ABO Royce Stephen CFAS Activities Answers

Advanced Financial Accounting And Reporting 1 (ACCTGN6)

Name: Abo, Royce Stephen D.

Section: Sec 9
CFAS ACTIVITY
NOTE: Sir I Bold all of my answers.
PROBLEM 1: TRUE OR FALSE
TRUE 1. All events and transactions of an entity are recognized the books of accounts.
FALSE 2. The accounting process of assigning. numbers, commonly in monetary terms, to the
economic transactions and events is referred to as classifying.
TRUE 3. The basic purpose of accounting is to provide information about economic activities
intended to be useful in making economic decisions.
TRUE 4. Financial accounting is the branch of accounting that focuses on general purpose
reports of financial position and operating results known as the financial statements.
TRUE 5. General purpose financial statements are those statements that cater to the common
and specific needs of a wide range of external users.
TRUE 6. The financial statements are the only source of information when making economic
decisions.
TRUE 7. All information presented in the financial statements are sourced from the accounting
records of the entity.
TRUE 8. Entity A's accounting period starts on July 1 and ends on June 30 of the following year.
Entity A uses a fiscal year period.
FALSE 9. Once promulgated, accounting standards are never changed.
FALSE 10. The entity's management is responsible for the selection of appropriate accounting
policies, not the accountant.

PROBLEM 2: MULTIPLE CHOICE

1. The concept of recognition is applied in which of the following instances?

a. An entity includes the effects of an event in the financial statements through a journal
entry.
b. An entity removes the effects of an event from the financial statements through a journal entry.
c. An entity discloses only an event in the notes, rather than including the effects of the event in
the monetary totals in the financial statements.

15 0
d. An entity records an event through a memorandum entry.

2. Which of the following events is not considered an exchange or reciprocal transfer?

a. purchase of inventory on account
b. lending money to another entity
c. payment of a loan payable
d. payment of taxes

3. Which of the following events is considered a nonreciprocal transfer?

a. sale of an asset c. loss from a calamity
b. donation d. production of finished goods

4. To be useful, accounting information should be presented using

a. monetary amounts. c. historical costs.
b. a common denominator. d. fair values.

5. Which of the following violates the historical cost concept?

a. Recording purchases of merchandise inventory at the purchase price.
b. Recording a building at the total construction costs.
c. Measuring inventories at net realizable value.
d. Recording an equipment acquired in an installment purchase at the cash price equivalent.

6. Entity A values its fixed assets at their historical costs and does not restate them for changes in
the purchasing power of the Philippine pesos due to inflation. Entity A is applying which of the
following accounting concepts?
a. prudence c. stable monetary unit
b. accrual basis d. time period

15 0
7. Entity A engages in importing and exporting activities. At the end of the period, Entity A has
assets and liabilities denominated in foreign currencies. When preparing its financial statements,
Entity A translates these assets and liabilities to pesos. Entity A is most likely' to be applying
which of the following accounting concepts?
a. double entry c. stable monetary unit
b. accrual basis d. time period

8. Preparing financial statements at least annually is application of which of the following

accounting concepts?
a. historical cost c. stable monetary unit
b. accrual basis d. time period

9. Entity A acquires merchandise inventory. Entity A initially records the acquisition cost of the
inventory as asset rather than an outright expense. When the inventory is subsequently sold,
Entity A recognizes the cost of the inventory sold as expense, in the same period the sale revenue
is recognized. This is an application of which of the following accounting concepts?
a. stable monetary unit c. matching
b. materiality d. proprietary

10. On Day 1, a customer buys goods from Entity A and promises to pay the sale price on Day
30. Entity A recognizes sales revenue on Day 1 rather than on Day 30. This is an application of
which of the following accounting concepts?
a. prudence c. consistency
b. accrual basis d. materiality

PROBLEM 3: MULTIPLE CHOICE

1. All the following are considered internal events, except

a. transfer of goods from work-in-process to finished goods inventory
b. losses from flood, earthquake, fire and other calamities
c. transformation of biological assets from immature to mature

15 0
d. vandalism committed by the entity's employees
2. Which of the following is considered an internal user of Entity A's financial reports?
a. Entity B, a bank, requires Entity A to submit audited financial statements in conjunction
to a loan being applied for by Entity A.
b. Mr. I is deciding whether to invest in Entity A. Mr. I uses Entity A's financial statements
in making its investment decision.
c. Ms. S, a shareholder of Entity A, is deciding whether to hold or sell her shareholdings in
Entity A. Ms. S uses Entity A's financial statemenTSTnriakingits "hold or sell" decision.
d. Mr. X, a member of Entity A's board of directors, uses financial reports to make
decisions regarding the financial and operational affairs of Entity A.

3. When resolving accounting problems not specifically addressed by current standards, an entity
shall be guided by the hierarchy of financial reporting standards. The correct sequence of the
hierarchy of financial reporting standards in the Philippines is
I. PASs, PFRSs and Interpretations
H. Conceptual Framework.
III. Judgment
IV. Pronouncement of other standard-setting bodies
a. I, HI, II and IV c. I, IV, 11 and 111
b. I, H, IV and III
c. I, IV, 11 and 111
d. I, H, III and IV

4. The proper application of accounting principle is most dependent upon the

a. management
b. accountant
c. auditor
d. chief executive officer

5. Which of the following statements is correct?

15 0
a. Accounting provides quantitative information only.
b. Accounting is considered an art because it requires the use of creative skills and
judgment.
c. The only acceptable measurement basis in accounting is historical cost.
d. Qualitative information can be found only in the notes to the financial statements.

6. Which of the following statements is correct?

a. All quantitative information are also financial in nature.
b. The accounting process of assigning peso amounts to economic transactions and
events is measuring.
c. The economic activity that involves using current inputs to increase the stock of
resources available for output is called savings.
d. The economic activity of using the final output of the production process is called income
distribution.

7. Which of the following statements is incorrect regarding accounting concepts?

a. Under the Accrual Basis of accounting, revenues are recognized when earned and
expenses are recognized when incurred, not when cash is received and disbursed.
b. Under the Going concern concept, the business entity is assumed to carry on its
operations for an indefinite period of time.
c. Under the Business entity/ Separate entity/ Entity/
Accounting entity Concept, the business is treated separately from its owners.
d. Under the Time Period/ Periodicity/ Accounting Period
concept, the life of the business is divided into series of reporting periods.
e. Under the Cost-benefit concept, the cost of processing and
communicating information should exceed the benefits derived from it.

8. Which of the following statements is incorrect?

a. Financial reporting standards may at times be influenced by legal, political, business and
social environments.
b. General-purpose financial statements must be prepared by a Certified Public Accountant.

15 0
c. General purpose financial statements are prepared primarily for the use of external
users.
d. The PFRSs are issued by the Financial Reporting Standards Council.
9. Mr. John Doe, CPA, is a professor in a university where he teaches mainly home economics,
music and physical education. Those subjects require that the teacher must be awesome. Mr. Doe
is also frequently invited as a judge in beauty pageants and singing contests and as a referee in
mixed martial arts competitions. Mr. Doe is considered to be
practicing accountancy in which of the following sectors?
a. Academe c. Commerce and industry
b. Public accounting d. None of these

10. Changes to reporting standards response to

a. government regulations.
b. users' needs.
c. global modernization
d. all of these

PROBLEM 4: FOR CLASSROOM DISCUSSION

1. Entity A buys bananas and converts them into banana chips.
The conversion of bananas into banana chips is a (an)
a. non-accountable event . c. non-reciprocal transfer.
b. external event. d. internal event.
Valuation by fact or opinion
2. Which of the following is considered valued by fact rather than by opinion?
a. Depreciation d. Retained earnings
b. Cost of goods sold c. Discount on share capital
Measurement Bases
3. Which of the following is not one of the several measurement bases used in accounting?
a. historical cost c. present value
b. fair value d. all of these are used

15 0
Accounting Concept
4. Entity A is owned by Mr. X and Ms. Y. Which of the following transactions does not violate
the separate entity concept and therefore is appropriately recorded in the accounting records of
Entity A?
a. Mr. X purchases groceries for his home consumption.
b. Mr. X gives Ms. Y chocolate and flowers on Valentine's Day.
c. Ms. Y provides capital to Entity A.
d. Ms. Y provides capital to Entity B, another business entity
5. Mr. A is assessing the ability of Entity A to generate future cash and cash equivalents. In
making the assessment, Mr. A uses not only the statement of cash flows but also the other
components of a complete set of financial statements. This is because of which of the following
concepts?
a. Going concern c. Intercalation
b. Time period d. Articulation
6. Entity A acquires a stapler. Instead of recognizing the cost of the stapler as an asset to be
subsequently depreciated, Entity A immediately charges it as expense. This is an application of •
which of the following concepts?
a. Prudence c. Cost-benefit
b. Materiality d. b and c
Common branches of accounting
7. What type of users' needs is catered by general purpose financial statements?
a. common needs c. a and b
b. specific needs d. neither a nor b
Four sectors in the practice of accountancy
8. Which of the following is not among the Four Sectors in the practice of accountancy as
enumerated in R.A. 9298 also known as the "Philippine Accountancy Act of 2004"?
a. Practice in Commerce and Industry
b. Practice in the Government
c. Practice in Education/Academe
d. Practice of Private Accountancy
Accounting standards

15 0
9. The Philippine Financial Reporting Standards (PFRSs) comprise:
I. Philippine Financial Reporting Standards
II. Philippine Accounting Standards
III. Interpretations
IV. Accounting Practice Statements and Implementation Guidance
a. I, II and III c. I and II
b. I, II, III and IV d. I and HI

PROBLEMS
PROBLEM 1: TRUE OR FALSE
TRUE 1. All changes in an entity's economic resources and claims to those resources result from
the entity's financial performance.
TRUE 2. The qualitative characteristics of useful information apply only to the financial
information provided in the financial statements.
TRUE 3. According to IFRS® Practice Statement 2 Making Materiality Judgments, cost is an
important consideration when making materiality judgments.
TRUE 4. When making materiality judgments, a quantitative assessment alone is not always
sufficient to conclude that an item of information is not material.
FALSE 5. Materiality judgments apply only to items that are recognized but not to those that are
unrecognized.
FALSE 6. The more significant the qualitative factors are, the lower the quantitative thresholds
will be. Thus, an item with a zero amount can be material in light of qualitative thresholds.
FALSE 7. When making materiality judgments, an entity should judge an item's materiality only
on its own and not in combination with other information in the complete set of financial
statements.
FALSE 8. The Conceptual Framework and the Standards specify a uniform quantitative
threshold for materiality.
TRUE 9.To meet the objectives of general-purpose financial reporting, a Standard sometimes
contains requirements that depart from the Conceptual Framework.
TRUE 10.The Conceptual Framework is concerned with the provision of financial information
to both external users and-internal users.

15 0
PROBLEM 2: TRUE OR FALSE
FALSE 1. The Conceptual Framework may be revised from time to time Revisions in the
Conceptual Framework automatically result to changes in the Standards.
TRUE 2. According to the revised Conceptual Framework, the asset is the
right, while the liability is the obligation, rather than the
ultimate inflows or outflow; of economic benefits resulting
from the asset or liability.
TRUE 3. Legal enforceability of a right, for example ownership,
necessary for control over an economic resource to exist.
TRUE 4. According to the revised Conceptual Framework, an asset can exist even if the
probability that it will provide inflows of future economic benefits is low, and even if the asset is
subject to a high measurement uncertainty.
FALSE 5.According to the revised Conceptual Framework, what the entity controls is the right,
and not the ultimate inflows of future economic benefits that the economic resource may
produce.
TRUE 6.The Conceptual Framework defines income and expenses in terms of changes in assets
and liabilities.
TRUE 7. Not all items that meet the definition of a financial statement element are recognized;
they are recognized only if recognizing them will also result in relevant and faithfully
represented information.
TRUE 8. Measuring an asset at historical cost will always' result in the same carrying amount of
the asset from period to period.
TRUE 9. According to the Conceptual Framework, amortized cost measurement relates to
historical cost, rather than current value.
FALSE 10. Although the use of a single measurement basis improves the understandability of
the financial statements, this may not always lead to useful information. Thus, the Standards
require
different measurement bases for different assets, liabilities, income and expenses.

15 0
PROBLEM 3: MULTIPLE CHOICE

1. According to the Conceptual Framework, these are the

qualitative characteristics that make information useful to users.
a. Fundamental c. Relevance
b. Enhancing d. Comparability

2. Information that is capable of making a difference in the

decisions made by users has this qualitative characteristic.
a. Relevance c. Timeliness
b. Faithful representation d. Verifiability

3. When making materiality judgments, the overriding consideration is

a. the ability of the item being judged to influence users' decisions.
b. the size of the impact of the item being judged.
c. the characteristics of the item being judged.
d. c and d

4. This qualitative characteristic is unique in the sense that it necessarily requires at least two
items.
a. Verifiability c. Timeliness
b. Faithful representation d. Comparability

5. Which of the following enhances the comparability of information?

a. Making unlike things look alike.
b. Making like things look different.
c. Using different methods to account for similar transactions from period to period.
d. Consistent application of accounting policies from period to period.

15 0
6. Information has this qualitative characteristic if different, knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation.
a. Relevance c. Verifiability
b. Faithful representation d. Comparability

7. The Conceptual Framework uses the term "claims" against the reporting entity to refer to
a. expenses.
b. liabilities.

8. Entity A is assessing whether an item meets the definition of a financial statement element.
Entity A considers the transaction's substance and economic reality rather than merely its legal
form. Entity A is applying which of the following accounting concepts?
a. Substance over form
b. Form over substance

9. Which of the following is not one of the aspects in the revised definition of an asset?
a. Right
b. Potential to produce economic benefits
c. Probability of the expected inflows of economic benefits from the asset
d. Control

10. The new definition of an asset (a liability) focuses on the asset (liability) being
a. a present right (obligation) that has resulted from past events and has the potential
to produce (cause a transfer of) economic benefits.
b. the expected inflows (outflows) of economic benefits that are both probable and can be
measured reliably.

15 0
c. a physical object (a duty to pay cash or other resources).
d. All of these.
11. Which of the following is not an indication of an economic resource's potential to produce
economic benefits?

a. The economic resource can be used in combination with other resources to produce
goods for sale.
b. The economic resource can be used to pay liabilities.
c. The economic resource can be distributed to the owners.
d. The resource has no use in the entity's operations and has no resale value.
12. Which of the following does not meet the definition of an asset?
a. Equipment that the entity intends, and is very certain, to acquire in the future.
b. Inventories purchased and received but not yet paid.
c. Land received from a donation.
d. A publishing title for a college textbook. The publishing title has no physical substance,
meaning you cannot see or touch it.

13. Entity A determined that an asset exists. However, the asset's low probability .of inflows
of economic benefits and its very high level of measurement uncertainty affected Entity A's
recognition decisions about the asset, as these raised doubt on whether the asset's recognition
would result in useful information. Consequently, Entity A did not recognize the asset, but
because Entity A deemed it relevant, information about the asset was nonetheless provided in the
notes. Which of the following statements is correct?
a. Entity A's accounting treatment is grossly incorrect because, according to the
Conceptual Framework, all items that meet the definition of an asset should always be
recognized, regardless of the asset's potential to produce economic benefits and its
measurement uncertainty.
b. Entity A's treatment for the asset is acceptable. The asset is
referred to as an 'unrecognized' asset.
c. Entity A's treatment for the asset is acceptable. The asset is
referred to as anon-existent' asset.
d. Entity A's non-recognition of the asset is correct. However,

15 0
the asset should have been completely ignored as providing information about unrecognized
items in the notes is not acceptable under the Conceptual Framework.

14. Which of the following will most likely affect the determination of whether an asset or a
liability exists?
a. A low probability that the asset or liability win cause inflows or outflows of future
economic benefits.
b. A high level of measurement uncertainty regarding the
asset or liability.
c. An unresolved dispute over a right or obligation.
d. All of these are relevant in determining the existence of an asset or a liability,
according to the Conceptual Framework.

15. An increase in the carrying amount of an asset could not possibly result in
a. the recognition of an income.
b. the recognition of an expense.
c. an increase in total equity.
d. no change in total equity.

PROBLEM 4: MULTIPLE CHOICE

1. The Conceptual Framework is least applicable in which of the following cases?

a. to account for a transaction that is specifically dealt with by a Standard
b. in resolving issues not addressed directly by a Standard
c. in developing Standards
d. in analyzing and interpreting Standards

2. General purpose financial statements are designed to

a. meet all the information needs of the primary users.
b. meet all of the common needs of all primary users.

15 0
c. meet most of the common needs of most primary users.
d. meet none of the needs of users of financial information.

3. These are users of financial information who are not in a position to require areporting entity
to prepare reports tailored to their particular information needs.
a. Primary users
b. Secondary users
c. heavy users
d. slight users

4. Which of the following is not one of the primary users listed in the Conceptual Framework?
a. Investors
b. Lenders
c. creditors
d. debtors

5. Which of the following would least likely to need general purpose financial statements in
making economic decisions?
a. Stockholders c. Management
b. Potential investors d. Lenders

6. Which of the following is not a factor to consider when applying the qualitative
characteristics?
a. The information must be both relevant and faithfully represented for it to be useful.
b. The enhancing qualitative characteristics only enhance the usefulness of information but
cannot make irrelevant information or erroneous information to be useful.
c. Sometimes, it may be necessary to make trade-offs between the qualitative characteristics
in order to provide useful information.
d. To be useful, information need only to meet one, but not necessarily all, of the
qualitative characteristics.

15 0
7. Which of the following is an example of a qualitative factor used in making materiality
judgments?
a. 10% of total revenues
b. 2.5% of total assets
c. P25,000 or more
d. The context of an item in relation to a current crisis in the banking and insurance
industry.

8. According to the Conceptual Framework, this information provides a direct indication of how
well management has discharged its responsibilities to make efficient and effective use of the
reporting entity's resources.
a. The changes in the' entity's economic resources
and claims to those resources.
b. The return that the entity has produced from its economic
resources.
c. The level of the entity's economic resources in relation to
the claims thereof.
d. The entity's liquidity and solvency.

9. Which of the following statements about the concepts in the Conceptual Framework is least
accurate?
a. General purpose financial reports are intended to meet equally the needs of all types of
external users.
b. A low probability of expected inflows or outflows of economic benefits resulting from an
asset or liability may affect the recognition of that asset or liability, but not necessarily its
existence.
c. A high level of measurement uncertainty associated with an asset or liability can affect
the faithful representation of that asset or liability, but not necessarily its relevance.
d. Recognition means including an item in the totals of the financial statements when
that item meets the definition of a financial statement element and recognizing it would
result in useful information.

15 0
10. According to the revised Conceptual Framework, the degree of uncertainty in the expected
inflows or outflows of economic benefits from an asset or liability or the degree of measurement
uncertainty associated with that asset or liability a. does not necessarily affect the conclusion that
an asset or a
liability exists, although it may affect recognition decisions about the asset or liability.
a. does not necessarily affect the conclusion that an asset or a liability exists, although it may
affect recognition decisions about the asset or liability.
b. greatly affects the conclusion that an asset or a liability exists if the expectation of inflows or
outflows is lowor the measurement uncertainty is high.
c. may not always affect the conclusion that an asset or a liability exists, but will most
certainly result to the non¬recognition of an asset or liability if the expectation of
inflows or outflows is low or the measurement uncertainty is high.
d. is irrelevant, both in determining the existence of an asset
or a liability and in making recognition decisions about that asset or liability.

PROBLEM 5: FOR CLASSROOM DISCUSSION

Purpose
1. Which of the following statements is incorrect regarding the purpose of the Conceptual
Framework?
a. The Conceptual Framework is intended to provide a foundation for the development of
globally acceptable Standards.
b. Globally acceptable Standards contribute to economic efficiency by lowering the cost of
capital and reducing international reporting costs.
c. Globally acceptable Standards reduces the information gap between financial statement
users and the reporting
entity's management.
d. The Conceptual Framework prescribes the concepts for both

15 0
general purpose and specific purpose financial reporting.

Status
2. The Conceptual Framework (choose the incorrect statement)
a. is not a PFRS.
b. in the absence of a PFRS, shall be considered by
management when making its judgment in developing
and applying an accounting policy that results in useful
information.
c. is concerned with general purpose financial reporting
only.
d. prevails over the PFRSs in cases of conflicts.

Scope
3. Which of the following is excluded from the scope of the Conceptual Framework?
a. The objective of financial reporting. financial information.
b. Qualitative characteristics of useful of financial statements
c. The components of a complete set
and their presentation requirement s.
and derecognition of
d. Definitions, recognition criteria
financial statement elements.
e. Descriptions of the measurement bases used in financial reporting.

The objective of financial reporting.

4. Which of the following is incorrect regarding the objective of general purpose financial
reporting?
a. The objective of general purpose financial reporting is to provide information that is
useful to primary users in making decisions about providing resources to the entity.

15 0
b. Decisions about providing resources to the entity depend on the users' expected
returns, which in turn, depend on assessments of the entity's prospects for future net cash
inflows and management stewardship.
c. The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework.
d. General purpose financial reporting provides information about an entity's economic
resources, claims, and changes in those resources and claims, but not on the utilization of those
resources by the entity's management.

Primary users
5. Which of the following statements best explains why government regulators are the reporting
entity's management and government not considered primary users under the Conceptual
Framework? a. These users are considered related parties, and hence do not make relevant
decisions.
a. These users have the ability to curtail the operations of the reporting entity and therefore have
the ability to affect the entity's going concern.
b. These users have the ability to curtail the operations of the reporting entity and therefore have
the ability to affect the entity's going concern.
c. These users have the power to demand information they need directly from the reporting
entity.
d. All of these.

Information on economic resources, claims, and changes

6. Information about the reporting entity's economic resources, claims against the reporting
entity and changes in those resources and claims is referred to in the Conceptual Framework as
the
a. economic phenomena.
b. entity's return.
c. financial performance.
d. prospects for future cash flows.

Qualitative characteristics

15 0
7. Entity A deliberately overstated its liabilities from PM to 01.2M. What qualitative
characteristic is violated?
a. Relevance c. Timeliness
b. Faithful representation d. Understandability

8. Two primary users are using the financial information of Entity A. If User #1 concludes that
Entity A's sales has increased while User #2 concludes that it has decreased, Entity A's financial
information is not
a. relevant.
b. faithfully represented.
c. comparable
d. verifiable.
Materiality
9. Entity A is making a materiality judgment. Entity A considers the size of the impact of an item
to be material if it exceeds 5% of total assets. What type of materiality assessment is this?
a. Quantitative c. Requirement of a Standard
b. Qualitative d. Relevance

Financial statements and the Reporting entity

10. Which of the following is incorrect regarding the objective of general purpose financial
statements?
a. General purpose financial statements show information on the reporting entity's assets,
liabilities, equity, income and expenses.
b. General purpose financial statements are intended to show the value of the reporting
entity.
c. General purpose financial statements provide information that is useful in assessing
the entity's ability to generate future net cash inflows.
d. General purpose financial statements provide information that is useful in assessing the
entity's management stewardship in relation to the use of the entity's economic resources.

The Elements of Financial Statements

15 0
11. Which of the following is least likely to be considered when determining whether an item
meets the definition of an asset?
a. whether there is a present economic resource, which is a right, that has resulted
from past events
b. whether the right has a potential to produce economic benefits, evidenced by at least one
circumstance
c. whether the entity controls the right
d. whether it is probable (more likely than not) that the resource will produce economic
benefits

12. The revised definitions of an asset and a liability emphasize that

a. an asset is a right, and a liability is an obligation, that has
the potential to produce, or cause the transfer of, economic benefits.
b. an asset is a controlled resource, and a liability is an
obligation, that is expected to cause inflows or outflows of economic benefits.
c, an asset is the physical object and the liability is ultimate outflow of economic benefits from
settling the obligation.
d. All of these are emphasized in the revised definitions.

13. Which of the following is correct when determining the existence of an asset or a liability?
a. An asset or a liability exists if the associated right or obligation arises from legal or contractual
requirements.
b. An asset or a liability exists only if the expected inflows or outflows of economic benefits
from the asset or the liability are probable, meaning they are more likely than not to occur,
c. An asset or a liability can exist even if its potential to produce, or cause a transfer of,
economic benefits is not certain or even likely — what is important is that the right or the
obligation exists in the present and that in at least one circumstance it will produce, or
cause a transfer of, economic benefits.
d. All of these are correct.

14. Control is a necessary element of an asset. Control means

15 0
the asset should have been completely ignored as providing information about unrecognized
items in the notes is not acceptable under the Conceptual Framework.

14. Which of the following will most likely affect the determination of whether an asset or a
liability exists?
a. A low probability that the asset or liability win cause inflows or outflows of future
economic benefits.
b. A high level of measurement uncertainty regarding the
asset or liability.
c. An unresolved dispute over a right or obligation.
d. All of these are relevant in determining the existence of an asset or a liability,
according to the Conceptual Framework.

15. An increase in the carrying amount of an asset could not possibly result in
a. the recognition of an income.
b. the recognition of an expense.
15 0
c. an increase in total equity.
d. no change in total equity.
PROBLEM 4: MULTIPLE CHOICE

1. The Conceptual Framework is least applicable in which of the following cases?

a. to account for a transaction that is specifically dealt with by a Standard
b. in resolving issues not addressed directly by a Standard
c. in developing Standards
d. in analyzing and interpreting Standards

2. General purpose financial statements are designed to

a. meet all the information needs of the primary users.
b. meet all of the common needs of all primary users.

15 0
c. meet most of the common needs of most primary users.
d. meet none of the needs of users of financial information.

3. These are users of financial information who are not in a position to require areporting entity
to prepare reports tailored to their particular information needs.
a. Primary users
b. Secondary users
c. heavy users
d. slight users

4. Which of the following is not one of the primary users listed in the Conceptual Framework?
a. Investors
b. Lenders
c. creditors
d. debtors

5. Which of the following would least likely to need general purpose financial statements in
making economic decisions?
a. Stockholders c. Management
b. Potential investors d. Lenders

6. Which of the following is not a factor to consider when applying the qualitative
characteristics?
a. The information must be both relevant and faithfully represented for it to be useful.
b. The enhancing qualitative characteristics only enhance the usefulness of information but
cannot make irrelevant information or erroneous information to be useful.
c. Sometimes, it may be necessary15 0 trade-offs between the qualitative characteristics
to make
in order to provide useful information.
d. To be useful, information need only to meet one, but not necessarily all, of the
qualitative characteristics.

15 0
7. Which of the following is an example of a qualitative factor used in making materiality
judgments?
a. 10% of total revenues
b. 2.5% of total assets
c. P25,000 or more
d. The context of an item in relation to a current crisis in the banking and insurance
industry.

8. According to the Conceptual Framework, this information provides a direct indication of how
well management has discharged its responsibilities to make efficient and effective use of the
reporting entity's resources.
a. The changes in the' entity's economic resources
and claims to those resources.
b. The return that the entity has produced from its economic
resources.
c. The level of the entity's economic resources in relation to
the claims thereof.
d. The entity's liquidity and solvency.

9. Which of the following statements about the concepts in the Conceptual Framework is least
accurate?
a. General purpose financial reports are intended to meet equally the needs of all types of
external users.
b. A low probability of expected inflows or outflows of economic benefits resulting from an
asset or liability may affect the recognition of that asset or liability, but not necessarily its
existence.
c. A high level of measurement uncertainty associated with an asset or liability can affect
the faithful representation of that asset or liability, but not necessarily its relevance.
d. Recognition means including an item in the totals of the financial statements when
that item meets the definition of a financial statement element and recognizing it would
result in useful information.

15 0
10. According to the revised Conceptual Framework, the degree of uncertainty in the expected
inflows or outflows of economic benefits from an asset or liability or the degree of measurement
uncertainty associated with that asset or liability a. does not necessarily affect the conclusion that
an asset or a
liability exists, although it may affect recognition decisions about the asset or liability.
a. does not necessarily affect the conclusion that an asset or a liability exists, although it may
affect recognition decisions about the asset or liability.
b. greatly affects the conclusion that an asset or a liability exists if the expectation of inflows or
outflows is lowor the measurement uncertainty is high.
c. may not always affect the conclusion that an asset or a liability exists, but will most
certainly result to the non¬recognition of an asset or liability if the expectation of
inflows or outflows is low or the measurement uncertainty is high.
15 0
d. is irrelevant, both in determining the existence of an asset
or a liability and in making recognition decisions about that asset or liability.

PROBLEM 5: FOR CLASSROOM DISCUSSION

Purpose
1. Which of the following statements is incorrect regarding the purpose of the Conceptual
Framework?
a. The Conceptual Framework is intended to provide a foundation for the development of
globally acceptable Standards.
b. Globally acceptable Standards contribute to economic efficiency by lowering the cost of
capital and reducing international reporting costs.
c. Globally acceptable Standards reduces the information gap between financial statement
users and the reporting
entity's management.
d. The Conceptual Framework prescribes the concepts for both

15 0
general purpose and specific purpose financial reporting.

Status
2. The Conceptual Framework (choose the incorrect statement)
a. is not a PFRS.
b. in the absence of a PFRS, shall be considered by
management when making its judgment in developing
and applying an accounting policy that results in useful
information.
c. is concerned with general purpose financial reporting
only.
d. prevails over the PFRSs in cases of conflicts.

Scope
3. Which of the following is excluded from the scope of the Conceptual Framework?
a. The objective of financial reporting. financial information.
b. Qualitative characteristics of useful of financial statements
c. The components of a complete set
and their presentation requirement s.
and derecognition of
d. Definitions, recognition criteria
15 0
financial statement elements.
e. Descriptions of the measurement bases used in financial reporting.

The objective of financial reporting.

4. Which of the following is incorrect regarding the objective of general purpose financial
reporting?
a. The objective of general purpose financial reporting is to provide information that is
useful to primary users in making decisions about providing resources to the entity.

15 0
b. Decisions about providing resources to the entity depend on the users' expected
returns, which in turn, depend on assessments of the entity's prospects for future net cash
inflows and management stewardship.
c. The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework.
d. General purpose financial reporting provides information about an entity's economic
resources, claims, and changes in those resources and claims, but not on the utilization of those
resources by the entity's management.

Primary users
5. Which of the following statements best explains why government regulators are the reporting
entity's management and government not considered primary users under the Conceptual
Framework? a. These users are considered related parties, and hence do not make relevant
decisions.
a. These users have the ability to curtail the operations of the reporting entity and therefore have
the ability to affect the entity's going concern.
b. These users have the ability to curtail the operations of the reporting entity and therefore have
the ability to affect the entity's going concern.
c. These users have the power to demand information they need directly from the reporting
entity.
d. All of these.

Information on economic resources, claims, and changes

6. Information about the reporting entity's economic resources, claims against the reporting
entity and changes in those resources and claims is referred to in the Conceptual Framework as
the
a. economic phenomena.
b. entity's return.
c. financial performance.
d. prospects for future cash flows.

Qualitative characteristics

15 0
7. Entity A deliberately overstated its liabilities from PM to 01.2M. What qualitative
characteristic is violated?
a. Relevance c. Timeliness
b. Faithful representation d. Understandability

8. Two primary users are using the financial information of Entity A. If User #1 concludes that
Entity A's sales has increased while User #2 concludes that it has decreased, Entity A's financial
information is not 15 0
a. relevant.
b. faithfully represented.
c. comparable
d. verifiable.
Materiality
9. Entity A is making a materiality judgment. Entity A considers the size of the impact of an item
to be material if it exceeds 5% of total assets. What type of materiality assessment is this?
a. Quantitative c. Requirement of a Standard
b. Qualitative d. Relevance

Financial statements and the Reporting entity

10. Which of the following is incorrect regarding the objective of general purpose financial
statements?
a. General purpose financial statements show information on the reporting entity's assets,
liabilities, equity, income and expenses.
b. General purpose financial statements are intended to show the value of the reporting
entity.
c. General purpose financial statements provide information that is useful in assessing
the entity's ability to generate future net cash inflows.
d. General purpose financial statements provide information that is useful in assessing the
entity's management stewardship in relation to the use of the entity's economic resources.

The Elements of Financial Statements

15 0
11. Which of the following is least likely to be considered when determining whether an item
meets the definition of an asset?
a. whether there is a present economic resource, which is a right, that has resulted
from past events
b. whether the right has a potential to produce economic benefits, evidenced by at least one
circumstance
c. whether the entity controls the right
d. whether it is probable (more likely than not) that the resource will produce economic
benefits

12. The revised definitions of an asset and a liability emphasize that

a. an asset is a right, and a liability is an obligation, that has
the potential to produce, or cause the transfer of, economic benefits.
b. an asset is a controlled resource, and a liability is an
obligation, that is expected to cause inflows or outflows of economic benefits.
c, an asset is the physical object and the liability is ultimate outflow of economic benefits from
settling the obligation.
d. All of these are emphasized in the revised definitions.
15 0

13. Which of the following is correct when determining the existence of an asset or a liability?
a. An asset or a liability exists if the associated right or obligation arises from legal or contractual
requirements.
b. An asset or a liability exists only if the expected inflows or outflows of economic benefits
from the asset or the liability are probable, meaning they are more likely than not to occur,
c. An asset or a liability can exist even if its potential to produce, or cause a transfer of,
economic benefits is not certain or even likely — what is important is that the right or the
obligation exists in the present and that in at least one circumstance it will produce, or
cause a transfer of, economic benefits.
d. All of these are correct.

14. Control is a necessary element of an asset. Control means

15 0
a. the entity has the exclusive right over the benefits -of an asset, including the ability to
prevent others from
accessing those benefits.
b. that the entity can ensure that the resource will produce economic benefits in all
circumstances.
c. the entity has the exclusive right over the entire economic resource, and not only a
portion of it.
d. a legally enforceable right conferred to the entity by a law
or other operation of law.

15. An asset is an economic resource and an economic resource is a right that has the potential to
produce economic benefits. Which. of the following is not one of the potentials of an economic
resource to produce economic benefits for an entity?
a. Service potential, i.e., the resource can be used to provide services in the entity's normal
business activities.
b. The resource can be converted into cash.
c. The resource has the ability to provide cost-savings to the entity.
d. The resource causes more outflows of cash from the entity than inflows.

Executory contracts
16. Entity A enters into a purchase commitment with Entity B (a seller). Neither party performs
its obligation on the contract, i.e., Entity A did not yet pay the purchase price, while Entity B did
not yet deliver the goods. Which of the following is incorrect?
a. The contract is executory. Entity A has a combined right to receive the goods and an
obligation to pay for them.
b. Entity A recognizes neither an asset nor a liability except when the contract becomes
burdensome, such as when the goods become obsolete before they are delivered.
c. If Entity B performs its obligation first, Entity A's combined right and obligation
changes to a liability.
d. If Entity A performs its obligation first, Entity A's combined right and obligation changes
to a liability.
15 0
Recognition and Derecognition
17. According to the revised Conceptual Framework, an item is recognized if
a. 15 statement
it meets the definition of a financial 0 element.
b. recognizing it would provide useful information.
c. it is probable that the item will result to an inflow or
outflow of economic benefits and its cost can be measured reliably.
d. a and b

18. According to the Conceptual Framework, an item is recognized if it meets the definition of an
asset, liability, equity, income or
expense, and recognizing it would provide relevant and faithfully represented information.
Which of the following relates faithful representation rather than relevance?
a. It is uncertain whether the asset exists.
b. The asset exists but the probability that it will produce inflows of economic benefits is low.
c. A high level of measurement uncertainty associated with the asset.
d. None of these. An item that meets the definition of an asset is always recognized as an asset.

19. Which of the following will most likely to cause the non-recognition of an asset or a
liability?
a. The probability of an inflow (outflow) of future economic benefits from the asset
(liability) is low.
b. There is a measurement uncertainty regarding the asset or liability.
c. It is uncertain whether the asset or liability exists.
d. Recognizing the asset or liability would not provide relevant and faithfully represented
information.

20. Which of the following would not result to the recognition of a liability?
a. Receipt of the proceeds of a bank loan.
b. Receipt of delivery of equipment purchased on credit.
c. A commitment for future execution becomes burdensome.

15 0