freight is capitalized but interest cannot be capitalized
d. Both expenses are expensed

34. Which term best describes the removal of the carrying amount of the property, plant
and equipment from the statement of financial position?
a. Derecognition
b. Impairment
c. Writeoff
d. Disposal

35. The carrying amount of property, plant and equipment shall be derecognized
a. On disposal
b. When no future economic benefits are expected
c. On acquisition
d. On disposal and when no future economic benefits are expected from the use
of the asset.

36. Depreciation is best described as a method of

a. Asset valuation
b. Current value allocation
c. Cost allocation
d. Useful life determination
37. As generally used in accounting, what is depreciation?
a. It is a process of asset valuation
b. It applies technically to intangible assets.
c. It is used to indicate a decline in market value of property, plant and
equipment.
d. It systematically allocates cost of property, plant and equipment to accounting
periods.

38. Which statement best describes the term depreciation?

a. The systematic allocation of the cost of an asset less residual value over the
useful life
b. The removal of an asset from the statement
c. The amount by which the fair value of an asset exceeds carrying amount
d. The amount by which the carrying amount of an asset exceeds fair value

39. Which is incorrect with respect to depreciation?

a. The depreciation method shall reflect the pattern in which the asset's
economic benefits are consumed.
b. Depreciation of an asset begins when it is available for the intended use.
c. Depreciation ceases at the date the asset is derecognized.
d. Depreciation is not recognized if the fair value of an asset exceeds carrying
amount.

40. All of the following factors need to be considered in determining the useful life of an
asset, except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

41. In the case of grant related to an asset, which of the following accounting treatment
in prescribed?
a. Record the grant at a nominal value in the first year and write it off in the
subsequent year
b. Either set up the grant as deferred income or deduct it in arriving at the
carrying amount of the asset
c. Record the grant at fair value in the first year and record it as income in the
subsequent year
d. As an extraordinary gain
42. In the case of grant related to income, which of the following accounting treatment is
prescribed
a. Credit the grant to equity
b. Present the grant as other income or as separate line item, or deduct it from
the related expense
c. Credit the grant to retained earnings
d. Credit the grant to sales revenue

43. The deferred grant income is classified as

a. Separate component of shareholders equity
b. Noncurrent liability
c. Current liability
d. Partly current liability and partly noncurrent liability

44. If the cost of the asset is recorded net of the grant

a. Equity is overstated
b. Liability is overstated
c. Asset is understated
d. Net income is understated

45. Which disclosure is not required about government grant?

a. The accounting policy adopted for government grant
b. Unfulfilled condition
c. The name of the government agency that gave the grant
d. The nature and extent of government grant

46. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing
cost is equal to
a. Actual borrowing cost incurred
b. Actual borrowing cost incurred up to completion of asset
c. Actual borrowing cost incurred up to completion of asset minus any
investment income from the temporary investment of the borrowing
d. Zero

47. Which of the following could be treated as qualifying asset for the purpose of
capitalizing borrowing cost?
a. Investment property
b. Financial asset at fair value
c. Inventory that is manufactured in large quantity
d. Biological asset

48. If the qualifying asset is financed by general borrowing, the capitalizable borrowing
cost is equal to
 a. Actual borrowing cost incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. Average expenditures on the asset multiplied by a capitalization rate or actual
borrowing cost incurred, whichever is lower
d. Zero

49. Which is not a condition that must be satisfied before interest capitalization can begin
on a qualifying asset?
a. Interest is being incurred
b. Expenditures for the asset have been made.
c. The interest rate is equal to the bank prime rate.
d. Activities necessary to get the asset ready for the intended use are in progress.

50. Capitalization of interest ends when

a. The asset is substantially complete and ready for the intended use.
b. No further interest is being incurred.
c. The asset is abandoned, sold or fully depreciated.
d. The activities that are necessary to get the asset ready for the intended use
have begun.

51. Which is required for borrowing costs incurred directly attributable to a qualifying
asset?
a. Recognize as an expense in the period incurred
b. Capitalize as part of the cost of the asset
c. Either recognize as an expense in the period incurred or capitalize as part of
the cost of the asset
d. Recognize as a deferred charge

52. Which should not be considered a qualifying asset?

a. A power generation plant that takes two years to construct
b. An expensive jet that can be purchased from a vendor
c. A toll bridge that usually takes more than a year to build
d. A ship that normally takes one to two years to complete.

53. Interest income on specific borrowing for qualifying asset

a. Reduces the cost of the qualifying asset.
a. Reduces interest expense reported in the income statement.
b. Increase equity.
c. Must be credited to interest income.
54. Which is the approach in accounting for interest incurred in financing specifically construction
of property?
a. Capitalize only the actual interest incurred during construction
b. Charge construction with all costs of funds employed
c. Capitalize no interest during construction
 d. Capitalize interest equal to the prime interest rate

55. Which is not a disclosure requirement in relation to borrowing cost?

a. Accounting policy adopted for borrowing cost
b. Borrowing cost capitalized during the period
c. Segregation of qualifying asset from other assets
d. Capitalization rate used to determine the amount of borrowing cost eligible for
capitalization

56. It is an entity over which the investor has significant influence.

a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund

57. Which statement best describes significant influence?

a. The holding of a significant proportion of the share capital in another entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of an entity
d. The mutual sharing in the risks and benefits

58. Under the equity method of accounting for investments, an investor recognizes its share of
the earnings in the period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee

59. When an investor uses the equity method to account for investment in ordinary shares, cash
dividends received by the investor from the investee are recorded as
a. Dividend income
b. A deduction from the investment income
c. A deduction from the investment account
d. A deduction from shareholders' equity

60. When an investor uses the equity method to account for investment in ordinary shares, the
investment account tall be increased when the investor recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from the investee
c. Noncash dividend received from the investee
d. A share dividend received from the investee

61. Goodwill arising from an investment in associate is

a. Included in the carrying amount of the investment and amortized over the useful life.
b. Included in the carrying amount of the investment and not amortized.
 c. Charged to retained earnings.
d. Expensed immediately.

62. When an entity holds between 20% and 50% of the voting power of an investee, which
statement is true?
a. The investor must use the equity method.
b. The investor should use the equity method unless circumstances indicate that it is
unable to exercise significant influence over the investee.
c. The investor must use the cost method.
d. The investor must use the fair value method.

63. An investor shall discontinue the equity method when

a. The investor ceases to have significant influence over the associate.
b. The associate operates under severe restrictions.
c. The investor ceases to have control over the associate.
d. The activities of investor and associate are dissimilar.

64. When an investment ceases to be an associate, the fair value of the investment is regarded as
its
a. Cost on initial recognition as a financial asset.
b. Fair value on initial recognition as a financial asset.
c. Fair value on initial recognition as a financial liability.
d. Amortized cost on initial recognition as an investment.

65. The equity method is not applicable under all of the following circumstances, except
a. The investor is a wholly-owned subsidiary.
b. The investor's equity and debt instruments are not traded.
c. The investor is in the process of filing financial statements with SEC for the purpose
of issuing debt and equity instruments in a public market.
d. The ultimate parent of the investor produces consolidated financial statements.

66. Which statement best describes impairment loss?

a. The removal of an asset from the statement of financial position.
b. The amount by which the carrying amount of an asset exceeds the recoverable
amounts.
c. The systematic allocation of cost of an asset less residual value over the useful life.
d. The amount by which the recoverable amount of an asset exceeds the carrying
amount.
67. What is the recoverable amount of an asset?
a. Fair value less cost of disposal
b. Value in use
c. Fair value less cost of disposal or value in use, whichever is higher
d. Fair value less cost of disposal or value in use, whichever is lower

68. What is the fair value of an asset?

 a. The price that would be received to sell an asset in an orderly transaction between
market participants
b. The price that would be paid to transfer a liability in an orderly transaction between
market participants
c. The discounted value of future cash flows
d. The undiscounted value of future cash flows

69. Which statement best describes value in use?

a. The present value of estimated future cash flows expected to arise from the
continuing use of an asset and from the ultimate disposal
b. The amount of cash that could currently be obtained by selling an asset in an orderly
disposal
c. The amount which an entity expects to obtain for an asset at the end of the useful life
d. Undiscounted future net cash flows

70. If the fair value less cost of disposal cannot be determined

a. The asset is not impaired.
b. The recoverable amount is the value in use.
c. The net realizable value is used.
d. The carrying amount of the asset remains the same.

71. If an asset is to be disposed of

a. The recoverable amount is the fair value less cost of disposal.
b. The recoverable amount is the value in use.
c. The asset is not impaired.
d. The recoverable amount is the carrying amount.

72. The estimates of future cash flows in calculating value in use include all of the following,
except
a. Cash inflows from the continuing use of the asset
b. Cash outflows incurred to generate the cash inflows from the continuing use of the
asset
c. Net cash flows from the disposal of the asset at the end of useful life.
d. Income tax payment.

73. Which of the following is not relevant in determining value in use?

a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money

74. An asset is reviewed for impairment

a. Every three years at the end of reporting period.
b. When the asset is fully depreciated.
 c. When circumstances indicate that the carrying amount of an asset might not be
recoverable.
d. Every year at the end of reporting period.

75. Which of the following conditions must exist in order for an impairment loss to be recognized?
a. The carrying amount is less than fair value.
b. The carrying amount of the asset is not recoverable.
c. The carrying amount is less than value in use.
d. The carrying amount is less than recoverable amount.
76. Impairment loss is reported
a. As direct deduction from retained earnings
b. As a component of discontinued operation.
c. As a component of income from continuing operations.
d. As a change in accounting estimate.

77. What is a cash generating unit?

a. The smallest business segments
b. Any group of assets that generate cash flows
c. Any group of assets reported separately to management
d. The smallest group of assets that generate independent cash flows from continuing
use

78. What is the allocation of an impairment loss recognized for a cash generating unit?
a. Across the assets of the unit based on carrying amount.
b. Across the assets of the unit based on fair value.
c. First, to any goodwill and the balance to the other assets prorata based fair value.
d. First, to any goodwill and the balance to the other assets prorata based on carrying
amount.

79. Costs of disposal include all of the following, except

a. Legal cost
b. Stamp and similar transaction tax
c. Cost of removing the asset
d. Finance cost

80. Which of the following is not relevant in determining value in use?

a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money

81. Which would be considered research and development?

a. Routine effort to refine an existing product
b. Periodic alteration to existing production line
c. Marketing research to promote a new product
 d. Construction of prototype

82. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of research and development equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering cost required to advance the design of a product to the manufacturing
stage

83. Which of the following is not one of the criteria which must be met before development cost
can be capitalized?
a. The entity has sufficient funding to complete the project.
b. The entity intends to complete the project.
c. The entity can reliably identify the research costs.
d. The project has achieved technical feasibility.

84. Which of the following costs should be capitalized?

a. Acquisition cost of equipment for current project only
b. Engineering cost incurred to advance the product to the full production stage
c. Cost of research a market for the product
d. Salaries of research staff

85. Which statement is true about development cost?

a. Development cost must be expensed.
b. Development cost is always deferred.
c. Development cost may be capitalized as an intangible asset in very restrictive
situations.
d. Development cost is charged to retained earnings.

86. Which statement is the most accurate about R and D?

a. Costs during the research phase can be capitalized.
b. Costs incurred during the development phase can be capitalized if certain criteria are
met.
c. Training costs during research can be capitalized.
d. Design of jigs and tools would qualify as research.
87. Which best describes the accounting for R and D cost?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

88. A research and development activity for which the cost would be expensed as incurred is
a. Design, construction and testing of preproduction prototype or model
b. Quality control during commercial production
c. Periodic design changes to existing product
 d. Adaptation of an existing capability to a particular requirement or customer needs

89. Which is a research and development cost?

a. Research and development performed under contract for others
b. Development or improvement of technique and process
c. Offshore oil exploration that is the primary activity
d. Market research related to a major product

90. Which research and development cost should be capitalized and amortized over current and
future periods?
a. Labor and material cost incurred in constructing a prototype or model
b. Cost of testing equipment that will also be used in another research and development
project
c. Administrative salaries allocated to research
d. Research findings purchased from another entity to aid a particular research project
in progress

91. Subsequent to initial recognition, the investment property shall be measured using
a. Fair value model or revaluation model
b. Fair value through profit or loss model
c. Cost model or fair value model
d. Cost model or revaluation model

92. If the entity uses the fair value model for the investment property, changes in fair value are
a. Recognized in profit or loss
b. Recognized in retained earnings
c. Recognized in other comprehensive income
d. Not recognized

93. If the entity uses the fair value model for investment property, which statement is true?
a. The entity should value the property at cost less accumulated depreciation and
impairment.
b. The entity should report the increase in fair value other comprehensive income for
the period.
c. The entity depreciates the investment property.
d. The entity does not record depreciation.

94. Under IFRS, assets classified as investment property are

a. Held for rental income
b. To be sold for a quick profit
c. Held for rental income or to be sold for a quick profit
d. Held for sale in the ordinary course of business

95. An investment property is derecognized when

a. It is disposed to a third party.
 b. It is permanently withdrawn from use.
c. No future economic benefits are expected from the disposal.
d. In all of these cases

96. Which statement regarding investment property is correct?

a. If the entity elects the fair value model, no depreciation is taken.
b. Gain or loss from fair value adjustment is reported in the income statement.
c. If the entity elects the cost model, depreciation should be recognized.
d. All of these statements are correct regarding investment property.

97. Which disclosure must be made when the cost model is used for investment property?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property

98. Which of the following disclosures shall be made when the fair value model has been
adopted?
a. Depreciation method used
b. The amount of impairment loss recognized
c. Useful life
d. Net gains or losses from fair value adjustments

99. Gain or loss from disposal of investment property shall be determined as the difference
between the
a. Net disposal proceeds and carrying amount.
b. Gross disposal proceeds and carrying amount.
c. Fair value and carrying amount of the asset.
d. Gross disposal proceeds and fair value of the asset.

100. Transfers from investment property to property, plant and equipment are
appropriate
a. When there is change of use.
b. Based on the discretion of management.
c. Only when the entity adopts the fair value model.
d. The entity can never transfer property into another classification once it is classified
as investment property.
ANSWER KEY:

1. A 26. A 51. B 76. C

2. B 27. A 52. B 77. D
3. D 28. C 53. A 78. D
4. D 29. B 54. A 79. D
5. B 30. C 55. C 80. D
6. B 31. A 56. A 81. D
7. B 32. C 57. C 82. C
8. A 33. C 58. D 83. C
9. A 34. A 59. B 84. B
10. A 35. D 60. A 85. C
11. C 36. C 61. B 86. B
12. C 37. D 62. B 87. D
13. A 38. A 63. A 88. A
14. D 39. A 64. B 89. B
15. A 40. D 65. C 90. A
16. D 41. B 66. B 91. C
17. C 42. B 67. C 92. A
18. D 43. D 68. A 93. D
19. D 44. C 69. A 94. C
20. D 45. C 70. C 95. D
21. D 46. C 71. A 96. D
22. D 47. A 72. D 97. A
23. D 48. C 73. B 98. D
24. B 49. C 74. D 99. A
25. C 50. A 75. B 100.A