FINANCIAL ACCOUNTING AND REPORTING

Handout 01 – Conceptual Framework

1. This refers to the theoretical basis or a set of concepts for general purpose financial reporting.
a. Conceptual Framework
b. Philippine Financial Reporting Standards (PFRS)
c. Philippine Standards on Auditing (PSA)
d. Management Discussion and Analysis (MD&A)

2. Which of the following refers to the underlying theme of the Conceptual Framework?
a. Relevance.
b. Faithful representation.
c. Decision usefulness.
d. Consistency.

3. The purpose of the Conceptual Framework includes all of the following, except
a. To assist the Financial Reporting Standards Council (FRSC) to develop accounting standards.
b. To assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy.
c. To assist all parties to understand and interpret the Standards.
d. To assist the Securities and Exchange Commission (SEC) in performing its duties to the public.

4. Which of the following correctly describes the authoritative status of the Conceptual Framework for Financial
Reporting?
a. It is not a Standard, and nothing in it overrides any Standard.
b. It is more authoritative than the Standard.
c. It shall be applied in the absence of a Standard that specifically applies to a transaction.
d. The FRSC may sometimes depart from it without explaining the departure.

5. What is the objective of general purpose financial reporting according to the Conceptual Framework?
a. To prepare and present a complete set of financial statements.
b. To prepare and present a complete set of financial statements that meet the qualitative characteristics
of useful information.
c. To provide information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions relating to providing resources to the entity.
d. To prepare and present a complete set of financial statements in accordance with all applicable
Standards and other regulatory requirements.

6. These users are those who must rely on and cannot require reporting entities to provide general purpose
financial reports for much of the financial information they need. Consequently, they are the users to whom
general purpose financial reports are directed.
a. Primary users
b. Secondary users
c. Tertiary users
d. Other users

7. Primary users of general purpose financial reports does not include:

a. Investors.
b. Lenders.
c. Creditors.
d. Management.

8. Other users of general purpose financial reports exclude

a. Employees.
b. Regulators.
c. Public.
d. Creditors.

9. What are qualitative characteristics of financial information according to the Conceptual Framework?
a. They are the categories or grouping of accounts of the financial effects of transactions and other events
in the financial reports.
b. They are notes to financial statements.
c. They are the attributes that identify the type of information provided in financial reports that are most
likely to be useful to users for making decisions.
d. They are the declaration of a reporting entity of compliance with the Standards.

Prepared by: John Bo S. Cayetano, CPA, MBA Page 1 of 7

10. What are the two fundamental qualitative characteristics of useful financial information in accordance with
the Conceptual Framework?
a. Relevance and reliability.
b. Reliability and going concern.
c. Going concern and relevance.
d. Relevance and faithful representation.

11. Relevant financial information

a. is information that is verifiable.
b. is information that is capable of making a difference in a decision made by users.
c. is information that is useful.
d. is information that is neutral.

12. Financial information is capable of making a difference in decisions (i.e., relevance fundamental qualitative
characteristic) if it has
a. Predictive value and understandability.
b. Verifiability and neutrality.
c. Confirmatory value and comparability.
d. Predictive value and confirmatory value.

13. To be a perfectly faithful representation according to the Conceptual Framework, a depiction of financial
information would have the three characteristics of
a. Completeness, neutrality, and freedom from error.
b. Predictive value, confirmatory value, and materiality.
c. Comparability, consistency, and materiality.
d. Predictive value, consistency, and reliability.

14. Neutrality of financial information means

a. A depiction includes all information necessary for a user to understand the phenomenon being depicted,
including all necessary descriptions and explanations.
b. A depiction is without bias in the selection or presentation of financial information.
c. Not supported by the exercise of prudence.
d. Slanted or manipulated to increase the probability that financial information will be received favorably
or unfavorably by users.

15. This refers to the exercise of caution when making judgements under conditions of uncertainty. It means that
assets and income are not overstated and liabilities and expenses are not understated. Equally, it does not
allow for the understatement of assets or income or the overstatement of liabilities or expenses.
a. Professional judgment.
b. Prudence.
c. Perfection.
d. Estimation.

16. Which of the following statements about materiality is not correct?

a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a
reasonable person.
d. It is not an entity-specific aspect of relevance with a specified uniform quantitative threshold.

17. Financial information should be verifiable in order to enhance

a. Relevance.
b. Comparability.
c. Faithful representation.
d. Consistency.

18. The qualitative characteristic that enables users to identify and understand similarities in, and differences
among, items.
a. Comparability.
b. Verifiability.
c. Understandability.
d. Timeliness.

19. The Conceptual Framework identifies four enhancing qualitative characteristics of financial information. For
which of these characteristics is disclosure of accounting policies particularly important?
a. Verifiability
b. Timeliness
c. Comparability

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 d. Understandability

20. It refers to the use of the same methods for the same items, either from period to period within a reporting
entity or in a single period across entities.
a. Comparability.
b. Consistency.
c. Matching.
d. Conformity.

21. It helps assure users that information faithfully represents the economic phenomena it purports to represent.
It means that different knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful representation.
a. Comparability.
b. Verifiability.
c. Understandability.
d. Timeliness.

22. This means having information available to decision-makers in time to be capable of influencing their
decisions.
a. Comparability.
b. Verifiability.
c. Understandability.
d. Timeliness.

23. Information that is presented in a clear fashion, so that reasonably informed users of that information can
interpret it is an example of
a. Relevance.
b. Faithful representation.
c. Understandability.
d. Comparability.

24. According to the conceptual framework, the relevance of providing information in financial statements is
subject to the constraint of
a. Comparability.
b. Cost-benefit.
c. Reliability.
d. Faithful representation.

25. Which of the following best describes the cost-benefit constraint?

a. The benefits of the information must be greater than the costs of providing it.
b. Financial information should be free from cost to users of the information.
c. Costs of providing financial information are not always evident or measurable, but must be considered.
d. All of the choices are correct.

26. To help users of financial statements to identify and assess changes and trends, financial statements also
provide comparative information for at least
a. One preceding reporting period.
b. Two preceding reporting periods.
c. Three preceding reporting periods.
d. Four preceding reporting periods.

27. The Conceptual Framework identifies an underlying assumption in preparing financial statements. This is:
a. Going concern
b. Materiality
c. Substance over form
d. Accruals

28. Which of the following is an implication of the going concern assumption?

a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and significant.
d. All of these.

29. According to the Conceptual Framework, which of the following is incorrect about the reporting entity?
a. It is an entity that is required, or chooses, to prepare financial statements.
b. It can be a single entity or a portion of an entity or can comprise more than one entity.
c. It is not necessarily a legal entity.
d. It is the perspective of any particular group of the entity's existing or potential investors, lenders or
other creditors.
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30. If a reporting entity comprises both the parent and its subsidiaries, the reporting entity's financial statements
are referred to as
a. Consolidated financial statements.
b. Unconsolidated financial statements.
c. Combined financial statements.
d. Complete set of financial statements.

31. If a reporting entity is the parent alone, the reporting entity's financial statements are referred to as
a. Consolidated financial statements.
b. Unconsolidated financial statements.
c. Combined financial statements.
d. Complete set of financial statements.

32. If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship,
the reporting entity's financial statements are referred to as
a. Consolidated financial statements.
b. Unconsolidated financial statements.
c. Combined financial statements.
d. Complete set of financial statements.

33. The elements of financial statements linked to a reporting entity’s financial position (economic resources and
claims) do not include
a. Assets.
b. Liabilities.
c. Equity.
d. Income.

34. The elements of financial statements linked to changes in economic resources and claims reflecting a reporting
entity’s financial performance include
a. Income.
b. Expenses.
c. Both a and b.
d. Neither a nor b.

35. Which of the following types of accounts show how resources came (claim) into a firm?
a. Liabilities.
b. Equity.
c. Assets.
d. Both liabilities and equity.

36. Equity is
a. A present economic resource controlled by the entity as a result of past events. An economic resource
is a right that has the potential to produce economic benefits.
b. A present obligation of the entity to transfer an economic resource as a result of past events.
c. The residual interest in the assets of the entity after deducting all its liabilities.
d. Contributions from holders of equity claims, and distributions to them.

37. According to the Conceptual Framework, the definition of an asset does not include
a. Right.
b. Potential to produce economic benefits.
c. Control.
d. Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating
to contributions from holders of equity claims.

38. Rights that have the potential to produce economic benefits take many forms, including
a. Rights to receive cash, goods or services.
b. Rights to exchange economic resources with another party on favorable terms.
c. Rights to benefit from an obligation of another party to transfer an economic resource if a specified
uncertain future event occurs.
d. All of the above.

39. Which of the following statements about ‘potential to produce economic benefits’ in the definition of an asset
is incorrect according to the Conceptual Framework?
a. An economic resource is a right that has the potential to produce economic benefits.
b. For potential to produce economic benefits to exist, it needs to be certain that the right will produce
economic benefits.
c. A right can meet the definition of an economic resource, and hence can be an asset, even if the
probability that it will produce economic benefits is low.
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 d. Low probability to produce economic benefits might affect what information to provide about the asset
and how to provide that information, including decisions about whether the asset is recognized and how
it is measured.

40. According to the Conceptual Framework, which of the following provides a link of economic resource to an
entity?
a. Right.
b. Potential to produce economic benefits.
c. Control.
d. Past event.

41. It refers to the present ability of an entity to direct the use of the economic resource and obtain the economic
benefits that may flow from it. It also includes the present ability to prevent other parties from directing the
use of the economic resource and from obtaining the economic benefits that may flow from it.
a. Right.
b. Potential to produce economic benefits.
c. Control.
d. Past event.

42. According to the Conceptual Framework, for a liability to exist, three criteria must all be satisfied. Which is
not one of them?
a. The entity has an obligation.
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of past events.
d. The obligation has high probability of transfer of an economic resource.

43. It refers to a duty or responsibility that an entity has no practical ability to avoid.
a. Transfer.
b. Obligation.
c. Settlement.
d. Incurrence.

44. It refers to a contract, or a portion of a contract, that is equally unperformed—neither party has fulfilled any
of its obligations, or both parties have partially fulfilled their obligations to an equal extent.
a. Executory contract.
b. Financial contract.
c. Unfulfilled contract.
d. Unsigned contract.

45. According to the Conceptual Framework, the process of reporting an item in the financial statements of a
reporting entity is
a. Allocation.
b. Matching.
c. Realization.
d. Recognition.

46. The amount at which an asset, a liability or equity is recognized in the statement of financial position is
referred to as its
a. Carrying amount.
b. Fair value.
c. Cost.
d. Realizable value.

47. This measurement basis provides monetary information about assets, liabilities and related income and
expenses, using information derived, at least in part, from the price of the transaction or other event that gave
rise to them.
a. Historical cost.
b. Fair value.
c. Value in use.
d. Current cost.

48. Current value measures provide monetary information about assets, liabilities and related income and
expenses, using information updated to reflect conditions at the measurement date. Current value
measurement bases include
a. Fair value.
b. Value in use for assets and fulfilment value for liabilities.
c. Current cost.
d. All of the above.

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49. It refers to the price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date.
a. Fair value.
b. Value in use.
c. Fulfilment value.
d. Current cost.

50. It refers to the present value of the cash flows, or other economic benefits, that an entity expects to derive
from the use of an asset and from its ultimate disposal.
a. Fair value.
b. Value in use.
c. Fulfilment value.
d. Current cost.

51. It refers to the present value of the cash, or other economic resources, that an entity expects to be obliged to
transfer as it fulfils a liability. Those amounts of cash or other economic resources include not only the
amounts to be transferred to the liability counterparty, but also the amounts that the entity expects to be obliged
to transfer to other parties to enable it to fulfil the liability.
a. Fair value.
b. Value in use.
c. Fulfilment value.
d. Current cost.

52. It refers to the cost of an equivalent asset at the measurement date, comprising the consideration that would
be paid at the measurement date plus the transaction costs that would be incurred at that date.
a. Current cost of an asset.
b. Historical cost of an asset.
c. Current cost of a liability.
d. Historical cost of a liability.

53. Which of the following is incorrect regarding value in use and fulfilment value?
a. They do not include transaction costs, except those that an entity expects to incur on the ultimate
disposal of the asset or on fulfilling the liability
b. They reflect entity-specific assumptions.
c. They reflect market-participant assumptions.
d. They are determined using cash-flow-based measurement techniques.

54. It refers to the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics
for presentation and disclosure purposes. Such characteristics include—but are not limited to—the nature of
the item, its role (or function) within the business activities conducted by the entity, and how it is measured.
a. Classification.
b. Grouping.
c. Segregation.
d. Aggregation.

55. This occurs when an entity recognizes and measures both an asset and liability as separate units of account,
but groups them into a single net amount in the statement of financial position. This is generally not
appropriate when used for dissimilar items.
a. Unit of account.
b. Offsetting.
c. Classification.
d. Grouping.

56. Income and expenses are classified and included in

a. Profit or loss.
b. Other comprehensive income.
c. Either a or b.
d. Neither a nor b.

57. Which of the following is the correct concept of capital according to the Conceptual Framework?
Financial capital Physical capital
(money or purchasing (operating capability)
power)
a. Net assets or equity Productive capacity
b. Productive capacity Net assets or equity
c. Net assets or equity Net assets or equity
d. Productive capacity Productive capacity

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58. Which concept of capital is adopted by most entities in preparing their financial statements.
a. Financial capital.
b. Physical capital.
c. Either a or b.
d. Neither a nor b.

59. The selection of the appropriate concept of capital by an entity should be based on the needs of the users of
its financial statements. If the users of financial statements are primarily concerned with the maintenance of
nominal invested capital or the purchasing power of invested capital, which of the following concept of capital
should be adopted?
a. Financial capital.
b. Physical capital.
c. Either a or b.

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