Since 1977
FAR
FAR.2943 – Conceptual Framework for Financial Reporting
DISCUSSION QUESTIONS
1. Which statement is incorrect regarding the Conceptual
Framework for Financial Reporting?
a. Serves as a guide in developing future PFRSs.
b. Serves as a guide in resolving accounting issues
that are not addressed directly in existing PFRSs.
c. Is not a PFRS and hence does not define standards
for any particular measurement or disclosure issue.
d. Prevails in cases where there is conflict with a
PFRS.
2. The Conceptual Framework for Financial Reporting
addresses fundamental issues including
a. The objective of financial reporting
b. Characteristics that make financial information
useful
c. Definition, recognition, derecognition,
measurement, presentation and disclosure of the
elements of financial statements
d. All of these
3. The IASB revised the Conceptual Framework because
the previous version is
a. No longer relevant.
b. No longer useful.
c. Useful, but incomplete and needed improvements.
d. None of the above.
4. Revisions of the Conceptual Framework
a. Are no longer expected after the release of the
new Conceptual Framework.
b. Are expected every three to five years.
c. Will automatically lead to changes to the
Standards.
d. Will not automatically lead to changes to the
Standards.
5. Which of the following remained unchanged in the
2018 Conceptual Framework?
a. The reporting entity
b. Derecognition
c. Presentation and disclosure
d. Concepts of capital and capital maintenance
6. Which of the following is the foundation of the
Conceptual Framework?
a. The objective of general purpose financial
reporting.
b. A reporting entity concept.
c. The qualitative characteristics of, and the
constraint on, useful financial information.
d. The elements of financial statements.
7. What is the objective of financial reporting as indicated
in the conceptual framework?
a. Provide information that is useful to those making
investing and credit decisions.
b. Provide information that is useful to management.
c. Provide information about those investing in the
entity.
d. All of the above.
8. The ‘primary users’ of financial information include
I. Existing and potential investors
II. Existing and potential lenders and other creditors
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OCAMPO/OCAMPO
III. User group such as employees, customers,
government and their agencies, and the public
a. I only c. I and III only
b. I and II only d. I, II and III
9. The decisions of the ‘primary users’ involve
a. Buying equity and debt instruments.
b. Selling or holding equity and debt instruments
c. Providing or settling loans and other forms of
credit.
d. All of the above.
10. Which statements is false concerning users and their
information needs?
a. Lenders are interested in information that enables
them to determine whether their loans and the
interest on these loans will be paid when due.
b. The providers of risk capital and their advisers are
concerned with the risk inherent in, and return
provided by their investment
c. Government and its agencies have an interest in
information about the continuance of an enterprise
especially when they have long-term involvement
or are dependent on the enterprise.
d. Employees and their representative groups are
interested in information about the stability and
profitability of the entity.
11. The users of financial statements who are interested in
information that enables them to determine whether
the amounts owing to them will be paid when due
a. Lenders
b. Investors
c. Customers
d. Suppliers and other trade creditors
12. They are interested in information about trends and
recent developments in the prosperity of the enterprise
and the range of its activities
a. Investors c. Public
b. Lenders d. Customers
13. The “fundamental” qualitative characteristics are
a. Relevance and reliability
b. Relevance and faithful representation
c. Timeliness and verifiability
d. Understandability and comparability
14. Qualitative characteristic that financial information
must possess to be useful to the primary users of
general purpose financial reports include
a. Timeliness c. Understandability
b. Verifiability d. Faithful representation
15. Qualitative characteristics that make useful information
more useful include
a. Relevance c. Comparability
b. Faithful representation d. All of these
16. Accounting information is considered to be relevant
when it
a. Is capable of making a difference in a decision.
b. Is verifiable and neutral.
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c. Can be depended on to represent the economic a. Information is available to decision-makers in time

conditions and events that it is intended to to be capable of influencing their decisions.
represent. b. Different knowledgeable and independent
d. Is understandable by reasonably informed users of observers could reach consensus, although not
accounting information. necessarily complete agreement, that a particular
depiction is a faithful representation.
17. Financial information is capable of making a difference c. Financial reports are prepared for users who have
in decisions a reasonable knowledge of business and economic
a. If it can be used as an input to processes activities and who review and analyze the
employed by users to predict future outcomes. information with diligence.
b. If it provides feedback about (confirms or changes) d. Enables users to identify and understand
previous evaluations. similarities in, and differences among, items.
c. Both a and b.
d. Neither a nor b. 26. Comparability of financial information depends on
a b c d
18. What is an entity-specific aspect of relevance? Consistency yes yes no no
a. Predictive value c. Timeliness Regular reporting periods no yes no yes
b. Confirmatory value d. Materiality
27. Decision makers vary widely in the types of decisions
19. Which statement is incorrect regarding ‘materiality’? they make, the methods of decision making they
a. Information is material if omitting it or misstating employ, the information they already possess or can
it could influence decisions that users make on the obtain from other sources, and their ability to process
basis of financial information about a specific information. Consequently, for information to be useful
reporting entity. there must be a linkage between these users and the
b. Materiality is based on the nature or magnitude, or decisions they make. This link is
both, of the items to which the information relates a. Relevance. c. Understandability.
in the context of an individual entity’s financial b. Reliability. d. Materiality.
report.
c. The IASB does not specify a uniform quantitative 28. Which of the following enhancing qualitative
threshold for materiality or predetermine what characteristics can make irrelevant or not faithfully
could be material in a particular situation. represented information useful?
d. None of these. a. Timeliness c. Understandability
b. Verifiability d. None of these
20. To be a faithful representation as described in the
Conceptual Framework, information must be all of the 29. The conceptual framework includes a cost-benefit
following, except: constraint. Which of the following best describes the
a. Complete. c. Confirmatory. cost-benefit constraint?
b. Free from error. d. Neutral. a. The benefits of the information must be greater
than the costs of providing it.
21. Information is neutral if it b. Financial information should be free from cost to
a. Is free from bias toward a predetermined result users of the information.
b. Would have no impact on a decision maker c. Costs of providing financial information are not
c. Provides benefits which are at least equal to the always evident or measurable, but must be
costs of its preparation considered.
d. Can be compared with similar information about an d. All of the choices are correct.
enterprise at other points in time
30. All of the following represent costs of providing
22. The 2018 Conceptual Framework explicitly referred to financial information except
a. Prudence a. Preparing. c. Auditing.
b. Substance over form b. Disseminating. d. Accessing capital.
c. Stewardship
d. All of these 31. Which statement is incorrect regarding a reporting
entity?
23. Which statement is incorrect regarding prudence? a. A reporting entity is an entity that is required, or
a. Neutrality is supported by the exercise of chooses, to prepare financial statements
prudence. b. A reporting entity should be a legal entity.
b. Prudence is the exercise of caution when making c. A reporting entity could be a portion of an entity or
judgments under conditions of uncertainty. comprise more than one entity.
c. Prudence does not allow for overstatement of d. A reporting entity does not comprise an arbitrary
assets, liabilities, income or expenses. or incomplete collection of assets, liabilities,
d. Prudence allows for understatement of assets, equity, income and expenses.
liabilities, income or expenses.
32. The objective of financial statements is to provide
24. Which of the following helps users make good financial information about the reporting entity’s
decisions? assets, liabilities, equity, income and expenses that is
a. A faithful representation of an irrelevant useful to users of financial statements in assessing
phenomenon. a. The prospects for future net cash inflows to the
b. An unfaithful representation of a relevant reporting entity.
phenomenon. b. Management’s stewardship of the entity’s
c. Both a and b. economic resources.
d. Neither a nor b. c. Both a and b.
d. Neither a nor b.
25. Which statement relates to comparability?

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33. General purpose financial statements
a. Are those intended to meet the needs of users who
are not in a position to require an entity to prepare
reports tailored to their particular information
needs.
b. Provide all of the information that financial
statements’ users need.
c. Are designed to show the value of a reporting
entity since they provide information to help
existing and potential investors, lenders and other
creditors to estimate the value of the reporting
entity.
d. All of the above.
34. Which of the following financial statements provide
information about assets, liabilities, equity, income and
expenses of two or more entities that are not all linked
by a parent-subsidiary relationship?
a. Consolidated financial statements
b. Unconsolidated financial statements
c. Combined financial statements
d. Separate financial statements
35. The underlying assumption(s) in the preparation of
financial statements include
a. Going concern c. Both a and b
b. Accrual basis d. Neither a nor b
36. Which statement is incorrect regarding the going
concern assumption?
a. The entity is a going concern and will continue in
operation for the foreseeable future.
b. The entity has neither the intention nor the need to
enter liquidation or to cease trading.
c. If such an intention or need exists, the financial
statements may have to be prepared on a different
basis and, if so, the basis used is disclosed.
d. None, all the statements are correct.
37. 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.
38. Which statement is incorrect regarding the elements of
financial statements?
a. These are the grouping, into broad classes, of the
financial effects of transactions and other events
according to economic characteristics.
b. The elements directly related to the measurement
of financial position are assets, liabilities and
equity.
c. The elements directly related to the measurement
of financial performance are revenues and gains.
d. None of the above.
39. Which statement is incorrect regarding ‘recognition’?
a. The process of 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 financial
statements.
b. It involves depicting the item in one of those
statements—either alone or in aggregation with
other items—in words and by a monetary amount,
and including that amount in one or more totals in
that statement.
c. Both a and b.
d. Neither a nor b.
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40. In accordance with the 1989 Framework, an item that
meets the definition of an element should be
recognized if:
a. It is probable that any future economic benefit
associated with the item will flow to or from the
entity.
b. The item has a cost or value that can be measured
with reliability.
c. Both a and b.
d. Neither a nor b.
41. Which statement is incorrect regarding the new criteria
for recognition of the elements of financial statements?
a. The revised recognition criteria refer explicitly to
the qualitative characteristics of useful information.
b. The new criteria are intended develop a more
coherent set of concepts, not to increase or
decrease the range of assets and liabilities
recognized.
c. Both a and b.
d. Neither a nor b.
42. Which statement is incorrect regarding recognition of
the elements of financial statements?
a. Only items that meet the definition of an asset, a
liability or equity are recognized in the statement
of financial position.
b. Only items that meet the definition of income or
expenses are recognized in the statement of
financial performance.
c. All items that meet the definition of one of those
elements are recognized.
d. None of these.
43. The new Conceptual Framework defines ‘derecognition’
as
a. The removal of all or part of a recognized asset or
liability from an entity’s statement of financial
position.
b. The process of incorporating in the balance sheet
or income statement an item that meets the
definition of an element and satisfies the criteria
for recognition.
c. The process of determining the monetary amounts
at which the elements of the financial statements
are to be recognized and carried in the balance
sheet and income statement.
d. The sorting of assets, liabilities, equity, income or
expenses on the basis of shared characteristics for
presentation and disclosure purposes.
44. In accordance with the 1989 Framework, an asset is
defined 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 obligation of the entity arising from past
events, the settlement of which is expected to
result in an outflow from the entity of resources
embodying economic benefits.
c. The residual interest in the assets of the entity
after deducting all its liabilities.
d. Increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.
45. Which statement is incorrect regarding the new
definition of an asset?
a. An asset is a present economic resource controlled
by the entity as a result of past events.
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b. An economic resource is a right that has the
potential to produce economic benefits.
c. It clarified that an asset is the economic resource,
not the ultimate inflow of economic benefits.
d. It needs to be certain or likely that economic
benefits will arise.
b. Classifying information in a manner that groups
similar items and separates dissimilar items.
c. Aggregating information in such a way that it is not
obscured either by unnecessary detail or by
excessive aggregation.
d. Disregarding costs constraints.

46. Which statement is incorrect regarding the new 53. Under this concept, a profit is earned only if the
definition of a liability? financial (money) amount of the net assets at the end
a. A liability is a present obligation of the entity to of the period exceeds the financial (money) amount of
transfer an economic resource as a result of past net assets at the beginning of the period, after
events. excluding any distributions to, and contributions from,
b. An obligation is a duty or responsibility that the owners during the period.
entity has no practical ability to avoid.
c. It clarified that a liability is the obligation to Under this concept, a profit is earned only if the
transfer the economic resource, not the ultimate physical productive capacity (or operating capability)
outflow of economic benefits. of the enterprise (or the resources or funds needed to
d. Retained the ‘expected flow’ criterion. achieve that capacity) at the end of the period exceeds
the physical productive capacity at the beginning of
47. Which statement is incorrect regarding equity? the period, after excluding any distributions to, and
a. Equity is the residual interest in the assets of the contributions from, owners during the period.
entity after deducting all its liabilities.
b. The amount at which equity is shown in the First statement Second statement
balance sheet is dependent on the measurement of a. Physical capital Financial capital
assets and liabilities. b. Financial capital Physical capital
c. Equity may be sub-classified in the balance sheet. c. Financial capital Financial capital
d. None, all the statements are correct. d. Physical capital Physical capital

48. Information about income and expenses is 54. The balance sheet of Lai Company showed the
a. Less important as information about assets and following on January 1 and December 31 of the current
liabilities. year:
b. More important as information about assets and
January 1 December 31
liabilities.
Total assets 10,000,000 15,000,000
c. Just as important as information about assets and
Total liabilities 3,000,000 4,000,000
liabilities.
Contributed capital 5,000,000
d. Not important.
During the year, Lai issued ordinary shares with par
49. Factors to consider in selecting a measurement basis value of P2,000,000 at a premium of P1,000,000. On
include December 31, Lai paid dividends of P2,500,000. What
I. Characteristics of the asset or liability was the net income for the current year?
II. Contribution to future cash flows a. P3,500,000 c. P4,000,000
III. Measurement inconsistency b. P4,500,000 d. P5,500,000
IV. Measurement uncertainty
SOLUTION GUIDE:
a. I, II, III and IV c. I, II and III only
b. I and II only d. I, II and IV only Equity, ending Pxx
Equity, beginning ( xx)
50. The following measurement bases provide information Net change in equity – Increase (Decrease) xx
updated to reflect conditions at the measurement date, Contributions from owners ( xx)
except Distribution to owners xx
a. Fair value c. Current cost Comprehensive income xx
b. Value in use d. Amortized cost Other comprehensive income (OCI) ( xx)
Profit or loss Pxx
51. In accordance with the 2018 Conceptual Framework,
historical cost
a. Provides information derived, at least in part, from 55. Which concept of capital should be adopted by an
the price of the transaction or other event that entity if the users of financial statements are primarily
gave rise to the item being measured. concerned with the maintenance of nominal invested
b. Is the price that would be received to sell an asset, capital or the purchasing power of invested capital?
or paid to transfer a liability, in an orderly a. Financial concept
transaction between market participants at the b. Physical concept
measurement date. c. Either a or b
c. Reflects entity-specific current expectations about d. Neither a nor b
the amount, timing and uncertainty of future cash
flows. 56. Which capital maintenance concept requires the
d. Reflects the current amount that would be paid to adoption of the current cost basis of measurement?
acquire an equivalent asset or received to take on a. Financial concept
an equivalent liability. b. Physical concept
c. Either a or b
52. Effective communication of information in financial d. Neither a nor b
statements does not require:
a. Focusing on presentation and disclosure objectives
and principles rather than focusing on rules. - now do the DIY drill -

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DO-IT-YOURSELF (DIY) DRILL

1. Which is (are) true concerning the Conceptual 9. What is meant by comparability when discussing
Framework? financial accounting information?
I. The framework sets out the concepts that underlie a. Information has predictive or feedback value.
the preparation and presentation of financial b. Information is reasonably free from error.
statements for external users. c. Information that is measured and reported in a
II. The framework is not PFRS and hence does not similar fashion across companies.
define standard for any particular measurement or d. Information is timely.
disclosure issue.
III. The framework is concerned with general-purpose 10. Changing the method of inventory valuation should be
financial statements including consolidated reported in the financial statements under what
financial statements. qualitative characteristic of accounting information?
a. I only c. I and III a. Understandability. c. Timeliness.
b. I and II d. I, II and III b. Verifiability. d. Comparability.

2. The Conceptual Framework includes all of the 11. Company A issuing its annual financial reports within
following, except: one month of the end of the year is an example of
a. Objective of financial reporting. which enhancing quality of accounting information?
b. Qualitative characteristics of accounting a. Neutrality. c. Predictive value.
information. b. Timeliness. d. Comparability
c. Elements of financial statements.
d. Supplementary information 12. Which of the following qualitative characteristics is
(are) included in the 2018 Conceptual Framework?
3. What is a purpose of having a conceptual framework? a. Substance over form c. Verifiability
a. To enable the profession to more quickly solve b. Prudence d. All of these
emerging practical problems.
b. To provide a foundation from which to build more 13. According to the Conceptual Framework, the
useful standards. usefulness of providing information in financial
c. Neither a nor b. statements is subject to the constraint of
d. Both a and b. a. Consistency
b. Materiality
4. One element of the objective of financial reporting is to c. Reliability
provide: d. Balance between benefit and cost
a. Information that is useful in assessing cash flow
prospects 14. Which of the following measurement attributes is not
b. Information about the liquidation values of the currently used in practice?
resources held by the enterprise a. Present value
c. Information about the investors in the business b. Net realizable value
entity c. Current replacement cost
d. Information that will attract new investors d. Inflation-adjusted cost

5. The underlying theme of the conceptual framework is 15. The following statements pertain to the provisions of
a. Decision usefulness. c. Reliability. Conceptual Framework on the concepts of Capital
b. Understandability. d. Comparability. Maintenance

6. What is the quality of information that enables users to Statement 1: The principal difference between two
better forecast future operations? concepts of capital maintenance is the treatment of the
a. Reliability. c. Comparability. effects of changes in the prices of assets and liability of
b. Materiality. d. Relevance. the entity.

7. When inventory is misstated, its presentation lacks: Statement II: The selection of the appropriate concept
a. Faithful representation of capital by an entity should be based on the needs of
b. Relevance the users of its financial statements.
c. Comparability
d. All of the choices are correct Statement III: The concept of capital maintenance
chosen by an entity shall determine the accounting
8. An implicit assumption in the Conceptual Framework is model used in the preparation of its financial
that statements.
a. Information must be decision-useful to all potential
users of financial reporting. a. Only statement I is false
b. General-purpose financial reporting is the primary b. Only statement II is false
source of information for users of financial c. Only statement III is false
reporting. d. None of the foregoing statements is false
c. Users need reasonable knowledge of business and
financial accounting matters to understand the
information contained in financial statements.
d. All of the choices are correct. J - end of FAR.2943 - J

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