Preliminary Examination

Conceptual Framework and Accounting Standards

BSMA 2-A, 2-B and 2-C

Choose the correct answer from the choices provided.

1. All of the following are considered internal events, except:

a. Losses from flood, earthquake, fire and other calamities
b. Vandalism committed by the entity’s employees
c. Transfer of goods from work-in-process to finished goods inventory
d. Transformation of biological assets from immature to mature

2. Which of the following is considered an internal user of AAA Inc’s financial reports?
a. Mr. Cupido deciding whether to invest in AAA Inc. Mr. Cupido uses entity’s financial statements
in making its investment decisions.
b. Mr. Yoso, a member of AAA Inc’s board of directors, uses financial reports to make decisions
regarding the financial and operational affairs of AAA Inc.
c. BBB Inc, a bank, requires AAA Inc to submit audited financial statements in conjunction to a loan
being applied for by AAA Inc.
d. Ms. Sipi, a shareholder of AAA Inc, is deciding whether to hold or sell her shareholdings in AAA
Inc. Ms. Sipi uses AAA Inc’s financial statements in making its “hold or sell” decisions.

3. In explaining the meaning of the term ‘obligation’ in the definition of a liability, the Conceptual
Framework states:
a. That an obligation is a duty or responsibility that an entity has no practical ability to avoid
b. That an obligation can arise from a duty or responsibility conditional on a future action that the
entity itself may take, if the entity has no practical ability to avoid taking that action
c. That an obligation can arise from an entity’s customary practices, published policies or specific
statements, if the entity has no practical ability to avoid those practices, policies or statements
d. All of the above

4. Statement 1: All events and transactions of an entity are recognized the books of accounts
Statement 2: The basic purpose of accounting is to provide information
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

5. 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
6. Preparing financial statements at least annually is an application of which of the following
accounting concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period

7. Statement 1: The entity's management is responsible for the selection of appropriate accounting
policies, not the accountant
Statement 2: Yin Inc's accounting period starts on July 1 and ends on June 30 of the following
year. Yin Inc uses a fiscal year period.
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

8. Statement 1: The financial statements are the only source of information

Statement 2: General purpose financial statements are those statements that cater to the
common and specific needs of a wide range of external users.
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

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

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

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

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

11. 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.
12. Argus Inc 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. Argus Inc applying which of the
following accounting concepts?
a. Accrual basis
b. Prudence
c. Time period
d. Stable monetary unit

13. Preparing financial statements at least annually is an application of which of the following
accounting concepts?
a. Time period
b. Accrual basis
c. Stable monetary unit
d. Historical cost

14. An entity engages in importing and exporting activities. At the end of the period, the entity has
an assets and liabilities denominated in foreign currencies. When preparing its financial
statements, the entity translates these assets and liabilities to pesos. The entity most likely to be
applying which of the following accounting concepts?
a. Double entry
b. Accrual basis
c. Stable monetary unit
d. Time period

15. On June 1, 2023, a customer bought goods from an seller and promises to pay the selling price
on June 30, 2023. The seller recognizes sales revenue on June 1 rather than June 30. This is an
application of which of the following accounting concepts?
a. Prudence
b. Accrual basis
c. Consistency
d. Materiality

16. The proper application of accounting principles is most dependent upon the:
a. Management
b. Accountant
c. Auditor
d. Chief executive Officer

17. Which of the following statements is correct?

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.
18. 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
II. Judgment
III. Pronouncement of other standard-setting bodies
IV. Conceptual Framework

a. I, III, Il and IV
b.I, IV. II and III
c. I Il, IV and Ill
d. I, Il, Ill and IV

19. 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 andevents 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.

20. Which of the following statements is incurred 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 operation for an
indefinite period of time.
c. Under the Cost-benefit concept, the cost of processing and communicating information should
exceed the benefits derived from it.
d. Under the Time Period Accounting period concept, the life of the business is divided into series
of reporting periods.

21. 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.
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.

22. Which of the following is considered valued by fact rather than by opinion?
a. Depreciation
b. Costs of goods sold
c. Discount on share capital
d. Retainer earnings
23. Entity Ko is owned by Mr. Ry and Ms. You. Which of the following transactions does not violate
the separate entity concept and therefore is appropriately recorded in the accounting records of
Entity Ko?
a. Mr. Ry purchases groceries for his home consumption.
b. Mr. Ry gives Ms. You chocolate and flowers on Valentine's Day.
c. Ms. You provides capital to Entity Ko.
d. Ms. You provides capital to Entity Boo, another business entity

24. According to the Conceptual Framework, these are the qualitative characteristics that make
information useful to users:
a. Fundamental
b. Enhancing
c. Relevance
d. Comparability

25. Information that is capable of making a difference in the decisions made by users has this
qualitative characteristic.
a. Relevance
b. Faithful representation
c. Timeliness
d. Verifiability

26. When making materiality judgments, the overriding considerations 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. Both B and C

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

28. 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.
29. Information has this qualitative characteristics if difference knowledgeable and independent
observes could reach consensus although not necessarily complete agreement that a particular
depiction is a faithful representation.
a. Relevance
b. Faithful representation
c. Verifiability
d. Comparability

30. The conceptual framework uses the term claims against the reporting entity to refer to
a. Expenses
b. Liability
c. Equity
d. Both B and C

31. 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

32. Company Aldous is assessing whether an item meets the definition of a financial statement
element. The Company considers the transaction’s substance and economic reality rather than
merely its legal form. The Company is applying which of the following accounting concepts?
a. Substance over form
b. Form over substance
c. Accrual
d. Verifiability

33. 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.
c. A Physical object (a duty to pay cash or other resources)
d. All of these

34. 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
35. 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.

36. 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

37. 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

38. 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
c. Meet most of the common needs of most primary users
d. Meet none of the needs of users of financial information

39. These are users of financial information who are not in a position to require a reporting entity to
prepare reports tailored to their particular information needs.
a. Primary users
b. Secondary users
c. External users
d. Beneficial users

40. Which of the following is not one of the primary users listed in the Conceptual Framework?
a. Investors
b. Lenders
c. Creditors
d. Debtors

41. Which of the following would least likely to need general purpose financials statements in
making economic decisions?
a. Stockholders
b. Potential investors
c. Management
d. Lenders
42. 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.

43. 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. Php 25,000 or more
d. The context of an item in relation to a current crisis in the banking and insurance industry.

44. Under this concept of capital maintenance, profit is earned if net assets increased during the
period after excluding the effects of transactions with the owners.
a. Financial capital maintenance
b. Physical capital maintenance
c. Projected capital maintenance
d. Past capital maintenance

45. According to the revised conceptual framework, income and expenses are classified as either
a. Recognized in profit or loss or in other comprehensive income
b. Gains and revenues and expenses and losses, respectively
c. Contributions from or distributions to the entity’s owners
d. Increases or decreases in the entity’s assets or liabilities

46. 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
d. Paying in advance the purchase price of inventories for future delivery.

47. Aulus Inc is making a materiality judgment. The Company considers the size of the impact of an
item to be material if it exceeds 5% of the total assets. What type of materiality assessment is
this?
a. Qualitative
b. Relevance
c. Quantitative
d. Requirement of a Standard
48. Two primary users are using the financial information of AAA Inc. If User 1 concludes that AAA
Inc.’s sales has increased while User 2 concludes that it has decreased, AAA Inc’s financial
information is not
a. Relevant
b. Faithfully represented
c. Comparable
d. Verifiable

49. Company ZZZ deliberately overstated its liabilities from Php 10 million to 12 million. What
qualitative characteristics is violated?
a. Relevance
b. Faithfully representation
c. Timeliness
d. Understandability

50. 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

51. Entity CCC determined that a previously recognized asset no longer meet the definition of an
asset. Accordingly, Entity CCC removed the carrying amount of the asset from the balance sheet
and recognized it as an expense. Entity CCC is applying which of the following principles?
a. Matching
b. Recognition
c. Derecognition
d. Presentation and disclosure

52. Statement 1: 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.
Statement 2: 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
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

53. Statement 1: To meet the objectives of general purpose financial reporting, a Standard
sometimes contains requirements that depart from the Conceptual Framework
 Statement 2: The Conceptual Framework is concerned with the provision of financial
information to both external and internal users.
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

54. Statement 1: The Conceptual Framework defines income and expenses in terms of changes in
assets and liabilities.
Statement 2: Legal enforceability of a right, for example ownership, is necessary for control over
an economic resources to exist
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

55. Statement 1: Measuring an asset at historical cost will always result in the same carrying
amount of the asset from period to period.
Statement 2: According to the Conceptual Framework, amortized cost measurement relates to
historical cost, rather than current value
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

56. Statement 1: All changes in an entity’s economic resources and claims to those resources result
from the entity’s financial performance
Statement 2: The qualitative characteristics of useful information apply only to the financial
information provided in the financial statements
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

57. How does the Conceptual Framework explain the role of stewardship?
a. Providing information needed to assess management's stewardship is identified as an additional
objective of financial reporting, equal in prominence to providing financial information useful to
users in making decisions relating to providing resources to the entity
b. Decisions relating to providing resources to the entity depend on users' assessment of the
amount, timing and uncertainty of the prospects for future net cash inflows to the entity and on
their assessment of management's stewardship
c. Providing information needed to assess stewardship is more important than providing
information needed to assess the prospects for future cash inflows to the entity
d. Financial reports are not intended to provide information needed to assess stewardship
58. For information to be relevant, it has to possess:
a. Only predictive value
b. Only confirmative value
c. Both predictive and confirmatory value
d. Either predictive or confirmatory value, or both

59. Recognition is the process of:

a. Capturing, for inclusion in the statement of financial position or the statement(s) of financial
performance, an item that meets the definition of one of the elements of the financial
statements—an asset, a liability, equity, income or expenses
b. Determining where an item should be presented in the financial statements
c. Sorting assets, liabilities, equity, income or expenses on the basis of shared characteristics
d. Adding together of assets, liabilities, equity, income or expenses that have shared characteristics

60. The Conceptual Framework describes prudence as:

a. A bias towards understating assets or income and towards overstating liabilities or expenses
b. A preference towards the earlier recognition of expenses and liabilities than of income and
assets
c. The exercise of caution when making judgements under conditions of uncertainty
d. A form of accounting conservatism