Conceptual Framework

1. A soundly developed conceptual framework of concepts and objectives should

a. increase financial statement users' understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly soluble.
d. all of these.

2. A Standard sometimes contains requirements that depart from the Conceptual Framework. In such
cases,
a. the requirements of the Conceptual Framework will prevail over those of the Standard.
b. the departure is explained in the ‘Basis for Conclusions’ on that Standard.
c. the entity’s management shall formulate its own accounting policy and disregards both the
requirements of the Conceptual Framework and the Standard.
d. A Standard should never depart from the Conceptual Framework.

3. The overall objective of financial reporting is to provide information

a. about an entity's assets, liabilities, and equity.
b. about an entity's financial performance during a period.
c. that is useful to primary users in making economic decisions about providing resources to the
entity.
d. that allows owners to assess management's performance.

4. The two primary qualities that make accounting information useful for decision making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. faithful representation and relevance.

5. According to the Conceptual Framework, predictive value relates to

Relevance Faithful representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No

Skill-building Activities
MULTIPLE CHOICE.
1. Which of the following is considered a qualitative factor in making materiality judgments?
a. the context of an item in relation to the current economic state of the environment where the
entity operates.
b. 10% of profit or loss, in absolute terms
c. 5% of total revenues
d. 1% of total assets
2. Which of the following statements about materiality is not correct?
a. An item must make a difference; otherwise, it need not be reported.
b. Materiality is affected by an item’s relative size and/or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a
reasonable person.
d. All of these are correct statements about materiality.

3. The Filipino adage “Aanhin mo pa ang damo pag patay na ang kabayo” relates to which of the
following qualitative characteristics?
a. Relevance
b. Timeliness
c. Faithful representation
d. Comparability

4. When information about two different entities has been prepared and presented in a similar
manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency.
d. comparability.

5. According to the Conceptual Framework, physical count of inventory is an example of

a. direct verification.
b. indirect verification.
c. timeliness.
d. relevance.

6. Information is considered relevant when it

a. can be depended on to represent the economic conditions and events that it is intended to
represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

7. The quality of information that gives assurance that it is reasonably free of error and bias and
provides a true, correct and complete depiction of what it purports to represent is
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.

8. Information is neutral if it
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information.
c. has no impact on a decision maker.
d. is free from bias toward a predetermined result.

9. Decision makers vary widely in the types of decisions they make, the methods of decision making
they employ, the information they already possess or can obtain from other sources, and their
ability to process information. Consequently, for information to be useful there must be a linkage
between these users and the decisions they make. This link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.

10. Which of the following is considered a pervasive constraint by the Conceptual Framework?
a. Cost constraint
b. Verifiability
c. Conservatism
d. Cost restraint

11. Which of the following is not an element that is directly related to the measurement of an entity’s
financial position?
a. assets
b. liabilities
c. equity
d. income

12. The revised Conceptual Framework defines an asset as

a. a resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
b. 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.
c. a physical object that can produce economic benefits for the entity.
d. All of these.

13. Which of the following is most likely to result in the recognition of a liability?
a. Customers become entitled to rebates for their past purchases.
b. Intention to acquire inventories in a future period.
c. Entering into a purchase contract for future delivery.
d. Agreeing on an irrevocable future commitment that is not burdensome at present.

14. Which of the following is not an indication of an economic resource’s potential to produce
economic benefits for the entity?
a. The resource cannot be used in the entity’s operations but has a resale value.
b. The resource has no use to the entity but it can be exchanged for another resource with
another party.
c. The entity does not intend to sell or use the resource but instead distribute it to the owners as
dividends.
d. The economic benefits from the resource were already consumed by the entity.

15. Which of the following correctly reflects the Conceptual Framework definitions of income and
expenses?
Income Expenses
a. Increase in assets Increase in liabilities
b. Decrease in assets Decrease in liabilities
c. Owner contributions Owner distributions
d. Decrease in equity Increase in equity

Check for Understanding (Graded Quiz)

MODIFIED TRUE OR FALSE:
TRUE 1. The Conceptual Framework assists the International Accounting
Standards Board (IASB) in developing Standards that are based on consistent concepts.
FALSE2. The Conceptual Framework is part of PFRS.
FALSE3. When there is a conflict between the Conceptual Framework and a PFRS, the Conceptual
Framework will prevail.
TRUE 4. In the absence of a standard, management shall consider the Conceptual Framework in making
its judgment in developing and applying an accounting policy that results in useful information.
FALSE5. The Conceptual Framework provides the concepts regarding the Quantitative characteristics of
useful financial information.
TRUE6. The Conceptual Framework provides the concepts regarding the Concepts of capital and capital
maintenance.
TRUE 7. The objective of general purpose financial reporting is to provide financial information about
the reporting entity that is useful to primary users in making decisions about providing resources to the
entity.
FALSE 8. Primary users are those who can demand information directly from reporting entities.
TRUE 9. The fundamental qualitative characteristics are the characteristics that make information useful
to users.
FALSE10. Relevant information has predictive value and comparability value
FALSE11. Materiality is an ‘industry-specific’ aspect of relevance.
FALSE12. An information is said to be faithfully represented when it as objectivity - information is
selected or presented without bias.
FALSE13. Different users could reach consensus as to what the information purports to represent refers
to the Enhancing Qualitative Characteristics Comparability.
TRUE 14. The objective of general purpose financial statements is to provide financial information about
the reporting entity’s assets, liabilities, equity, income and expenses that is useful in assessing
management’s stewardship over economic resources
TRUE 15. Financial statements are normally prepared on the assumption that the reporting entity is a
going concern, meaning the entity has neither the intention nor the need to end its operations in the
foreseeable future.
FALSE16. A reporting entity must be a legal entity.
FALSE17. Equity relates to the financial performance of an entity.
FALSE 18. Asset is a future 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.
TRUE 19. Asset refers to a right, and not necessarily to a physical object, e.g., the right to use, sell, lease
or transfer a building.
TRUE 20. The potential to produce economic benefits need not be certain or even likely – what is
important is that the right already exists and that, in at least one circumstance, it would produce
economic benefits for the entity.
TRUE 21. Control means the entity has the exclusive right over the benefits of an asset and the ability to
prevent others from accessing those benefits.
FALSE 2. Liability is a present obligation of the entity to receive an economic resource as a result of past
events.
TRUE 23. An obligation can be either legal obligation or constructive obligation.
TRUE 24. An executory contract establishes a combined right and obligation to
exchange economic resources.
FALSE 25. Income is an increase in equity including those contributions from
holders of equity claims.
FALSE26. Recording is the process of including in the statement of financial
position or the statement(s) of financial performance an item that meets the definition of one of the
financial statement elements.
FALSE27. Deletion is the removal of a previously recognized asset or liability from the entity’s statement
of financial position.
FALSE 28. Market value is 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.
TRUE 29. Information is communicated through presentation and disclosure in the financial statements.
TRUE 30. Under the physical concept of capital, capital is regarded as the entity’s productive capacity,
e.g., units of output per day.