CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD

Chapter 3

Problem 3-1 IAA The ingredients of relevant financial information

What are the attributes that make the are:
information provided in the financial statements
useful to the readers? ● b. Predictive value, confirmatory value
and timeliness
● a. Qualitative characteristics of financial ○ Relevant financial information
information includes predictive value,
○ The qualitative characteristics are confirmatory value, and timeliness.
what make financial information
useful, including attributes like What is the quality of information that gives
relevance and faithful representation. assurance that it is reasonably free of error and
bias?
The following statements relate to qualitative
characteristics: ● b. Faithful representation
○ Faithful representation ensures that
● a. All statements are true the information accurately reflects
○ Qualitative characteristics are the economic phenomena it
considered either fundamental or represents, meaning it is free from
enhancing, contribute to the significant error and bias.
decision-usefulness of financial
reporting information, and help Which of the following is the best description of
distinguish better information from faithful representation in relation to information
inferior information. in financial statements?

The fundamental qualitative characteristics are: ● c. Freedom from material error

○ Faithful representation means the
● a. Relevance and faithful representation information is complete, neutral, and
○ The fundamental qualitative free from material error, accurately
characteristics of financial depicting what it intends to
information are relevance and represent.
faithful representation.
To achieve faithful representation, the financial
Accounting information is considered relevant statements:
when it:
● b. Must be complete, neutral and
● b. Is capable of making a difference in a reasonably free from error.
decision. ○ Faithful representation requires that
○ Information is relevant if it can information be complete, neutral,
influence the decisions of users by and free from error to accurately
helping them evaluate past, present, depict the economic situation of an
or future events. entity.

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

The financial accounting information is directed ○ Consistency means that similar

toward the common needs of users and is events are treated the same way in
independent of presumptions about particular different periods, which enhances
needs and desires of specific users. comparability.

● c. Neutrality When information about two different entities

○ Neutrality ensures that financial engaged in the same industry has been prepared
information is presented without bias and presented in a similar manner, the
and does not cater to the specific information exhibits the enhancing qualitative
needs or preferences of any characteristic of:
particular user group.
● d. Comparability
In the event of conflict between the economic ○ Comparability allows users to
substance of a transaction and the legal form, the identify and understand similarities
economic substance shall prevail. and differences between different
entities.
● b. Substance over form
○ The principle of substance over form The characteristic that is demonstrated when a
dictates that the economic substance high degree of consensus can be secured among
of transactions should be reflected in independent measurers using the same
the financial statements rather than measurement method is:
just their legal form.
● c. Verifiability
○ Verifiability means that different
knowledgeable and independent
Problem 3-2 IAA observers can reach a consensus on
The enhancing qualitative characteristics of the measurement of the same
financial information are: information using the same method.

● d. Comparability, understandability, Which concept of accounting holds that, to the

verifiability and timeliness maximum extent possible, financial statements
○ Enhancing qualitative characteristics shall be based on arm's length transactions?
improve the usefulness of financial
information and include ● b. Verifiability
comparability, understandability, ○ Verifiability involves ensuring that
verifiability, and timeliness. transactions are measured in a
manner that can be confirmed or
Financial information exhibits consistency when: validated, ideally through arm's
length transactions, to enhance the
● c. Accounting entities give similar events reliability of the financial statements.
the same accounting treatment each
period. An entity issuing the annual financial reports
within one month after the end of the reporting
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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

period is an example of which enhancing quality ● a. Users have a reasonable knowledge of

of accounting information? business and economic activities and
review the information with reasonable
● b. Timeliness diligence.
○ Timeliness refers to providing ○ Understandability means that
information promptly to ensure it is information should be clear and
relevant for decision-making. concise, assuming users have a basic
understanding of business and
Allowing entities to estimate rather than
economic activities.
physically count inventory at interim periods is
an example of a tradeoff between:

● c. Timeliness and verifiability

Problem 3-3 IAA
○ Estimating inventory at interim
The overriding qualitative characteristic of
periods enhances timeliness but may
accounting information is:
reduce verifiability because the
estimates are not as precise as ● d. Decision usefulness
physical counts. ○ Decision usefulness is considered the
overarching characteristic that
Which qualitative characteristic of financial
encompasses both relevance and
information requires that information should not
faithful representation.
be biased in favor of one group of users to the
detriment of others? Which of the following terms best describes
information that influences the economic
● d. Neutrality
decisions of users?
○ Neutrality ensures that information is
presented fairly and impartially, ● c. Relevant
without bias toward any particular ○ Relevant information is capable of
group. making a difference in
decision-making.
For information to be useful, the linkage between
the users and the decisions made is: What is the quality of information that enables
users to better forecast future operations?
● a. Relevance
○ Relevance ensures that information ● d. Relevance
is capable of influencing the ○ Relevance includes the predictive
decisions of users by being pertinent value that helps users make forecasts
to their needs. about future operations.
Which statement is true in relation to the According to the Conceptual Framework,
enhancing quality of understandability? predictive value and confirmatory value are
ingredients of:

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

● a. Relevance Changing the method of inventory valuation

○ Predictive value and confirmatory should be reported in the financial statements
value are aspects of relevance, under what enhancing quality of accounting
helping users make decisions based information?
on past and future events.
● d. Comparability
Which term best describes information in ○ Comparability is affected by changes
financial statements that is unbiased? in accounting methods, as it impacts
the ability to compare financial
● Neutral information across periods or
○ Neutrality means the information is entities.
free from bias and does not favor one
group of users over another. Technically, when an entity applies the same
accounting treatment to similar events from
What is meant by comparability when discussing period to period, the entity is exhibiting which
financial accounting information? quality?

● c. Information is measured and reported ● b. Consistency

in a similar fashion across entities. ○ Consistency involves applying the
○ Comparability allows users to same accounting principles and
identify and understand similarities practices over time to ensure
and differences between entities. comparability.

What is meant by consistency when discussing

financial accounting information?
Problem 3-4 IAA
● a. Information is measured and reported
When there is agreement between a measure or
in a similar fashion across points in time.
description and the phenomenon it purports to
○ Consistency refers to the use of the
represent, the information possesses which
same accounting principles and
characteristic?
methods over time within the same
entity. ● c. Faithful representation
○ Faithful representation ensures that
Which of the following is not an enhancing
the information accurately reflects
qualitative characteristic?
the economic phenomenon it
● b. Profit-oriented represents.
○ The enhancing qualitative
The qualitative characteristic of faithful
characteristics are understandability,
representation includes
timeliness, comparability, and
verifiability. Profit-oriented is not a ● b. Neutrality
qualitative characteristic.

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

○ Faithful representation includes ○ Verifiability is demonstrated when

neutrality, completeness, and different competent accountants
freedom from error. independently agree on the reporting
method and amount, showing that
Enhancing qualitative characteristics of the information can be verified by
accounting information include all of the different observers.
following, except
According to the Conceptual Framework,
● b. Materiality verifiability implies:
○ Materiality is a fundamental
qualitative characteristic rather than ● c. Consensus
an enhancing one. The enhancing ○ Verifiability implies that different
characteristics are comparability, knowledgeable and independent
verifiability, timeliness, and observers can reach a consensus that
understandability. the information is faithfully
represented.
The enhancing quality of understandability
means that information should be understood by When an entity has started placing its quarterly
financial statements on its web page, thereby
● b. Those who have a reasonable reducing by ten days the time to get information
understanding of business and economic to investors and creditors, the qualitative
activities concept involved is:
○ Understandability refers to
information being clear and ● c. Timeliness
comprehensible to users who have a ○ Timeliness refers to the provision of
reasonable knowledge of business information in a timely manner so
and economic activities. that it is relevant for
decision-making.
Enhancing qualitative characteristics of
accounting information include When an entity changed the inventory valuation
method, which characteristic is jeopardized by
● b. Comparability and timeliness this change?
○ Enhancing qualitative characteristics
are comparability, timeliness, ● a. Comparability
verifiability, and understandability. ○ Comparability is affected when
changes in accounting methods make
When different competent accountants it difficult to compare financial
independently agree on the amount and method statements over time.
of reporting an economic event, what is the
concept demonstrated?

● d. Verifiability

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

Recognizing expected losses immediately but ● a. The benefit of the information must be
deferring expected gains is an example of: greater than the cost of providing it.
○ The cost-benefit constraint ensures
● b. Conservatism that the benefits of information
○ Conservatism refers to the practice outweigh the costs of providing it.
of recognizing losses as soon as they
are anticipated but delaying the Conservatism is selecting an accounting
recognition of gains until they are alternative that:
realized.
● a. Understates assets and net income
○ Conservatism involves choosing
Problem 3-5 IAA accounting methods that minimize
Which statement about materiality is not true? the risk of overstatement of assets
and income.
● d. The relevance of information is not
affected by its nature and materiality.
○ The relevance of information is Problem 3-6 AICPA Adapted
indeed affected by its nature and The ability through consensus among measurers
materiality; the concept of to ensure that information represents what it
materiality ensures that only purports to represent is an example of the
information which could influence concept of:
users' decisions is reported.
● b. Verifiability
An item would be considered material when: ○ Verifiability ensures that information
can be confirmed through consensus
● d. Omitting, misstating or obscuring the among measurers to ensure its
information would make a difference to accuracy.
the primary users.
○ Materiality is determined based on Which of the following accounting concepts
whether the omission or states that an accounting transaction shall be
misstatement affects the decisions of supported by sufficient evidence to allow two or
users. more qualified individuals to arrive at essentially
similar conclusions?
The Conceptual Framework includes which
constraint? ● b. Objectivity
○ Objectivity requires transactions to
● c. Cost be supported by evidence so that
○ The Conceptual Framework different individuals can reach
identifies cost as a constraint, where similar conclusions.
the benefits of providing information
must justify the costs of producing it. Objectivity is assumed to be achieved when a
transaction:
Which best describes the cost-benefit constraint?
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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

● c. Involves an arm's length transaction ● c. Financial statements included an item

between two independent parties of property, plant and equipment with
○ Objectivity is achieved when carrying amount increased to
transactions are conducted at arm's management estimate of market value.
length between independent parties. ○ This violates faithful representation
because it involves subjective
The principle of objectivity includes the concept adjustments that may not reflect the
of: true value.

● d. Verifiability What is the underlying concept governing the

○ Objectivity encompasses GAAP pertaining to recording gain
verifiability, ensuring that contingencies?
information is based on objective
evidence that can be verified. ● a. Conservatism
○ Conservatism guides the recording of
Proponents of historical cost maintain that gain contingencies by recognizing
statements prepared using historical cost are potential losses but not recognizing
more: gains until they are realized.

● a. Objective The usefulness of providing information in

○ Historical cost is valued for its financial statements is subject to the constraint
objectivity, as it is based on actual of:
transactions rather than estimates or
adjustments. ● b. Cost-benefit
○ The cost-benefit constraint ensures
The consistency standard requires that: that the benefits of providing
information outweigh the costs.
● b. The effect of accounting changes upon
income should be properly disclosed.
○ Consistency involves disclosing the
effects of changes in accounting Problem 3-7 IAA
policies or estimates on income. Fundamental qualitative characteristics of
financial accounting information are either
Which of the following relates to both relevance
relevant or prudent.
and faithful representation?
● False
● d. Free from error
○ The fundamental qualitative
○ Information that is free from error is
characteristics are relevance and
both relevant and faithfully
faithful representation, not
represented.
prudence.
Which of the following situations violates the
concept of faithful representation?

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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

An enhancing qualitative characteristic is ● False

confirmatory value. ○ Applying different treatments affects
comparability, not verifiability.
● False Verifiability pertains to the accuracy
○ Confirmatory value is a component of information, while comparability
of relevance, not an enhancing refers to consistency over time.
characteristic. Enhancing
characteristics include comparability, The idea of consistency does not mean that
verifiability, timeliness, and entities cannot switch from one accounting
understandability. method to another.

A fundamental qualitative characteristic is ● True

understandability. ○ Consistency requires that once an
accounting method is adopted, it
● False should be applied consistently unless
○ Understandability is an enhancing a change is warranted and disclosed.
characteristic, not a fundamental one.
The fundamental qualitative Financial statement users are assumed to have
characteristics are relevance and reasonable knowledge of business and financial
faithful representation. accounting matters.

To be a faithful representation, an information ● True

must be predictive and confirmatory. ○ Financial statement users are
assumed to have a reasonable
● False understanding of business and
○ Faithful representation requires accounting principles.
information to be complete, neutral,
and free from error. Predictive and Entities consider only quantitative factors in
confirmatory values are aspects of determining whether an item is material.
relevance.
● False
An enhancing quality of financial accounting ○ Entities consider both quantitative
information is comparability. and qualitative factors when
determining materiality.
● True
○ Comparability is indeed an Neutrality and predictive value are
enhancing qualitative characteristic, characteristics of relevant information.
along with verifiability, timeliness,
and understandability. ● False
○ Predictive value is a characteristic of
Applying different accounting treatment to relevance, but neutrality is a
similar events from period to period is a characteristic of faithful
violation of verifiability. representation.
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 CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARD
Chapter 3

The tendency to recognize favorable events early form to better reflect the true nature
is an example of conservatism. of the transaction.

● True
○ Conservatism involves recognizing
potential losses or expenses earlier
and gains only when they are
realized.

Once an accounting method is adopted, it should

never be changed.

● False
○ An accounting method can be
changed if the change is justified,
disclosed, and improves the financial
statements’ relevance and reliability.

Information is timely if it is received on time to

make a decision.

● True
○ Timeliness means information
should be available in time to
influence decisions.

Conservatism is a pervasive constraint on useful

information.

● False
○ Conservatism is not a constraint but
rather a guiding principle. The
pervasive constraint on useful
information is the cost-benefit
constraint.

In case of conflict between economic substance

and legal form of a transaction, the legal form
shall prevail.

● False
○ Generally, economic substance
should take precedence over legal

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