CHAPTER 1

THE ACCOUNTANCY
PROFESSION
Question 1-1
 Define Accounting.

Answer 1-1:
The Accounting Standards Council defines
accounting as follows:
Accounting is a service activity. Its function is to
provide quantitative information, primarily financial
in nature, about economic entities, that is intended
to be useful in making economic decisions.
The Committee on Accounting Terminology of the
American Institute of Certified Public Accountants
defines accounting as follows:
Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of
money, transactions and events which are in part at
least of a financial character and interpreting the
result thereof.
The American Accounting Association in its Statement
of Basic Accounting Theory defines accounting as
follows:
Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgment and decision by users of the
information
Question 1-2
 What is the overall objective of accounting?
Answer 1-2:
The overall objective of accounting is to provide
quantitative financial information about a business
that is useful to statement users particularly
owners and creditors in making economic
decisions.
The primary task of an accountant supply financial
information so that the statement users could
make informed judgment and better decision.
Question 1-3
What do you understand by the accountancy
profession?
Answer 1-3:
Republic Act No. 9298 is the law regulating the practice
of accountancy in the Philippines. This law is known as
the “Philippine Accountancy act of 2004”
Accountancy has developed as a profession attaining a
status equivalent to that of law and medicine.
In the Philippines, in order to qualify to practice the
accountancy profession, a person must finish a degree
in Bachelor of Science in Accountancy and pass a very
difficult government examination given by the Board of
Accountancy.
The Board of Accountancy is the body
authorized by law to promulgate rules and
regulations affecting the practice of the
accountancy profession in the Philippines.
The Board of Accountancy is responsible for
preparing and grading the Philippine CPA
examination
This computer-based examination is offered twice
a year, one in May and another in October, in
authorized testing centers around the country.
Question 1-4
 Explain the accreditation to practice public
accountancy.
Answer 1-4:
Certified Public Accountants, firms and partnership of
certified public accountants, including partners and
staff member thereof, are required to register with the
Board of Accountancy and Professional Regulatory
Commission for the practice of public accountancy.
The PRC upon favorable recommendation of the
Board of Accountancy shall issue the Certificate of
Registration to practice public accountancy which
shall be valid for 3 years and renewable every 3 years
upon payment of required fees.
Certified public Accountants generally practice
their profession in three main areas, namely:
a. Public accounting
b. Private accounting
c. Government accounting
Question 1-5
 Explain the limitation of the practice of public
accountancy.
Answer 1-5:
A certificate of accreditation shall be issued to
certified public accountants in public practice only
upon showing in accordance with the rules and
regulations promulgated by the Board of
Accountancy and approved by the Professional
Regulation Commission that such registrant has
acquired a minimum of three years of meaningful
experience in any of this areas of public practice
including taxation.
Single practitioners and partnerships for the
practice of public accountancy shall be registered
certified public accountants in the Philippines.
The Securities and Exchange Commission shall
not register any corporation organized for the
practice of public accountancy.
Question 1-6
 What is public accounting?
Answer 1-6:
Public Accounting, in essence, is the practice of
the accountancy profession.
Individual practitioners, small accounting firms and
large multinational organizations render
independent and expert financial services to the
public such as auditing, taxation and management
advisory services.
Question 1-7
 Explain the three kinds of services rendered by
a public accountant.
Answer 1-7:
1. Auditing has traditionally been the primary
service offered by most public accounting
practitioners.
Auditing or specifically external auditing is the
examination of financial statements by
independent certified public accountant for the
purpose of expressing an opinion as to the
fairness with which the financial statements are
prepared.
Actually, external auditing is the attest function of
independent CPAs.
The Bureau of Internal Revenue requires audited
financial statements to accompany the filing of annual
income tax return.
Banks and other lending institutions frequently require
an audit by an independent CPA before granting a
loan to the borrower.
2. Taxation service includes the preparation of
annual income tax returns and determination of tax
consequences of certain proposed business
endeavors.
The CPA not infrequently represents the client in tax
investigations.
3. Management advisory service has no precise
coverage. Generally, this area of practice refers to
services to clients on matters of accounting,
finance, business policies, organization
procedures, product costs, distribution and other
phases of business conduct and operations.
Question 1-8
 Explain private accounting
Answer 1-8
Private Accounting means that Certified Public
Accountants are employed in business entities in
various capacity as accounting staff, chief
accountant, internal auditor and controller.
The highest accounting officer in a business entity
is the controller.
The major objective of the private accountant is to
assist management in planning and controlling the
operations of the entity.
Private accounting includes maintaining the
records, producing the financial reports, preparing
the budgets and controlling and allocating the
costs of the business.
The private accountant has also the responsibility
for the determination of the various taxes the
business is obliged to pay.
Question 1-9
 Explain government accounting.
Answer 1-9:
Government accounting encompasses the process of
analyzing, classifying, and communicating all transactions
involving the receipt and disposition of government funds
and property and interpreting the result thereof.
The focus of government accounting is the custody and
administration of public funds.
Many Certified Public Accountants are employed in many
branches of the government, more particularly the Bureau
of Internal Revenue, Commission on Audit, Department of
Budget and Management, Securities and Exchange
Commission and even in a police agency like the National
Bureau of Investigation.
Question 1-10
 What do you understand by the Continuing
Professional Development or CPD?
Answer 1-10:
Republic Act No. 10912 is the law mandating and
strengthening the continuing professional development
program for all regulated professions, including the
accountancy profession.
All certified public accountants shall abide by the
requirements, rules and regulations on continuing
professional education to be promulgated by the board of
accountancy, subject to the approval of the professional
regulation commission, in coordination with the accredited
national professional organization of certified public
accountants or any duly accredited educational institution.
Continuing professional education is defined as
the inculcation and acquisition of advanced
knowledge, skill, proficiency, and ethical and moral
values after the initial registration of the Certified
Public Accountants.
Continuing professional education raises and
enhance the technical skill and competence of the
Certified Public Accountant.
Question 1-11
 What is the meaning of CPD credit units?
Answer 1-11:
The CPD credit units refer to the CPD credit hours
required for the renewal of CPA license and
accreditation of a CPA to practice accountancy
profession every three years.
Under the new BOA Resolution, all Certified Public
Accountants regardless of area or sector of practice
shall be required to comply with 120 CPD units.
Certified Public Accountants are required to comply
with 120 CPD credit units for accreditation to
practice the accountancy profession.
However, only 15 CPD credit units are required for
renewal of CPA license.
Excess credit units earned shall not be carried
over to the next three-year period, except credit
units earned for masteral and doctoral degrees.
It is to be emphasized that the Continuing
Professional Development has become mandatory
for Certified Public Accountants.
The Continuing Professional Development is
required for the renewal of CPA license and
accreditation of CPA to practice the accountancy
profession.
Question 1-12
 Explain exemption from CPD requirement.
Answer 1-12:
A CPA shall be permanently exempted from CPD
requirements upon reaching the age of 65 years.
However, this exemption applied only to the
renewal of CPA license and not for the purpose of
accreditation to practice the accountancy
profession.
Question 1-13
 Distinguish accounting and auauditing
Answer 1-13:
In a broad sense, accounting embrases auditing.
Auditing is one of the areas of accounting
specialization.
In a limited sense, accounting is essentially
constructive in nature. Accountung ceases when
filnancial statements are already prepared.
On the other hand, auditing is analytical. The
work of an auditor begins when the work of the
accountant ends.
Question 1-14
 Distinguish accounting and bookkeeping.
Answer 1-14:
Bookkeeping is procedural and largely concerned
with development and maintenance of accounting
records.
Bookkeeping is the “how” of accounting.
Accounting is conceptual aand is concerned with
tge why, reason or justification for any action
adopted.
Bookkeeping is a procedural element of accounting
as arithmentic is a procedural element of
mathematics
Question 1-15
 Distinguish financial accounting and managerial
accounting.
Answer 1-15:
Financial accounting focuses in general purpose reports
known as dinancial statements which are intended for
internal and external users.
Financial accounting is the area of accounting that
emphasizes reporting to creditors and invetors.
Managerial accounting is the accumulation and
preparation of financial reports for internal users only
In other words, managerial accounting is the area of
accounting that emphasizes developing accounting
information for use within an entity.
Question 1-16
 What is the meaning of generally accepted
accounting principles?
Answer 1-16:
Generally accepted accounting principles
encompases the conventions, rules and procedures
necessary to define what is accepted accounting
practice.
Generally accepted accounting principles are
conventional.
The principles become generally accepted by
agreement often tacit agreement rather than by formal
derivation from a set of postulates and basic concepts
Question 1-17
 What do you understand by the Financial
Reporting Standards Council or FRSC?
Answer 1-17:
The FRSC is the accounting standard setting body
created by the Professinal Regulation Commission
upon recommendation of the Board of
Accountancy to assist the Board of Accountancy in
carrying out its powers and functions provided
under R.A. No. 9298
The main function is to establish and improve
accounting standards that will be generally
accepted in the Philippines
The accounting standards promugated by the
Financial Reporting Standards Council constitute
the highest hierarchy of generally accepted
accounting principles in the Philippines.
The approved standards of the FRSC are known
as Philippine Accounting Standards of PAS and
Philippine Financial Rdporting Standards or
PFRS.
Question 1-18
 What is the composition of FRSC?
Answer 1-18:
The FRSC is composed of 15 with a chairman who
had been Or is presently a senior ccounting
practitioner and 14 repesentatives from the
following:
Question 1-19
 What do you understand by the Philippine
Interpretations Committee?
Answer 1-19:
The Philippine Interpretations Committee or PIC was
formed for the following role:
a. To prepare interpretations of PFRS for approval by
the FRSC
b. To provide timely guidance on financial reporting
issues not specifically addressed in current PFRS.
The interpretations are intended to give authoritatove
guidance on issues that are likely to receive divergent
or unacceptable treatment because the standards do
not provide specific and clearcut rules and guidelines.
Question 1-20
 What do you understand by the International
Accounting Standards Committee (IASC)?
Answer 1-20:
The IASC is an independent private sector body, with the
objective of achieving uniformity in the accouning
principles which are used by business and other
organizations for financial reporting around the world.
It was formed in June 1973 through an agreement made
by professuonal accountancy bodies from Australia,
Canada, France, Germany, Japan, Mexico, the
Netherlands, the United Kingdom and Ireland, and the
United States of America.
The approved statement of the IASC are known as
International Accounting Standards or IAS.
Question 1-21
 What do you understand by the International
Accounting Standards Board?
Answer 1-21:
The International Accounting Standards Board or
IASB now replaces the International Accounting
Standards Committee or IASC.
The IASB publishes standards in a series of
pronouncements called International Fimqncial
Reporting Standarda or IFRS.
However, the IASV has adopted the body
standards issued by the IASC.
The pronouncements of the IASC continue to be
designated as International Accounting Standards
or IAS.
The IFRS is a global phenomenon intended to
bring about greater transparency and a higher
degree of comparability on financial reporting.
Such phenomenin is essential to achieve the goal
of one uniform and globally acceptes financial
reporting standards.
Question 1-22
 What do you understand by the Philippine Financial
Reporting Standards?
Answer 1-22:
The Financial Reporting Standards Council issues
standards in a series of pronouncements called Philippine
Financial Reporting Standards or PFRS.
The Philippine Financial Reporting Standards collectively
include all of the following:
a. Philippine Financial Reporting Standards which
correspond to International Financial Reporting
Standards.
The Philippine Financial Reporting Standarda are
numbered the same as their counterpart in International
Financial Reporting Standards.
b. Philippine Accounting Standards which
corresponds to International Accounting
Standards.
The philippine Accounting Standards are
numbered the same as their counterpart in
International Accounting Standards.
c. Philippine Interpretations which corresponds to
the interpretation of the IFRIC and the Standing
Interpretations Committee, and Interpretations
developed by the Philippine Interpretations
Committee.
Question 1-23 Multiple Choice (ACP)
1. What is the law regulating the practice of accountancy
in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
2. It is the body authorized by law to promulgate rules and
regulations affectinh the practice of the accountancy
profession in the Philippines.
e. Board of accountancy
f. Philippine Institute of Accountants
g. Securities and Exchange Commission
h. Financial Reporting Standards Council
3. The qualifications of the members of the board of
accountancy include all of the following, except
a. Must be a natural-born citizen and a resident of
the Philippines.
b. Must be duly registered CPA with at least ten
years of work experience in any scope of practice
of accountancy
c. Must be od good moral character and must not
have been convicted of crime involving moral
turpitude.
d. Musta have any pecuniary interest; directly or
indirectly, in any school conferring an academic
degree necessary for admission to tge practice of
accountancy.
4. What are the three main areas in the practice of the
accountancy profession
a. Public accounting, privatr accounting and managerial
accounting
b. Auditing, taxation and managerial accounting
c. Financial accounting, managerial accounting, and
corporate accounting
d. Public accounting, private accounting and government
acaccounting
5. What is the primary service of CPAs in Public practice.
e. Auditing
f. Taxation
g. Manageril accounting
h. Controlleship
6. Accountants employed in entities on various capacity as
accounting staff, chief accountant or controller are said to be
engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
7. It is the area of accountancy profession that encompasses
the process of analyzing, classifying, summarizing and
communicating all transactions involving the receipt aand
disposition of government funds and property and interpreting
results thereof.
e. Internal Auditing
f. External Auditing
g. Privete Accounting
h. Government Accounting
8. The Continuing Professionl Development is
required for
a. Renewal of CPA license
b. Accreditation to practice the accountancy
profession
c. Both renewal of CPA license and accrediation to
practice the accountancy profession.
d. Neither renewal of CPA license nor accreditation
to practice the accountancy profession.
9. Certified Public Accountants are licensed by
e. The philippine Institure of Certified Public
Accountants
f. Securities and Exchange Commission
g. The financial Execitivs Institure of the Philippines
10. Which statement in incorrect in relation to the practice
of public accounting?
a. Single practitioners for the practice of public accounting
shall be registeted CPAs in the Philippines.
b. Partners of partnership formed for the practice of public
accounting shall be registered CPAs in the Philippines
c. The securities and exchange commission can register
any corporation organized for the practice of public
accounting.
d. The professional regulation commission upon favorable
recommendations of the Board of Accountancy shall
issue certificate of accreditation to CPAs in public
practices provided the registrant has acquired a
minimum of three years of meaninful experience on
public practice
Answer 1-23
1. A
2. A
3. D
4. D
5. A
6. B
7. D
8. C
9. D
10. C
Question 1-24 Multiple Choice (ACP)
1. Which is the accounting standard-setting body
in the Philippines at the present time?
a. Accounting Standards Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards Council
2. All of the following are represented in FRSC,
except
e. Board of Accountancy
f. Securities and Exchange Commission
g. Commission on Audit
h. Departmentof Budget and Management
3. The Philippine financial Reporting standards
collectively include
a. PFRS corresponding to IFRS
b. PAS corresponding to IAS
c. Philippine Interpretations corresponding to IFRIC
and SIC
d. All of these are included in Philippine Financial
Reporting standards
4. GAAP is an abbreviation for
e. Generally authorized accounting procedures
f. Generally applied accounting procedures
g. Generally accepted auditing practices
h. Generally accepted accounting principles.
5. Accounting standard-setting has been
characterized as
a. Political process
b. Using a scientific method
c. Pure deductive reasoning
d. A legal process
Answer 1-24
1. D
2. D
3. D
4. D
5. A
Question 1-25 Multiple choice (IFRS)
1. The international accounting standards board was
formed
a. To enforce IFRS in foreign countries
b. To develop a single set of high quality IFRS
c. To establish accounting standards for multinational
entities
d. To develop accounting standards for countries that do
not have their own standard-setting bodies.
2. The IASB declared that the merits of proposed
standards are assessed
e. From a position of neutrality
f. From a position of materiality
g. Based on possible impact on behavior
h. Based on arguments of lobbyist
3. What is the chronological order in the evaluation of
a typical standard?
a. Exposure draft, standard and discussion paper
b. Exposure draft, discussion paper and standard
c. Standard, discussion paper and Exposure draft
d. Discussion paper, exposure draft and standard
4. The IASB publishes standards called
e. International Accounting Standards
f. Financial Reporting Standards
g. International Financial Reporting Standards
h. Statement of Financial Accounting Standards
5. The IASB employs a due process system which
a. Is an efficient system for collecting dues from
members.
b. Enables interested parties to express their views on
issues under consideration.
c. Identifies the most important accounting issues
d. Requires that all CPAs must receive a copy of IFRS
6. What is due process in the standard-setting by IASB?
e. IASB operates in full view of the public
f. Public hearings are held on proposed standards
g. Interested parties can make their views known
h. All of these are part of due process in standard-
setting.
7. What is the possible danger if politics plays too big
a role in developing IFRS?
a. Accounting standards are not truly generally
accepted
b. Individuals may influence the standards
c. User groups become active
d. The IASB delegates its authority to elected officials
8. Accounting standard-setting
e. Can be described as a political process which
reflects political actions of various interested user
groups
f. Is based solely in research and empirical officials.
g. User groups become active
h. The IASB delegates its authority to elected officials
9. The international accounting standards board
a. Was the predecessor to the IASC
b. Can overrule the USA GAAP
c. Promotes the use of high quality and
understandable global accounting standards.
d. Has its headquarters in Geneva
10. IFRIC Interpretations issued by IASB
e. Are considered authoritative and must be followed
f. Cover newly identified financial reporting issues not
specifically addressed
g. Cover issues with conflicting interpretations.
h. All of these are not true about IFRIC Interpretations.
Answer 1-25
1. B
2. A
3. D
4. C
5. B
6. D
7. A
8. A
9. C
10. D
Question 1-26 Multiple Choice (IAA)
1. Financial Accounting is concerned with
a. General purpose reports on financial position and
financial performance
b. Special reports for inventory management
c. Special Reports for income tax computations
d. General purpose reports on changes in share
prices.
2. Financial Accounting can be broadly defined as
the area of accounting that prepares
e. General purpose financial statements to be used
by parties internal to the entity
f. Financial statements to be used by investors.
c. General purpose financial statements to be used
by parties both internal and external to the entity.
d. Financial statements to be used primarily by
management.

3. Financial accounting emphasizes reporting to

a. Management
b. Regulatory Bodies
c. Internal Auditors
d. Creditors and Investors
4.Managerial accounting emphasizes
a. Reporting financial information to external users
b. Reporting to the Securities and Exchange
Commission
c. Combining accounting with data processing
d. Developing accounting information for use within an
entity
5. Which statement is true regarding managerial
accounting and financial accounting?
e. Managerial accounting is generally more precise
f. Managerial accounting need not follow GAAP while
financial accounting must follow GAAP
g. Managerial accounting has a future focus
h. The emphasis in managerial accounting is
relevance and emphasis on financial accounting is
timeless
Answer 1-26
1. A
2. C
3. D
4. D
5. B
Question 1-27 Multiple choice ( IAA)
1. Generally accepted accounting principle
a. Are accounting principles based on law.
b. Derive their credibility and authority from law
c. Derive their authority from regulatory authority
d. Derive their credibility and authority from recognition
and acceptance by the accountancy profession
2. Which statement best describes generally accepted
accounting principles?
e. The accounting principles have been developed on
the public sector
f. The accounting principles have been developed on
the basis of such factors as usage and practical
necessity.
g. The accounting principles are the same as laws
h. The accounting principles do not apply to SMEs
3. Proper application of generally accepted accounting
principles is most dependent upon
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
4. Once an accounting standard has been established
e. The standard is continually reviewed to see if
modification is necessary
f. The standard is not reviewed
g. The task of reviewing the standard is given to a
national organization of CPAs
h. No revisions should be made to the standard.
5. The primary responsibility for properly applying
GAAP lies with
a. External auditor
b. Internal auditor
c. Management
d. National accounting organization
Answer 1-27
1. D
2. B
3. D
4. A
5. C
CHAPTER 2

CONCEPTUAL FRAMEWORK
OBJECTIVE OF FINANCIAL
REPORTING
Question 2-1
 What do you understand by Conceptual
Framework for Financial Reporting?
Answer 2-1:
The Conceptual Framework for Financial Reporting is
a complete, comprehensive and single document
promulgated by the International Accounting
Standards Board
The Conceptual Framework is a summary of the
terms and concepts that underlie the preparation and
presentation of financial statements.
In other words, the conceptual framework describes
the concepts for general purpose financial reporting
It is the underlying theory for the development of
accounting standards and revision of previously
Question 2-2
 What are the basic purpose of the Conceptual
framework?
Answer 2-2:
a. To assist the International Accounting Standard Board
to develop IFRS based on consistent concepts.
b. To assist preparers of financial statements to develop
consistent accounting policy when no standard
applies to a particular transaction or other event or
where an issue is not addressed by an IFRS.
c. To assist preparers of financial statements to develop
accounting policy when a standard allows a choice of
an accounting policy.
d. To assist all parties to understand and interpret IFRS.
Question 2-3
 Explain the authoritative status of the Conceptual
Framework.
Answer 2-3:
If there is a standard or an interpretation that
specifically applies to a transaction, the standard or
interpretation overrides the Conceptual Framework.
In the absence of a standard or an interpretation that
specifically applies to a transaction management
shall consider the applicability of the Conceptual
Framework in developing and applying an
accounting policy that results in information that is
relevant and reliable.
However, it is to be stated that the Conceptual
Framework is not an International Financial
Reporting Standard.
Nothing in the Conceptual Framework overrides any
specific International Financial Reporting Standard.
In case where there is a conflict, the requirements of
the International Financial Reporting Standards shall
prevail over the Conceptual Framework.
Question 2-4
 What are the classifications of users of financial
information under the Conceptual Framework?
Answer 2-4:
The users of Financial information may be classified
into two, namely primary users and other users.
The primary users include the existing and potential
investors, lenders, and other creditors.
The other users include the employees, customer,
government and its agencies, and the public.
Question 2-5
 Explain primary users of their information needs.
Answer 2-5:
The primary users of financial information are the
parties to whom generally purpose financial reports
are primarily directed.
Such users cannot require reporting entities to
provide information directly to them and therefore
must rely on general purpose financial reports for
how much of the financial information is needed.
Existing and potential investors are concerned with
the risk inherent in and return provided by their
investments.
The investors need information to help them
determine whether they should buy, hold or sell.
Shareholders are also interested in information
which enables them to assess the ability of the entity
to pay dividends.
Existing and potential lenders and other creditors are
interested in information which enables them to
determine whether their loans, interest thereon and
other amounts owing to them will be paid when due.
Question 2-6
 Explain other users and their information needs.
Answer 2-6:
By residual definition, other users are users of financial
information other that the existing and potential investors,
lenders and other creditors.
Other users are so called because they are parties that
may find the general purpose financial reports useful but
the reports are not directed to the primarily.
Employees are interested in information about the stability
and profitability of the entity.
The employees are interested in information which
enables them to assess the ability of the entity to provide
remuneration, retirement benefits and employment
opportunities.
Customers have an interest in information about the
continuance of an entity especially when they have a
long-term involvement with or are dependent entity.
Government and its agencies are interested in the
allocation of resources and therefore the activities of
the entity.
These users require information to regulate the
activities of the entity, determine taxation policies
and as basis for national income and similar
statistics.
Entities affect member of the public in a variety of
ways.
Question 2-7
 What is the scope of the Revised Conceptual
Framework?
Answer 2-7:
The Revised Conceptual Framework contains eight
chapters.
1. Objective of Financial Reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and reporting entity
4. Elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance.
Question 2-8
 Explain the objective of financial reporting
Answer 2-8:
The objectives of financial reporting forms the
foundation of the conceptual framework.
The overall objective of financial reporting is to provide
financial information for decision making.
The objective of financial reporting is the “why”, purpose
or goal of accounting.
Financial reporting is the provision of financial
information about an entity to external users.
The principal way of providing financial information to
external users is through the annual financial
statements.
However, financial reporting encompasses not only
financial statements but also other information such
as financial highlights, summary of important
financial figures, analysis of financial statements and
significant ratios.
Financial reports also include nonfinancial
information such as description of major products
and a listing of corporate officers and directors.
Question 2-9
 What are the specific objectives of financial
reporting?
Answer 2-9:
a. To provide information useful in making decision
about providing resources to the entity.
b. To provide information useful in assessing the
cash flow prospects of the entity.
c. To provide information about the entity resources,
claims and changes in resources and claims.
Question 2-10
 What are the limitations of financial reporting?
Answer 2-10:
a. General purpose financial reports do not and cannot
provide all of the information that existing and potential
investors, lenders and other creditors need.
b. General purpose financial reports 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
c. General purpose financial reports are intended to provide
common information to users and cannot accommodate
every request for information.
d. To a large extent, general purpose financial reports are
based on estimate and judgment rather than exact
depiction.
Question 2-11
 Explain management stewardship of the entity’s economic
resources.
Answer 2-11:
Financial reporting provides information not only about entity
performance but also management performance or
management stewardship.
Information about how efficiently and effectively management
has discharged its responsibilities to use the entities
economic resources helps users to assess management
stewardship of those resources.
Such information is also useful for predicting how
management will use the entity’s economic resources in
future periods.
Hence, the information can be useful for assessing the
entity’s prospects for future net cash flow.
Question 2-12 Multiple Choice (IFRS)
1. Which statement is not true about the Conceptual
Framework for Financial Reporting?
a. The Conceptual Framework is an IFRS
b. The Conceptual Framework describes the concepts for
general purpose financial reporting
c. In case of conflict, the requirement of the IFRS prevail
over the Conceptual Framework
d. All of these statements are not true
2. Which is a purpose of the Conceptual Framework?
e. To assist the IASB to develop IFRS based on consistent
concepts.
f. To assist preparers to develop consistent accounting
policy when no standard applies to a particular
transaction.
c. To assist all parties to understand and interpret IFRS.
d. All of these can be considered a purpose of the
Conceptual Framework.
3. Which is not a purpose of the conceptual framework?
a. To assist users of financial statements in interpreting
the standards
b. To assist preparers of financial statements in
applying the standards
c. To assist preparers of financial statements in
developing an accountancy when a standard allows
an accounting policy choice.
d. To assist the Board of Accountancy in promulgating
rules and regulations affecting the accountancy
profession.
4. The conceptual framework provides the
foundation for standard that
a. Contribute to transparency by enhancing
international comparability and quality of financial
information.
b. strengthen accountability of management
c. Contribute to economic efficiency by helping
investors to identify opportunities and risks
across the world
d. All of these are result of IFRS
Answer 2-12
1. A
2. D
3. D
4. D
Question 2-13
1. What is the authoritative status of the Conceptual
Framework?
a. The conceptual framework has the highest level of
authority
b. In the absence of a standard or an interpretation that
specifically applies to a transaction, the conceptual
framework shall be followed.
c. In the absence of a standard or an interpretation that
specifically applies to a transaction, management shall
consider the applicability of the conceptual framework
in developing and applying an accounting policy that
result in information that is relevant and reliable
d. The conceptual framework applies only when the IASB
develops new standards
2. The conceptual framework is intended to establish
a. GAAP in financial reporting
b. The meaning of “present fairly in accordance with
GAAP”
c. The objective and concepts for use in developing
standards of financial accounting and reporting.
d. The hierarchy of sources of GAAP.
3. A conceptual Framework should
e. Lea to uniformity of financial statements
f. Eliminate alternative accounting principles
g. Guide multinational entities in developing generally
accepted auditing standards
h. Define the basic objectives, terms and concepts of
accounting
4. Which is not a purpose of the Conceptual
Framework?
a. To provide definition of key terms and concepts.
b. To provide specific guidelines for resolving
situations not covered by existing accounting
standards
c. To assist accountants in selecting among
alternative accounting and reporting methods.
d. To assist IASB in the standard-setting process.
Answer 2-13
1. C
2. C
3. D
4. B
Question 2-14
1. In the conceptual framework for financial reporting
what provides the why of accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Elements of Financial statement
d. Objective of financial reporting
2. The underlying theme of the Conceptual Framework
is
e. Decision usefulness
b. Understandability
c. Timeliness
d. Comparability
3. Which is not of purpose of having a Conceptual Framework?
a. To enable the accountancy profession to solve more quickly
emerging practical problems
b. To provide a foundation from which to build more useful
financial accounting standards
c. To enhance comparability of financial statements across entities
d. To assist regulatory agencies in issuing rules and regulations for
a particular industry
4. Which statement is not true concerning the Conceptual
Framework?
e. The Conceptual Framework should be a basis for standard
setting.
f. The Conceptual Framework should allow practical problems to
be solved more quickly
g. The Conceptual Framework should be based on fundamental
truth derived from the law of nature.
h. The Conceptual Framework should increase users'
understanding and confidence
Answer 2-14
1. D
2. A
3. D
4. C
QUESTION 2-15 Multiple choice (IAA)
1. The overall objective of financial reporting is to provide
information
a. That is useful for decision making.
b. About assets, liabilities and equity of an entity
c. About financial performance during a period.
d. That allows owners to assess management performance.
2. The primary focus of financial reporting has been on
meeting the needs of which of the following groups?
e. Management
f. Existing and potential investors, lenders and other
creditors
g. National taxing authorities
h. Independent CPAs
3. The primary objective of financial reporting is to
provide useful information to
a. Management
b. Capital providers
c. Regulatory body
d. Government
4. Which is an objective of financial reporting?
e. To provide information that is useful in making
investing and credit decisions.
f. To provide information that is useful to management.
g. To provide information about the potential users.
h. To provide information about ways to solve internal
and external conflicts about the entity.
5. What is an objective of financial reporting?
a. To provide information that is useful to management in
making decisions.
b. To provide information that clearly portrays nonfinancial
transactions.
c. To provide information that is useful to assess the amount,
timing, and uncertainty of prospective cash receipts.
d. To provide information that excludes claims against the
resources.
6. An objective of financial reporting is to provide
e. Information about the investors in the entity
f. Information about the liquidation value.
g. Information that is useful in assessing cash flow
prospects.
h. Information that will attract new investors.
7. Assessing cash flow prospects is interpreted to
mean
a. Cash basis accounting is preferred over accrual
basis
b. Information about the financial effects of cash
receipts and cash payments is generally
considered the best indicator of ability to
generate favorable cash flows.
c. Over the long run, trends in revenue and
expenses are generally more meaningful than
trends in cash receipts and disbursements.
d. All of the choices are correct regarding assessing
cash flow prospects.
Answer 2-15
1. A
2. B
3. B
4. A
5. C
6. C
7. C
QUESTION 2-16 Multiple choice (AICPA Adapted)
1. The objectives of financial reporting are based on
a. The need for conservatism
b. Reporting on management stewardship
c. Generally accepted accounting principles
d. The needs of the users of the information
2. Financial reporting pertains to
e. Individual business entities, rather than to industries or
an economy as a whole or to members of society as
consumers
f. Individual business entities and an economy as a whole
or to members of society as consumers
g. Individual business entities and an economy as a
whole, rather than to industries or to members of society
as consumers
h. Individual business entities, industries and an economy
as a whole, rather than to members of society as
consumers
3. During a period when an entity is under the
direction of a particular management, financial
reporting will directly provide information about
a. Both entity performance and management
performance
b. Management performance but not entity
performance
c. Entity performance but not management
performance
d. Neither entity performance nor management
performance.
4. Which of the following is not true about an
objective of financial reporting?
a. Financial reporting shall provide information
about entity resources, claims against those
resources and changes in them.
b. Financial reporting shall not provide information
useful in evaluating management stewardship.
c. Financial reporting shall provide information
useful in investment, credit and similar decisions.
d. Financial reporting shall provide information
useful in assessing cash flow prospects.
5. Which is not an objective of financial reporting?
a. To provide information about assets and claims
against those assets
b. To provide information that is useful in assessing
sources and uses of cash
c. To provide information that is useful in lending
and investing decisions
d. To provide information about liquidation value of
an entity
Answer 2-16
1. D
2. A
3. A
4. B
5. D