Comprehesive Reser te Gteantel Agcouting and fe Reporttag SUGGESTED KEY ANSWERS iT A uiy_D 2 e 2{- 8 2} Dd 22] B- 3/8 13) 8 [231 p i 4] oc i4[ oc 24| a | 5] B i5 |B 25] B | 6| D> 16) E ra) 17|B s{B is| B o| D wis fc io[ A 20[ D 10Chapter 2: The Canceptaat Framework fon Fiaanctal Reporting CHAPTER 2: : THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING Nature of the Conceptual Framework for Financial Reporting > The Conceptual Framework forms the theoretical foundation of accounting. > It is the underlying theory for the development and revision of accounting standards. > Adocument that contains: + The concepts for general purpose financial reporting, and ‘Summary of the terms and concepts that underlie the preparation and presentation of financial statements urposes of the Con | Framework . > To assist the IASB in the development of existing and future accounting standards based on consistent concepts; > To assist financial statement preparers in the development of consistent accounting policies when no accounting standard applies to.a particular transaction or event, or when an accounting standard allows a choice of accounting policy or treatment; and > To assist all parties in understanding and interpreting the accounting standards. Authoritative Status of the Conceptual Framework > The applicability of the Conceptual Framework on a particular transaction shall be considered only when there is no accounting standard or interpretation that specifically deals with that particular transaction, > Note that theConceptual Framework is not an accounting standard. + In cases where there is a conflict between an accounting standard and the Conceptual Framework, the requirements of the accounting standard will prevail over the requirements of the Conceptual Framework. Contents of the Conceptual Framework for Financial Reporting i Title: ‘The Objective of General-Purpose Financial Reporting Qualitative Characteristics of Useful Financial Information Financial Statements and the Reporting Entity The Elements of Financial Statements Recognition and Derecognition 3 Measurement Presentation and Disclosure Concepts of Capital and Capital Maintenance S oNauawNe iComprchensine Reviewer tx Fleancial Hecsurting and Reporting Part 1 Overview of the Conceptual Framework } The following chart provides the structure of. the Conceptual Framework ] efor for Financ Fest ered | The why purpose of accounting Objective of Financial Reporting Qualitative a Sot | Hementsof eee nancial Useful Financial Statements Information " ‘Second levet The Bdge between the fist and hing) - Third lever Recognition, Measurement, and Disclosure Concepts The "how" = implemen Figure 2.1: Structure of the Conceptual Framework for Financial Reporting PART 1: The Objective of General-Purpose Financial Reporting > Obj ncial Reportit > This forms the foundation of the Conceptual Framework. > The “why” of accounting. 4 This serves as the goal or purpose of accounting. > The overall or general objective is to provide financial information that is useful for decision-making. Limitati Financial Repo! > General purpose financial reports: do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. ¥ are not designed to show the value of an entity but these reports provide information to help the primary users estimate the value of the entity. Y are intended to provide common information to users and cannot accommodate every request for information. ¥ are based on estimates and judgments rather than exact depiction. Users of Financial Information > The users of financial information are classified into: 1, Primary users, and 2. Other users 12eae =m SS SSS Chapter 2: The Conceptual Framework for Finanelat Reporting Primary users > The parties to whom general purpose financial reports are primarily directed. > The primary users are the following: ¥ Existing and potential investors, and ¥ Lenders and other creditors Other users > These are the users of financial information other than the primary users. > These types of users may find the general-purpose financial reports useful but these are not directed to them primarily. > Other users include, but not limited to, the following: Employees Customers Government and its agencies Suppliers General public SS488 PART 2: Qualitative Characteristics of Useful Financial Information ualitative Characteris f Useful Financial Inform: > The qualities (or attributes) that make financial information useful to the users in making economic decisions. Fundamental Qualitative Characteristics > These characteristics relate to the content (or substance) of financial information. > Fora financial information to be useful, it must be relevant and faithfully represent ‘what it purports to represent. > The fundamental qualitative characteristics are: (1) Relevance, and (2) Faithful representation Relevance . " > Refers to the capacity of the information to affect a decision. > Relevant information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. “+ Information has predictive value if the information can be used as an input to predict future outcomes. ei “Information has confirmatory. value if it provides feedback about previous evaluations. 13 PtA Comprehensive Reviewer tn Financial Aesunting and Reportieg Part 1 > The relevance of an information is affected by its nature and materiality. % Information is material if omitting or misstating It could influence (or affecy the decisions of primary users. = Materiality dictates that strict adherence to accounting standards is required when the items are not significant enough to affect the deciit of a primary user and the fairness of the financial statements. In simpl terms, materiality is just a “quantitative threshold”. = The materiality of an item depends on relative size rather than absolutg size. Meaning, what is material for one may not be material to another, + There is no uniform quantitative threshold for materiality as it depend, on the professional judgment of the accountant. | Faithful Representation > The descriptions and figures presented in the financial reports should match why really existed (or happened). } > Thrée characteristics: (1) Completeness ‘> All information that are necessary for a user to understand | phenomenon being depicted must be included and clearly stated in reports. (2) Neutrality ‘Being neutral is being fair. 4 The information contained in the financial reports should be free fr bias: In other words, the reports should not favor one party to thy detriment of another party. Y The financial reports are directed to the common needs of users a. not to the particular needs of specific users. Prudence or Conservatism y > The exercise of care and caution when dealing with uncertainties in the ¢ measurement process. The exercise of prudence means that: j ¥ Assets and income are not overstated. Liabilities and expenses are not understated. (3) Free from error “This means there are no errors or omissions in the description of ty phenomenon or transactions. + This does not necessarily mean perfectly accurate in all aspects. 14Chapter 2: The Conceptual Framewsrh for Financial Reporting ‘Substance over form > This concept states that if information is to represent faithfully the transactions and other events it purports to represent, it is necessary that the transactions and other events are accounted for in accordance with their economic substance and not merely their legal form. ‘If there will be a conflict between the economic substance and legal form of a particular transaction, the economic substance of that transaction will prevall over its legal form. * Enhancing Qualitative Characteristics > These characteristics are intended to increase the usefulness of financial information. | > The enhancing qualitative characteristics are: (V.C.U.T.) (1) Verifiability (2) Comparability (3) Understandability (4) Timeliness Verifiability __ > An information is verifiable 'f it is supported by evidence that an accountant would look into and arrive at the same conclusion. > Can either be: Y Direct verification — verifying an information through direct observation such — as counting cash. Indirect verification - checking the inputs to a model, formula or other technique and recalculating the outputs using the same methodology. ‘Example: Verifying the valuation of inventory by checking the inputs (quantities and costs) and recomputing it. Comparability ® This characteristic enables users to identify and understand similarities and differences among items. > This term is not synonymous to uniformity. Consistency > Refers to the use of the same methods for the same items, either from period to period within a company or in a single period across companies. > Related to comparability but not’synonymous. > Comparability is the goal and consistency helps to achieve that goal. 15 LLL aComprehensive Resiewer ta Financial Hecseiting and Reporting Part 1 Understandability * b> Information should be presented in a form that users understand. > This characteristic is very essential because if relevant and faithfully represent information is not understood by users, that information is rendered useless, Timeliness i 4 “This means having the information available to users in time to be capable > * Some transactions and events are complex and difficult to understan, Excluding information about these might make the information in the Te poy easier to understand. However, the reports will result to’ incompie} information and therefore might mislead the users. influencing their decisions. Generally, the older the information, the less useful itis, ‘The following chart summarizes the qualitative characteristics of useful finang, information: frundamental Qualitative ‘Characteristics Qualitative Characteristics of Financial ‘Statements Suseseeeeseeeeeee Predictive value Relevance it Confirmatoryvaiue | ‘Completeness Comparability Understandabilty Timeliness Figure 2.2: Qualitative Characteristics of Useful Financial Information 16Chapter 2: The Qanseptual Framework fon Financial Reporting Cost constraint > Cost is a pervasive constraint on the information that can be provided by financial reporting. > Reporting financial information imposes costs, and it is important that those costs ~ are justified by the benefits of reporting that information. + This concept is known as cost-benefit consideration. The benefit derived from the information should exceed the cost in obtaining ‘the information. [ PART 3: Financial Statements and the Reporting Entity ] Objective of financial statements > To provide information about a reporting entity's assets, liabilities, equity, income and expenses, ‘Assets, liabilities and equity are presented in the statement of financial position. ‘Income and expenses are presented in the statement of financial performance. Reporting period > The period when financial statements are prepared for financial reporting. > Financial statements are prepared at least annually. % Optionally, it may be prepared on an interim basis (j.e., three months, six months, nine months). » Financial statements also provide comparative information for at least one preceding period. Perspective adopted in financial statements > Financial statements provide information about transactions and other events Viewed from the perspective of the reporting entity as a whole, not from the perspective of the primary users. Going concern assumption > Financial statements are prepared on the assumption that the reporting entity will continue in operation for the foreseeable future. 4 _Itis assumed that the entity has no intention to liquidate or stop operations. 17Comprehensive Rewiewer in Financial Accounting and Reporting Part t Reporting entity > An entity that is required or chooses to prepare financial statements. “> Itcan bea single entity or a portion of an entity, or can comprise more t ‘one entity. Consolidated financial statements R sr these are the financial statements prepared when the reporting ent} comprises both the parent and its subsidiaries. sone he parent is the company that exercises control over its subsidiaries, The parent obtains control over a subsidiary by way of acquiring majority ownership interest (e.g., more than 50%) in the voti common stocks of the subsidiary, 4 provides information about the assets, liabilities, equity, income and exper Pf both the parent and its subsidiaries as a single reporting entity. nsolidated financial statements : > _Unonmece are the financial statements prepared when the reporting entity sf parent company only. ‘provides information about the parent company’s assets, abl, incom end expenses and not those of the subsidiaries, Jal statements ymbined financial e > Gomrase are the fnancel statements prepared when the reporting ei comprises two or more entities that are not linked by a parent and subsidi ationship such as home office and branch, 18Chapiter 2: The Conceptual Framenark for Ftaancial PART 4: The Elements of Financial Statements Elements of financial statements > Refers to the quantitative inforniation reported in the financial statements. > The following chart summarizes the elements of financial statements: m Asset g Elements of Financial il 3 Position ability g 3 Equity 2 Income E Elements of Financial 3 Performance ~ Expense Figure 2.3: Elements of Financial Statements Asset > Apresent 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. Rights that have the potential to produce economic benefits may take the following forms: . Rights that correspond to an obligation of another entity Right to receive cash; ¥ Right to receive goods or services; V Right to “exchange economic resources with another party on favorable terms; and ¥ Right to benefit from an obligation of another party if a specified uncertain future event occurs. «Rights that do not correspond to an obligation of another entity Right over physical objects, such as property, plant and equipment or inventories ¥ Right to intellectual property = Rights established by contract or legislation 19 ML aComprchensive Restewor ix Franclat Hecounting and Reporting Pant Uabilty > Present obligation of an entity to transfer an economic resource as a result of events. > Fora liability to exist, all of the following must be satisfied: The entity has an obligation, ¥ The obligation is to transfer an economic resource, ¥ The obligation is a present obligation that exists as a result of past event, ‘Obligation > A duty or responsibility that an entity has no practical ability to avoid. | > Can either be legal or constructive. = Obligation may be legally enforceable as a consequence of a bind contract or statutory requirement. * Constructive obligation arises for normal business practice, custom and desire to maintain good business relations or act in an equitable manner, > Obligations to transfer an economic resource as a result of past event include: ‘Obligation to pay cash; Re Obligation to deliver goods; Y Obligation to-provide services at some future time; ¥ Obligation to exchange economic resources with another party on unfavorelD! terms; and ¥ Obligation to transfer an economic resource if specified uncertain future evg occurs. . pity , 5 ; ee >. The residual interest in the assets of an entity after deducting all of the liabili > Defined as increases in assets or decreases in liabilities that result in increase equity, other than those relating to contributions from owners, > Scope of income: & Revewe * Income arising from the ordinary course of business, © Gains +, Represent other items that meet the definiti ine ordinary course of Breese ion of income and do not 4Chapter 2: The Caneeptust Framework for Franctal Reporting Expense > Defined as decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to owners. > Scope of expense: encompasses losses as well as those expenses that arise in the course of the ordinary regular activities. Regular expenses + Those expenses incurred in the ordinary course of business, * Loss = Those expenses do not arise in the ordinary course of business. I { PART 5: Recognition and Derecognition I Recognition > The process of capturing for inclusion in the financial statements an item that | meets the definition of one of the elements of financial statements. ‘Only items that meet the definition of an asset, liability, income, or expense are recognized in the financial statements. Recognition criteria > Only items that meet the definition of the elements of financial statements are recognized in the financial statements. ‘The amount at which an asset, a liability or equity is recognized in the statement of financial position is referred to as its carrying amount. Derecognition > The removal of all or part of a recognized asset or liability from the statement of financial position. > Normally occurs when an item no longer meets the definition of an asset or a liability. “+ Anasset is derecognized when the entity loses control of the asset. A liability is derecognized when the entity no longer has a present obligation for the liability.Comprckensine Reviewer ta Financial Accounting and Reporting Part | | l PART 6: Measurement. Measurement > The process of quantifying the elements recognized in the financial statements, Measurement bases (a) Historical cost > The entry price (or value) to acquire an asset or incur a liability, | ‘The historical cost of an asset is the costs incurred in acquiring ( creating) the asset, comprising the amount paid to acquire @ create) the asset plus transaction costs. ‘The historical cost of a liability is the amount received to incur thy liability minus transaction costs. > The historical cost of an asset is updated over time to depict, if applicable (a) Depreciation or amortization; | (b) Settlement; | (©) Impairment; and (@) Accrual of interest to reflect any financing component of the asset, > The historical cost of a liability is updated over time to depict, applicable: (2) By satisfying an obligation to pay (Full or partial) or by satisfying obligation to deliver goods; (b) Inflation; and (c) Accrual of interest to reflect any financing component of the liabily (6) Current value > This measure provi income and expenses, usin: the measurement date. ides information about assets, liabilties and reatd 9 information updated to reflect conditions} > This includes the following: | (@) Fair value ‘The price that would be received to sell an asset, or paid { transfer a liability, in an orderly transaction between markt participants at the measurement date. “This can be observed directly using market price of the asset ( liability in an active market. In cases where the fair value cannot be directly measured, # entity can use present value of cash flows. 22Chapter 2: The Conceptual Framework for Flaanclal Reporting (b) Value in use for asset ‘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. (©) Fulfilment value for liability + The present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability. Transaction costs on value in use and fulfillment value Both value in use and fulfilment value do not include transaction costs incurred on acquiring an asset or incurring a liability since they are based on future cash flows. "However, value in use and fulfilment value include the present value of any transaction costs an entity expects to incur on the ultimate disposal of the asset or on fulfilling the liability. (d) Current cost ‘+ 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. ** The current cost of a liability is the consideration that would be received for an. equivalent liability at the measurement date minus the transaction costs that would be incurred at that date. Selecting a measurement basis > The IASB did not mandate a single measurement basis because the different measurement bases could produce useful information under different circumstances. > Historical cost is the measurement basis most commonly adopted in preparing financial statements. PART 7: Presentation and Disclosure Presentation and Disclosure > A reporting entity communicates information about its assets, liabilities, equity, income and expenses by presenting and disclosing information in the financial statements. > This can be achieved by classification and aggregation of assets, liabilities, equity, income and expenses. . ‘Classifications the sorting of assets, liabilities, equity, income and expenses on the basis of shared or similar characteristics. * Offsetting is generally not appropriate. * Income and expenses are classified either: {a) Inthe statement of profit or loss; or (b) In other comprehensive income 23 DNComprehensive Restewer tx Financial Aecouting and Reporting Dart 1 % Aggregation is the adding together of assets, liabilities, equity, income ang expenses that have similar or shared characteristics and, are included in the same classification. | * This makes information more useful by summarizing a large volume of detail. { PART 8: Concepts of Capital and Capital Maintenance ] Concept of Capital | > A financial concept of capital is adopted by most entities in preparing their financia, statements. : 4 Under this concept of capital, capital is synonymous with the nét assets or equity of the entity. | > Under a physical concept of capital, capital is regarded as the productive capacity of the entity based on, for example, units of output per day. |: . | | ital Mair an (a). Financial ‘maintenance ; Ne Cer its concept, a profit is earned only if the amount of the net assets at the end of the period exceeds the amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, ‘oviners during the period. (0) Physical capital maintenance | > Under this concept a profit is eared only if the physical productive capacity - (or operating capability) of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Required measurement basis to be adopted > The physical capital maintenance concept requires the adoption of the current cost basis of measurement. > The financial capital maintenance concept, however, does not require the use of a particular basis of measurement. 241 Chapt 2: The Crncepteal Framer or Forancal Pepsi 2 EXERCISES | || Nature, Purposes and Status of the Conceptual Framework ‘1, Which is not correct about the Conceptual Framework for Financial Reporting? ‘A. The Conceptual Framework forms the theoretical foundation of accounting: ] B. The Conceptual Framework serves as a guide for the development an revision of accounting standards. . | C. The Conceptual Framework constitutes the highest level of authoritative 1 status. D. All of the foregoing statements are correct about the Conceptual Framework t for Financial Reporting. 2. “The Conceptual Framework is intended to establish which of the following? ' A. IFRSs. . B. The objectives and concepts for use in developing IFRSs. C. The true concept of “present fairly in accordance with IFRSs’ D. The hierarchy of sources of accounting standards and principles. 3. Which of the following is a purpose of the Conceptual Framework for Financial: Reporting? ‘A. To assist the IASB in the development of IFRS based on consistent concepts. B. To assist preparers of financial statements in developing consistent accounting policies when no accounting standard applies to a particular transaction or event, or when an accounting standard -allows a choice of accounting policy or treatment. CC. To assist all parties in understanding and iriterpreting IFRS. D. Allof the foregoing. 4, Which statements are correct about the Conceptual Framework for Financial Reporting? I. The Conceptual Framework contains the concepts for general-purpose + financial reporting only. 1. The Conceptual Framework contains the concepts for special-purpose financial reporting only. HI. The Conceptual Framework contains the concepts for both general- and special-purpose financial reporting. The Conceptual Framework is an accounting standard, The Conceptual Framework is not an accounting standard, In case of conflict between an accounting standard and the Conceptual - Framework, the requirements of the accounting standard will prevail over the requirements of the Conceptual Framework. VIL. Incase of conflict between an accounting standard and the Conceptual Framework, the requitements of the ‘Conceptual Framework will prevail over the requirements of the accounting standard. B<2 1, Vand VI only 1, Vand VI only TH, IV and VI only III, Vand VII only PPS 2Comprchensice Reviewer tn Financial Accounting and. Reporting Dart t 5. Which is correct about the Conceptual Framework for Financial Reporting? ‘A. The Conceptual Framework must be followed even if there is an accoy, standard or interpretation that specifically deals with that Partcy transaction or event, When there is no accounting standard or interpretation that specifically ape, to a particular transaction or event, the Conceptual Framework myer followed. 5 by C. The applicability of the Conceptual Framework on a particular transaction, event shall be considered even if there is an accounting standarq’ % interpretation that specifically deals with that particular transaction oF event! D. The applicability of the Conceptual Framework on a particular transaction event shall be considered only when there is no accounting standard ©) interpretation that specifically deals with that particular transaction or event) 1@ Cor amework ‘What provides the “why” of accounting? ‘A. Objective of financial reporting. san : B. Qualitative characteristics of useful financial information. CC. Elements of financial statements. D. Recognition and measurement concepts. 7. What is the underlying theme of the Conceptual Framework? ‘A. Comparable information. ~ B, Timeliness of information. C. Understandability of information. D. Decision usefulness. © Financial Reporting 8. Which is correct about the objective of financial reporting? A. It forms the foundation of the Conceptual Framework. B. It provides the “why” of accounting. : C. Its overall objective is to provide financial information that is useful fo decision-making. _D. All of these are correct. 9. The primary focus of financial reporting has been on meeting the needs of whic of the following users? 4 L Existing investors I Potential investors II. Lenders and creditors A. Tand only B. Land II only C. Iand M1 only D. 1, and WI 26hapten 2: The Conceptual Framework for Fteascial Reporting 10. The primary users of financial information include which of the following? Investors ‘ ‘Lenders and creditors Management Government General public SSBRO Land II only 1, Hand I Ii, and IV Ml and IV 11. Which of the following is not a limitation of financial reporting? Financial reports can only provide information to help primary users estimate the value of the entity and not designed to show the value of the entity. Financial reports are based on estimates and judgments rather than exact depiction. C. Financial reports can only provide all the information needed by its primary users and not of other users. D._ All of these are limitations of financial reporting. bs 9Nm> = 12. Qualitative characteristics of useful financial information ‘A. are the qualities or attributes that make financial information useful to the users in making economic decisions, B. Contribute to the decision-usefulness of financial information. C. are classified either as fundamental or enhancing, D. All of these are correct, 13. These qualitative characteristics relate to the content or substance of financial information. ‘A. Fundamental qualitative characteristics B, Enhancing qualitative characteristics C._ Relevance characteristics D. Completeness characteristics 14. Which of the following are the fundamental qualitative characteristics. of useful financial information? 1 Relevance I. Reliability Il. Faithful representation 1V. __ Materiality Tand It Tand III 1, Wand V 1, I and IV popP> 27Comprchensive Reviewer tn Financial Accounting and. Reporting Pant | 15. A financial information is considered relevant when it A. is capable of making a difference in a decision, B. can be depended upon to represent the economic conditions and events th; it is intended to represent. C. is understandable by reasonably informed users. D. is verifiable and neutral. it a entail 16. Which of the following are the ingredients of relevant financial information? Predictive value ~ Confirmatory value Materiality Tand II and II I, and 17. Itis the quality of information that means the numbers and descriptions mate, what really existed or happened. A. Relevance B. Faithful representation C.. Completeness D. Neutrality 18. wen of the following is (are) correct concerning materiality? Information is material if omitting or misstating it could influence the decisions of the users. B. Strict adherence to accounting standards is not required when the items are not significant enough to affect the decision of the user and the fairness of the financial statements. C. Materialty is dependent on the professional judgment of the accountant. D. All of these are correct. | Tand I | | } poer AE 19. For an information to be faithfully represented, it must be Complete IL Comparable } TL Neutral IV. Free from error A B. c D. ). 1, I, Wand IV | 20. Which quatative characteristic of financial information requires that informain should not favor one party to the detriment of another party? A. Comparability B. Neutrality | C. Free from error . | D. Reliability |21. 22. 23. 24, 25. We ———A———— Chapter 2: The Conceptual Framework for Financial Reporting ‘This concept states that transactions and events must be accounted for in accordance with their economic substance and rather than merely their legal form. A. Relevance B. Verifiability C. Substance over form D. Form over substance Which of the following is correct in case there will be conflict between the ecoriomic substance and legal form of a particular transaction? ‘A. The economic substance of that transaction will prevail over its legal form. B. The legal form of that transaction will prevail over its economic substance. C. Either the economic substance or the legal form ofthat transaction, depending on the accounting policy of the entity. D. That transaction should not be accounted for. These qualitative characteristics are intended, to increase the usefulness of financial information. A. Fundamental qualitative characteristics B. Enhancing qualitative characteristics CC. Relevance characteristics D. Completeness characteristics Which of the following are the enhancing qualitative characteristics of useful financial information? Comparability 0, Completeness TI. —_Understandability Iv. _Verifiability Vv. Timeliness VI. Consistency A B a D. 1, 0, Wand IV 1,1, VandV 4G, I, Wand V 1, Iv, Vand VI Which of the following characteristic is demonstrated when different accountants independently agree on the amount and method of reporting a transaction o event? A. Comparability B. Verifiability C. Understandability D. Neutrality When information about two different companies engaged in the same industry has been prepared and presented in a similar manner, the information exhibits which of the following characteristic? ‘A. Comparability B. Consistency C. NeutralityComprchensive Rewtewer x Financial Accounting and Reporting Part | Constraint on useful financial reporting r D. Verifiable | 27. Information about different companies and about different periods of the sy company can be prepared and presented in a similar manner. Comparability ay, consistency are related to which of these objectives? ‘Comparability Consistency | A ‘Companies ‘Companies | B. Companies Periods | a Periods Companies | D. Periods Periods 28. Which of the following statements best describes the term “comparability” in context of useful financial information? | A. Information is measured and reported in a similar manner across entities, B. Information is measured and reported in a similar manner across points time. C. Information is relevant. D. Information is verifiable. 29. Which of the following statements best describes the term “consistency” in th context of useful financial information? ] ‘A. Information is measured and reported in a similar manner across entities. | B. Information is measured and reported in a similar manner across points} time. C. Information is relevant. D. Information is verifiable. 30. Which of the following is true in relation to the enhancing quality *understandability”? ‘A. All information that are necessary for a user to understand the phenom being depicted must be included and clearly stated in the reports. B, Financial information shall be free from material errors. CC. The information contained in the financial reports should be free from bias. D. Users have a reasonable knowledge of the business and its activities. 31. The Conceptual Framework mentions one constraint on useful financial reporting Which is it? | ‘A. Conservatism B. Cost C. “Prudence D. Going concern 30Goi Chapter 2: The Conceptual Framenorh for Financlal Reporting 32. Which of the following best describes the cost-benefit constraint? h Reporting financial information imposes costs and it is important that those costs are justified by the benefits of reporting that information. JL The benefit derived from the information should exceed the cost in obtaining it. i, The cost in obtaining the information should exceed the benefit derived from it. 1v. __ Financial information should be free from cost to users. A. Land I B, [and Il c. Mand IV D. MandIv 3; en | i‘ "3, What is the objective of financial statements? A To assess future cash flows to the entity. B. To assess management stewardship. C._ To provide information about economic resources of an entity, claims against the entity and changes in the economic resources and claims, D. To satisfy the information needs of primary users. 34, Financial statements are prepared at least A. Annually B. Semi-annually C. Quarterly D. Monthly 35, Financial statements provide information about transactions and events viewed from the perspective of the ‘A. Primary users B. Other users C. Reporting entity D. Management sumption in the pre financial statements 36. The Conceptual framework mentions only one assumption in the preparation of financial statements. Which is it? ‘Accrual basis Cash basis Going concern Liquidating concern posers cern assumpti 37. Financial statements are prepared under the assumption that the reporting entity will continue in operation for the foreseeable future. Which of the following best describes this? ‘A. Accrual basis B. Going concern assumption 5 C._Liquidating concern assumption 31 \ "(alla 2 7 aaa | a melComprehensive Reniewer tx Heanctal Accounting and Reporting Dart t | D. Reporting entity Reporting Entity 38. Itis an entity that is required, or chooses, to prepare financial statements. ‘A. Company B. Legal entity C. Economic entity D. Reporting entity 39. A reporting entity A. Cen bea single entity B. Canbe portion of a single entity Can comprise more than one entity D. Allof these can be considered a reporting entity inancial statements | 40. If the reporting entity comprises both the parent and its subsidiaries, the finang, statements are referred to as ‘A. Consolidated financial statements B. Unconsolidated financial statements C. Combined financial statements D. Separate financial statements | | 41. If the reporting entity comprises of the parent company only, the finan statements are referred to as ‘A. Consolidated financial statements B. Unconsolidated financial statements C. Combined financial statements D. Separate financial statements parent and subsidiary relationship, the financial statements are referred to as A. Consolidated financial statements B. Unconsolidated financial statements C. Combined financial statements | | 42. If the reporting entity comprises two or more entities that are not linked by; | D. Separate financial statements | A. 1, Iand I B, Il, IVandV © Mandy D. 1,11, Ill, Wand V 32Chapter 2: The Conceptual Framework jor Fnanctal Reporting 44, The elements of financial position describe amounts of resources and claims against resources A. During a period of time B. Ata point intime “ CC. During a period of time and at a point in time D. Neither during a period of time nor at a point in time 45. Which of the following are considered the elements of financial performance? Asset Liability Equity Income Expense I, Hand I I, IV and V Wand V 1, 0, II, IV and V poPP> 53. Which of the following criteria need not be satisfied for a liability to exist? 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 event: D. The settlement is expected to result in an outflow of economic benefit. 3454. 55. 56. 57. 58. 59. L IL. ml. NV. pomP | Chapter 2; The Omceptucl Framer or Feeselat Reporting Obligations to transfer an economic resource include which of the following? Obligation to pay cash Obligation to deliver goods or render service at some future time Obligation to exchange economic resources with another party on favorable terms Obligation to exchange economic resources with another party on unfavorable terms Obligation to transfer an economic resource if specified uncertain future event occurs. Obligation to transfer an economic resource if specified uncertain future event did not occur. Tand II only 1, Il, I and V 1,1, Vand V 1, HIV and VE It refers to the residual interest n the assets of the entity after deducting all of the liabilities, A B. c D. Income Equity Retained earnings All of the choices match the definition It is an increase in asset or a decrease in liability that results in increase in equity other tfian contribution from equity holders. A B. c D. Asset Liability Income Expenses ‘These arises in the ordinary course of activities of the entity. A B. iS D. Income Revenue Profit Gain Which of the following statement is true about income, revenue and gain? A B. S D. wi A B. c D, Income encompasses both revenue and gain. Revenue encompasses both income and gain, Gain encompasses both income and revenue. : Income is technically the same as revenue. y hat is the primary distinction between revenue and gain? ‘The materiality of the amount The likelihood that the transaction will recur The nature of the activity that gives rise to the transaction ‘The method of disclosing the transaction 35: Comprcheesive Restewcr tn Financial Arrsunting and Reporting Dart t | | | ; 60. Revenue is E iz ‘An increase in asset from primary operations resulting in increase in Fi equity. fae il. —_Aniincrease in asset from incidental transactions resulting in increase equity. te II’ A decrease in asset from primary operations resulting In increase in equity. — IV. _ A decrease in asset from incidental transactions resulting in increase equity. aa v. ‘An increase in liability from primary operations resulting In increase in uity. . ; Vi Aninerease in liability from incidental transactions resulting in increas in equity. - vi. oA Seoreee in lability from primary operations resulting in increase in ity. se Vat, A deetease in labllty from incidental transactions resulting in increas in equity. A. Tand VIE B, Land VII C Mand Vo D. Tand VII IR 61. Gain is . . _ L ‘An increase in asset from primary operations resulting in increase in equity. I _Anincrease in asset from incidental transactions resulting in increase} equity. I. —_Adecrease in asset from primary operations resulting in increase in equity. IV. _Adecrease in asset from incidental transactions resulting in increase i equity. V.- An increase in liability from primary operations resulting in increase in | equity. | VL —_An increase in liability from incidental transactions resulting in increase | in equity. 1 Vi OA decrease in liability from primary operations resulting in increase in equity. .VII. A decrease in liability from incidental transactions resulting in increast in equity. A. Tand VIL B. Land VII be C Mand Vit . a D. Tand VIII 36Chapter 2: The Conceptual Framewarl for Fieancial Reporting 62, Itis a decrease in asset or an increase in liability that results in decrease in equity other than distribution to equity holders. A. Asset B, Liability C. Income D. Expense 63. An outflow of asset based on an activity that represents the major operations is called A. Loss B. Liability C. Expense D. Equity 64, A decrease in an asset arising from incidental transaction is called A. Capital expenditure A B. Cost Cc. Loss D. Expense 65. It is defined as the process of capturing for inclusion in the financial statements an item that meets the definition of the elements of financial statements. A. Classifying B. Recognition CC. Derecognition D. Measurement 66. An item is recognized in the financial statements if A, It is probable that economic benefits will flow to or from the entity. B. The cost of that item can be measured reliably. C._ Itis probable that economic benefits will flow to or from the entity and that the cost can be measured reliably. . D. It meets the definition of an asset, liability, equity, income and expense. 67. Recognition of an element of financial statement is appropriate when the information results in A. Relevance B. Faithful representation C. Both relevance and faithful representation D. Neither relevance nor faithful representation 68. Itisdefined as the removal of all or part of an asset or a liability from the statement of financial position. A. Extinguishment B. Retirement C._ Derecognition D. Write-offReviewer tt Financial He an fcodtiting and Reporting 69. Derecognition normally occurs when mee 1, Anitem no longer meets the dennit : II, The entity loses control of the eae —e ILL. The entity no longer has a present obligation for the liability. Tonly Land I only Mand IT J, Hand I poeP SI nt 70. It is defined as the process of quantifying the elements recognized in the fina statements. A. Classifying B. Recognition C._Derecognition D. Measurement 71. The measurement bases include which of the following? L Historical cost I. Current cost I. Current value A. Tand Ionly B. IandIonly C. [and Honly D. I, Hand I 72. The historical cost of an asset is equal to the ‘A. Amount paid to acquire or produce the asset. ‘Amount paid to acquire or produce the asset with consideration of the eff B. of inflation. C. Amount paid to acquire or produce the asset plus transaction costs. D: Amount paid to acquire or produce the asset minus transaction costs. 73. Which of the following does not affect the historical cost of an asset over time?| A. Depreciation or amortization Impairment Inflation Accrual of interest to reflect the financing component. All of these affects the historical cost of an asset over time. moO 74. The historical cost of a liability is equal to the A. Amount received to, incur the liability. B. Amount received to incur the liability plus transaction costs. C. Amount received to incur the liability minus transaction costs. D. Amount:received to incur the. liability with consideration of the effec inflation. t 3875. 76. 77. 78. Chapter 2: The Conceptual Framework for Financial Reporting Which of the following does not affect the historical cost of a liability over time? ‘A. Settlement of obligation by payment or delivery of goods. B. Impairment ¢. Inflation D. Accrual of interest to reflect the financing component. E. All of these affects the historical cost of a liability over time, Current value includes which of the following? 1. Fair value IL. Present value II, Value in use IV. Current cost V. Historical cost A. I, Iand II B. I, Il andIV C 1,0, Mand Vv D. 1,0, Ill, Vandv Fair value is the A. 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. B. 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. C. Future 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. D. Present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability. E. Future valueof the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability. Value in use is the A. 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. B, 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, C. Future 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. D. Present value of the cash, or other economic resources, that an entity expects to be obliged to transfer as it fulfils a liability. E. Future value of the cash, or other economic resources, that an entity éxpects to be obliged to transfer as it fulfils a liability. 39Comprchensive Restewor in Financial Accounting and Reporting Part 1 79. Fulfillment value is the A. Price that would be received to sell an asset, or paid to transfer a liability, | £ an orderly transaction between market participants at the measurement day B, Present value of the cash flows or other economic benefits that an eng, expects to derive from the use of an asset and from its ultimate disposal, | C. Future value of the cash flows or other economic benefits that an ent, expects to derive from the use of an asset and from its ultimate disposal, | D. Present value of the cash, or other economic resources, that an entity expaq to be obliged to transfer as it fulfils a liability. ] E. Future value of the cash, or other economic resources, that an entity expeq to be obliged to transfer as it fulfils a liability. “a 80. The current cost of an asset is equal to the A. Amount that would be paid at the measurement date. B. Amount that would be paid at the measurement date with consideration y inflation. 7 ] c. Amount that would be paid at the measurement date plus the transact, costs that would be incurred at that date. | D. Amount that would be paid at the measurement date minus the transactiq, costs that would be incurred at that date. 3 i 81, The current cost of a liability is equal to the | A. Amount that would be received for an equivalent liability at the measurema, date. | B. Amount that would be received for an equivalent liability at the measureme, date with consideration of inflation. | ‘Amount that would be received for an equivalent liability at the’ measureme, date minus the transaction costs that would be incurred at that date. ‘Amount that would be received for an equivalent liability at the measurems date plus the transaction costs that would be incurred at that date. CG D. 82. The primary measurement basis is the | A. Historical cost B. Current cost C. Current value D. Fair value 83. The IASB requires the use of which of the following measurement bases Preparing financial statements? A. Historical cost B, Current value C. Fair value D. None of the foregoing. ; | 84, a commonly adopted measurement basis in preparing financial statemet A. Historical cost B. Current cost C. Fair value D. None of the foregoingaNd Disclosure 4" 2! Me Conceptual Framer for Financial Reporting 85. Itis the sorti Rapin i similar character liabilities, equity, income and expenses on the basis of A. Aggregation B. Classification C. Summarization D. Interpretation 86. Income and ex A. Current ai B. Profit or loss and other C. Ordinary and extraordi D. None of the foregoing Penses are classified as nd noncurrent comprehensive income inary 87. The new term to describe the statement Containing the profit or loss items together with the other comprehensive income tame 2 A. Statement of comprehensive income B, Statement of financial position C. Statement of financial performance D._Inicome and expense statement 88, It is the adding tox have similar chara A. Aggregation B. Classification C. Summarization D. Interpretation gether of assets, liabilities, equity, income and expenses that teristics and are included in the same classification. and Capital Maintenance Concey , 89. This concept of capital is adopted by most entities in preparing their financial statements. ‘A. Financial capital B. Physical capital C. Either A or B 5. Neither A nor B 90. Under this concept of capital, capital is regarded as the productive capacity of the entity. A. Financial capital B. Physical capital C. Either A or B D. Neither A nor B this concept of capital maintenance, a profit is earned only if the amount of 9 nae assets at the end of the period exceeds the amount of net.assets at the beginning of the period, after excluding any effects of transactions with the owners during the period. A. Financial capital maintenance B. Physical capital maintenance C. - Either A or B 41i | Comprchensive Reviewer tn Financial Accounting aud. Reporting Part 1 | D. Neither A nor B | 92. Under this concept of capital maintenance, a profit is earned only if the phy. productive capacity of the entity at the end of the period exceeds the Phyl Productive capacity at the beginning of the period, after excluding any effect ‘transactions with the owners during the period. ‘A. Financial capital maintenance B. Physical capital maintenance C. Either A or B D. Neither A nor B 93. The financial capital maintenance concept requires the adoption of which of y following measurement basis? A. Historical cost B. Current cost C. Fair value D. No particular measurement basis. ‘The physical capital maintenance concept requires the adoption of which of the "following measurement basis? ‘A. Historical cost B. Current cost C. Fair value D. No particular measurement basis. 42Chapter 2: The Conceptuat Framenorh for Fteancial Reportiog SUGGESTED KEY ANSWERS Cc 2i[ ¢ 4i[ 8 ei | D 81, Cc B 22| A a2{ oc 62 | Db 82_| A D 23 |B 43 A 63 | Cc 83 D B 24|_B 44{B 64 | a4 | A D 25| 8B 45 | C 65 |B 85 B A 26| A 46 | C 66 [| D 86, B D 27| 8B 47| A 67 | Cc 87, ci D 28] A 48 | A 68 [ C 88, A D 29| B 49 | C 69 | D 89) A A 30| D 5o| Cc 7o | D 90 B Cc 3i| 8 si] B vi | B 91. A D 32] A 52] 8B 72 | 92 B A 33| ¢ 53 | D 73 Cc 93 D B 34| A 54| Cc “a | Cc 94 B A 35| C 55| 8B 75 | B A 36| C 56] C 76 | B B 37|_B 57| B 7A D 38 | D 58| A 73 |B B 39| D s9{ Cc 7 | D B 40| A eo] A go [ c 43