Chapter 2 Conceptual Framework b.

to provide information to those

interested in the work of FRSC in the
1. The Conceptual Framework deals with all of
formulation of PFRS
the following, except
c. to assist preparers of fin statements in
a. The objective of financial reporting
applyng accounting standards
b. The qualitative characteristics of useful
d. d. All of these d
financial information
5. This is a complete, comprehensive and single
c. The definition, recognition and
document promulgated by IASB establishing
measurement of the elements of
the concepts that underlie financial reporting.
financial statements
a. Conceptual Framework for Financial
d. Supplementary information d
Reporting
2. Which of the following statements is true
b. Conceptual Framework for Financial
concerning the Conceptual Framework for
Statements
Financial Reporting?
c. Conceptual Framework for Business
a. It is not a reporting standard and does
Entities
not define standard for any particular
measurement or disclosure issue. d. Conceptual Framework a

b. It is concerned with general purpose fin 6. What is the authoritative status of the
statements including consolidated fin Conceptual Framework?
statements.

c. Nothing in the framework overrides

a. The Conceptual Framework has the
any specific PFRS.
highest level of authority.
d. d. All are true d
b. In the absence of a standard or an
3. Which is not a purpose of the Conceptual interpretation that specifically applies
Framework? to a transaction, the Conceptual
Framework shall prevail.
a. to assist FRSC in developing accounting
standards that will represent Philippine c. In the absence of a standard or an
GAAP interpretation that specifically applies
to a transaction, management shall
b. to assist FRSC in the review and
consider the applicability of the
adoption of existing international
Conceptual Framework in developing
accounting standards
and applying an accounting policy that
c. to assist auditors in forming an opinion results in information that is relevant
as to whether fin statements conform and reliable.
with Phil. GAAP
d. The Conceptual Framework applies only
d. to assist BOA in promulgating rules and when the IASB develops new or revised
regulations affecting the practice of public standards. c
accountancy d
7. As regards the relationship between IFRS and
4. Which is a basic purpose of the Conceptual the Conceptual Framework, which of the
Framework? following is true?

a. to assist users of fin statements in I. The Conceptual Framework is a

interpreting the information contained reporting standard.
in the financial statements
II. In case of conflict, the
requirements of the Conceptual
 Framework prevail over those of
the relevant IFRS.
a. Measurement and recognition concept
a. I only
b. Qualitative characteristic of accounting
b. II only information

c. Both c. Element of financial statement

d. Neither d d. d. Objective of financial reporting d

8. The Conceptual Framework is intended to 12. The underlying theme of the Conceptual
establish Framework is

a. GAAP a. Decision usefulness

b. The meaning of "present fairly in b. Understandability

accordance with GAAP"
c. Timeliness
c. The objectives and concepts for use in
d. d. Comparability a
developing standards of financial
accounting and reporting 13. What is a benefit of having a Conceptual
Framework?
d. d. The hierarchy of sources of GAAP c
a. To enable the accountancy profession
9. The Conceptual Framework should
to more quickly solve emerging
a. Lead to uniformity of financial practical problems.
statements among entities within the
b. To provide information from which to
same industry
build more useful standards.
b. Eliminate alternative accounting
c. To enable standard setting body to
principles
issue more useful and consistent
c. Guide MNCs in developing generally pronouncements over time.
accepted auditing standards
d. d. All of these d
d. d. Define the basic objective, terms and
14. Which of the following is not a benefit
concepts of accounting d
associated with the Conceptual Framework?
10. Which is not a purpose of the Conceptual
a. A Conceptual Framework should
Framework?
increase financial statement users'
a. Provide definitions of key terms and understanding and confidence in
concepts financial reporting.

b. Provide specific guidelines for resolving b. Practical problems should be more

situations not covered by existing quickly solvable by reference to an
accounting standards existing Conceptual Framework.

c. Assist accountants in selecting among c. A coherent set of accounting standards

alternative accounting and reporting and rules should result.
methods
d. d. Business entities will need far less
d. d. Assist IASB in the standard-setting assistance from accountants because
process b the financial reporting process will be
quite easy to apply d
11. In the Conceptual Framework for Financial
reporting, what provides the "why" of 15. Which is an important characteristic of the
accounting? Conceptual Framework?
 I. To enable the accountancy profession b. Existing and potential lenders and other
to more quickly solve emerging creditors
practical problems.
c. User group such as employees,
II. To provide a foundation from customers, governments and their
which to build more useful agencies, and the public
financial accounting standards.
d. Existing and potential investors, lenders,
a. I only and other creditors d

b. II only 19. The users of financial reports include

c. Both a. Creditors

d. Neither c b. Creditors and government agencies

16. Which of the following is not true concerning c. Creditors and unions
the Conceptual Framework?
d. Creditors, government agencies and
I. It should be a basis for standard setting. unions d

II. The Conceptual Framework should allow 20. Which of the following is an internal user of
practical problems to be solved more financial information?
quickly.
a. BOD
III. It should be based on fundamental truth
b. Shareholder
derived from the law of nature.
c. Bondholder
a. II only
d. Creditor with a long-term contract
b. III only
a
c. II and III only
21. These users require information on risk and
d. d. I and II only b return on investment

17. A soundly Conceptual Framework should a. Investors

I. Increase financial statements b. Employees

users' understanding and
c. Lenders
confidence in financial
reporting d. Customers a
II. Enhance comparability of financial statements 22. These users are interested in information
across entities. about the profitability and stability of an entity
in order to assess the ability of the entity to
II. Allow new and emerging
provide remuneration, retirement benefits and
practical problems to be solved
employment opportunities.
more quickly.
a. Customers
a. I only
b. The public
b. I and II only
c. Government and their agencies
c. I and III only
d. Employees d
d. I, II, III d
23. These users are interested in information
18. The primary users of financial statements
about the continuance of an entity when they
include
have a long-term involvement with or are
a. Existing and potential investors dependent on the entity.
 a. Customers the related interest thereon, and other
amounts owing to them will be paid when due.
b. Employees
a. Lenders and other creditors
c. Trade unions
b. Borrowers
d. Suppliers a
c. Trade creditors
24. These users are interested in information in
order to regulate the activities of an entity, d. d. Owners a
determine taxation policies and provide a basis
28. What is the objective of financial reporting?
for national statistics.
a. To provide information about the
a. Government and their agencies
financial position and financial
b. Major organization of users performance of an entity

c. BIR b. To To provide information about an

entity that is useful to existing and
d. Department of Finance a
potential investors, lenders, and other
25. These users need information on trends and creditors in making decisions about
recent developments where an entity makes a providing resources to the entity
substantial contribution to the local economy
c. To prepare a statement of financial
providing employment and using local
position, a statement of comprehensive
suppliers.
income and a statement of cash flows
a. The public
d. d. To prepare financial statements in
b. Government and their agencies accordance with all applicable
standards and interpretations b
c. Finance entities
29. The overall objective of financial reporting is to
d. d. Private entities a provide information
26. Which of the following in relation to a. That is useful for decision making
information needs is true?
b. About assets, liabilities and equity of an
I. Information that meets the need of entity
specified primary users is likely to
meet the needs of other users, such c. About financial performance during a
as employees, customers, period
government and their agencies, and
d. d. That allows owners to assess
the public.
management performance a
II. The management is also interested in
30. Which is an objective of financial reporting?
financial information but it need not
rely on general purpose financial a. to provide information that is useful to
reports because it can access management in making decisions
additional information internally.
b. to provide information that clearly
a. I only portrays non-financial transactions

b. II only c. to provide information that is useful to

assess the amounts, timing and
c. Both
uncertainty of of prospective cash
d. Neither c receipts

27. These users are interested in information that d. d. to provide information that excludes
enables them to assess whether their loans, claims against the resources c
31. One objective of financial reporting is to d. d. It is one of the implicit assumptions.
provide b

a. Information about the investors in the 35. The most useful information to existing and
entity potential investors, lenders and other creditors
in predicting future cash flow is
b. Information about the liquidation value
of the resources held by the entity a. Information about cash flows

c. Information that is useful in assessing b. Current earnings based on accrual

cash flow prospects accounting

d. d. Information that will attract new c. Information regarding the accounting

investors c policies used by management

32. An objective of financial reporting is "assessing d. d. Information regarding the results

cash flow prospects" which is interpreted to obtained by using a wide variety of
mean accounting policies b

a. Cash basis accounting is preferred over 36. The accrual basis of accounting is most useful
accrual basis of accounting. for

b. Information about the financial effects a. Determining the amount of income tax
of cash receipts and cash payments is liability
generally considered the best indicator
b. Predicting the short-term financial
of ability to generate favorable cash
performance.
flows.
c. Predicting the long-term financial
c. Over the long run, trends in revenue
performance.
and expenses are generally more
meaningful than trends in cash receipts d. d. Determining the amount of
and disbursements. dividends to be declared. b
d. d. All of these. c 37. The primary focus of financial reporting has
been on meeting the needs of which of the
33. Which of the following best describes
following groups?
"financial performance"?
a. Management
a. The revenue, expenses and net income
or loss for a period b. Existing and potential investors, lenders
and other creditors
b. The assets, liabilities and equity
c. National and local taxing authorities
c. The total assets minus total liabilities
d. d. Independent CPAs b
d. d. The total cash inflows minus total
cash outflows a 38. Which of the following best describes the term
"financial position"?
34. In measuring financial performance, accrual
accounting is used because a. The net income and expenses
a. Cash flows are considered less b. The net of financial assets less liabilities
important.
c. The potential to contribute to the flow
b. It provides a better indication of ability of cash and cash equivalents
to generate cash flows than cash basis.
d. d. The assets, liabilities and equity d
c. It recognizes revenue when cash is
received and expenses when cash is 39. The objectives of financial reporting are based
paid. on
 a. The need for conservatism d. d. An economy as a whole or to
members of society as consumers,
b. Reporting on management stewardship
rather than to Individual business
c. Generally accepted accounting entities or industries a
principles
43. During a period when an entity is under the
d. d. The needs of the users of the direction of a particular management, financial
information d reporting will directly provide information
about
40. Which of the following statements is not a
major objective of financial reporting? a. Both entity performance and
management performance
a. It shall provide information about
entity resources, claims against those b. Management performance but not
resources and changes in them. entity performance

b. It shall provide information useful in c. Entity performance but not

evaluating management stewardship. management performance

c. It shall provide information useful in d. d. Neither entity performance nor

investment, credit and similar decision. management performance c

d. d. It shall provide information useful in 44. Which best describes the term "going
assessing cash flow prospects. b concern"?

41. Which of the following is not an objective of a. Current liabilities exceed current assets.
financial reporting?
b. Ability of the entity to continue in
a. To provide information about an operation for the foreseeable future
entity's assets and claims against those
c. c. Potential to contribute to the flow of
assets
cash and cash equivalents to the entity
b. To provide information that is useful in b
assessing an entity's sources and uses
45. What is an implication of the going concern
of cash
assumption?
c. To provide information that is useful in
a. The historical cost principle is credible.
lending and investing decisions
b. Depreciation and amortization policies
d. d. To provide information about the
are justifiable and appropriate.
liquidation value of an entity d
c. The current and non-current
42. The information provided by financial
classification of assets and liabilities is
reporting pertains to
justifiable and significant.
a. Individual business entities, rather than
d. d. All of these. d
to industries or an economy as a whole
or to members of society as consumers 46. The relatively stable economic, political and
social environment supports
b. Business industries, rather than to
individual entities or an economy as a a. Conservatism
whole or to members of society as
b. Materiality
consumers
c. Timeliness
c. Individual business entities, industries
and an economy as a whole, rather d. d. Going concern d
than to members of society as
consumers 47. Which of the following is not a basic
assumption underlying financial accounting?
 a. Economic entity assumption b. Periodicity

b. Going concern assumption c. Going concern

c. Periodicity assumption d. d. Economic entity a

d. d. Historical cost assumption d 53. Inflation is ignored in accounting due to

48. Which basic assumption may not be followed

when an entity in bankruptcy reports financial
a. economic entity
results?
b. going concern
a. Economic entity
c. monetary unit
b. Going concern
d. d. time period c
c. Periodicity
54. The concept of accounting entity is applicable
d. c. Monetary unit b
a. Only to the legal aspect of business
49. The economic entity assumption
organizations
a. Is applicable to unincorporated
b. Only to the economic aspects of
businesses
business organizations
b. Recognizes the legal aspects of
c. Only to business organizations
business organizations
d. d. Whenever accounting is involved d
c. Requires periodic income
measurement 55. When a parent and subsidiary relationship
exists, consolidated financial statements are
d. d. Is applicable to all forms of business
prepared in recognition of
organizations d
a. legal entity
50. What is being violated if an entity provides
financial reports in connection with a new b. economic entity
product introduction?
c. stable monetary unit
a. Economic entity
d. d. time period b
b. Periodicity
56. The valuation of a promise to receive cash in
c. Monetary unit the future at present value is valid because of
what accounting concept?
d. d. Continuity a
a. entity
51. Which underlying assumption serves as the
basis for preparing financial statements at b. time period
regular artificial points in time?
c. going concern
a. Accounting entity
d. d. monetary unit c
b. Going concern
57. What is the accounting concept that justifies
c. Periodicity the usage of accruals and deferrals?
d. d. Stable monetary unit c a. going concern
52. Which basic accounting assumption is b. materiality
threatened by the existence of severe inflation
in the economy? c. consistency

a. Monetary unit d. d. stable monetary unit a

58. During the lifetime of an entity, accountants from the subsidiary at twice the normal
produce financial statements at arbitrary markup. Accounting entity
points in time in accordance with what basic
65. IDENTIFY ASSUMPTION CLEARLY VIOLATED: An
accounting concept?
entity decided to publish fin statements only in
a. accrual the years when it had good news to report.
Time period
b. periodicity
66. IDENTIFY ASSUMPTION CLEARLY VIOLATED: An
c. unit of measure
entity reported inventory, PPE and intangible
d. d. continuity b assets at current value at year-end. Going
concern
59. IDENTIFY UNDERLYING ASSUMPTION
INVOLVED: The operations of a saving bank are 67. IDENTIFY ASSUMPTION CLEARLY VIOLATED: An
being evaluated by the BSP. During the electronics entity owned by a proprietor
investigation, the BSP has determined that reported the cost of the proprietor's swimming
numerous loans made by top management pool as an asset of the entity.Accounting entity
were unwise and have seriously endangered
68. IDENTIFY ASSUMPTION CLEARLY VIOLATED: An
the future of the saving bank. Going
entity prepared financial statements adjusted
concern
for changes in purchasing power. Monetary
60. IDENTIFY UNDERLYING ASSUMPTION unit
INVOLVED: The parent entity in Manila has a
69. IDENTIFY ASSUMPTION CLEARLY VIOLATED: A
subsidiary in Japan. The financial statements of
mining entity kept no accounting records after
the subsidiary are translated to pesos for
starting business. The entity is waiting until the
consolidation with financial statements of the
mine is exhausted to determine the success or
parent entity at year end. Accounting entity
failure of business. Time period
61. IDENTIFY UNDERLYING ASSUMPTION
70. IDENTIFY ASSUMPTION DESCRIBED: An entity
INVOLVED: A machinery was imported from
reported financial statements in nominal pesos
USA at a certain cost five years ago. Because of
that have mixed rather than uniform amount
inflation, the machinery has now a current
of purchasing power. Monetary unit
replacement cost which is very much higher
than the historical cost. Management would 71. IDENTIFY ASSUMPTION DESCRIBED: A MNC
like to report the machinery at current published a complete set of financial
replacement cost. Monetary unit statements at least once a year, regardless of
whether the financial results were good or
62. IDENTIFY UNDERLYING ASSUMPTION
bad. Time period
INVOLVED: An entity has experience a drastic
reduction n revenue by reason of a long dry 72. IDENTIFY ASSUMPTION DESCRIBED: The pesos
spell in the area where the entity grows its of today can buy as much goods and services
tobacco. as the pesos five years ago. Monetary unit

73. IDENTIFY ASSUMPTION DESCRIBED: An

accounting entity is viewed as continuing in
63. The management decided to wait until next
operation in the absence of the evidence of
year and present financial statements for a
the contrary. Going concern
two-year period rather than prepare now the
traditional 12-month financial statements. 74. IDENTIFY ASSUMPTION DESCRIBED: An
Time period accounting practitioner mixed personal
accounting records with the records of the
64. IDENTIFY UNDERLYING ASSUMPTION
accounting practice. Accounting entity
INVOLVED: A subsidiary was exhibiting poor
financial performance for the current year. In
an effort to increase the subsidiary's reported
income, the parent entity purchased goods