Chapter 1

DevelopmentofFinancial Reporting Framework

15. The following relates to the evaluation ofa standard The Conceptual Framework for
I. &q>osure draft is issued for comment
II. Final standard is issued
- ■ Financial Reporting
III. Discussion paper

Which ofthe following is the correct chronological sequence? Learning Outcomes

aL I-II-111
b. Il-l-Ill
After reading this chapter, you should be able to:
c. Ill-li-I
(a) identify and obtain understanding of the eight (8) scopes of the Conceptual
d. I-IIl-lI
Framework for Financial Reporting; and
(b] attain proficiency in answering financial accounting theory questions relating
16. . Which ofthe following is true regarding the term of office of the chairman and to the conceptual framework for financial reporting.
members ofthe PRBOA?
a. No person who has served two successive terms shall be eligible for
reappointment until the lapse of one year.
Overview
b. Any vacancy occurring within the term of a member shall be filled up for
. the unexpired portion ofthe term only.
> The Conceptual Framework
c. The Chairman and members of BOA shall hold office for a term of three
years.'
• sets out the fundamental concepts for financial reporting that guide the
d. All ofthe statements are true.
lASB in developing IFRS Standards;
1 - ~

17. Which ofthe following is not of one ofthe objectives of PICPA?

a. To develop and improve accountancy education • helps to ensure that the Standards are conceptually consistent and that
similar transactions are treated the same way, so as to provide useful
b. To encourage cordial relations among accountants.
information for investors,lenders and other creditors;
c; To promote and maintain high professional and ethical standards among
accountants.
d. To issue the Certificate of Certified Public Accountant granted by the • /assists companies in developing accounting policies when no IFRS Standard
Republic ofthe Philippines. applies to a particular transaction,and more broadly,helps stakeholders to
understand and interpret the Standards; and .
18. The PICPA js a nonprofit corporation duly registered with the
a. PRBOA
• does not override any specific IFRS.Should the lASB decide to issue a new
or revised pronouncement that is in conflict with the framework,the lASB
b. PRC
c. SEC
will highlight the fact and explain the reasoiis for the departure in the basis
d. FRSC
forj:onclusions.

19: The following are the four geographical groupings ofthe PICPA,except Scope
a. Luzon
bj Cebu > Chapter 1 - The objective of general-purpose financial reporting
c. Mihdaiiao .
d. Metro Manila . • > Chapter 2- Qualitative characteristics of useful financial information

m Which Ofthe following about the IFRS Foundation is Incorrect? > Chapter 3- Financial statements and the reporting entity
a. It was formed On Februaiy 6,2001.
bi The IFRS Foundation's predecessor body was called the International > Chapter 4-The elements offinancial statements
Accounting Standards Foundation (lASF).
Cv The primaiy objective is to, develop globally accepted International > Chapter 5- Recognition and derecognition

d; IFRS Standards are set by the IFRS.Foundation's standard-setting body,the > Chapter 6- Measurement
international'Accounting Standards Committee.

12
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

> Chapter 7- Presentation and disclosure Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
Chapter 8- Concepts of capital and capital maintenance faithfully represented.

• Comparability - Information about a reporting entity is more useful if

> Chapter 1: The Objective of General-Purpose Financial Reporting it can be compared with a similar information about other entities
(inter-comparability) and with similar information about the same
> The objective of financial reporting is to provide financial information that is
entity for another period or another date (intra-cpmparability).
useful to users in making decisions relating to providing resources to the entity.
Comparability enables users to identify and understand similarities in,
> The primary users of general-purpose financial reporting are an entity's and differences among,items.

• e»sting and potential investors; and • Verifiability - helps to assure users that information represents
faithfully the economic phenomena it purports to represent It means
• lenders and Other creditors. that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a
> The IFRS Framework notes that general purpose financial reports cannot 'particular depiction is a faithful representation.
provide all the information that users may need to make economic decisions.
They will need to consider pertinent information from other sources as well.
• Timeliness - means that information is available to decision-makers in

> The IFRS Framework notes that other parties,including prudential and market time to be capable ofinfluencing their decisions.
regulators, may find general purpose financial reports useful. However, these
are not considered a primary user and general-purpose financial reports are not • Understandability - classifying, characterizing and presenting
primarily directed to regulators or other parties. information clearly and concisely makes it understandable.

> Cost is a pervasive constraint on the information that can be provided by

❖ Chapter 2: QuaUtative Characteristics of Useful Financial Information general purpose financial reporting. Reporting such information iniposes costs
and those costs should be Justified by the benefits ofreporting that information.
^ The qualitative characteristics ofuseful financial reporting identiiy the types of
information that are likely to be most useful to users in making decisions about
the reporting entity on the basis ofinformation in its financial report. *> Chapters: Financial Statements and the Reporting Entity

> Financial statements

> Financial information is useful when it has the following fundamental
qualitative characteristics: • A particular form of financial reports that provide information about
the reporting entity's assets, liabilities, equity, income and expenses.
• Relevance - the finaincial information is capable of making a difference . This information is provided in the statement of financial position,
in the decisions made by users and it has: ' statement offinancial periformance and in other statements and notes.
' ; o predictive value-information is relevant ifit helps users ofthe
financial statements in predicting future trends of the • Types offinancial statements
business; and • o Consolidated financial statements - provide .information of
o confirmatory value - confirming or correcting any past both the parent and its subsidiaries as a single reporting entity,
predictions made. o Unconsolidated financial statements - provide information of
i ' '
the parent only.
• Faithful Representation - a faithful representation seeks to maximize o Combined financial statements - provide information of two
the underlying characteristics of or more entities that are not all linked by a parent-subsidiary
o completeness - adequate or full disclosure of all necessary relationship.
information
o neutrality - fairness and freedom from bias
o freedom from error - no inaccuracies and omissions

14 15
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

• Reporting Period - financial statements are prepared for a specified > Derecognition normally occurs
period oftime and provide comparative information and under certain
circumstances forward-looking information. • for an asset when the entity loses control ofall or part ofthe recognized
asset
• Financial statements provide information about transactions and other
events viewed from the perspective of the reporting entity as a whole • for a liability when the entity no longer has a present obligation for all
and are normally prepared on the assumption that the reporting entity or part ofthe recognized liability.
is a going concern and will continue in operation for the foreseeable
future.
Chapters: Measurement
> The Reporting Entity
> Measurement is defined as the quantifying in monetaiy terms the elements of
• entity that is.required, or chooses,to prepare financial statements. financial statements. The revised' conceptual framework mentions two
, categories: ^
• Not necessarily a le^l entity - could be a portion of an entity or can
comprise more than one entity. • Historical cost
o historical cost provides information derived, at least in part
❖ Chapter 4: The Elements ofFinancial Statements from the price ofthe transaction or other event that gave rise
to the item being measured,
> Definitions ofthe Elements Relating to Financial Position o historical costofassets is reduced ifthey become impaired and
historical costofliabilities is increased ifthey become onerous.
6 one way to apply a historical cost measurement basis to
revents.
^ Aneconomic
economicresource
resourcecontrolled by the
is a right that hasentity as a result
the potential to financial assets and financial liabilities is to measure them at
produce economic benefits. 'amortized cost.

" ■ ■ . v.

~ ^ present obligation of the entity to transfer an economic • Current value

resnnnctkMN, o Fair value- the price that would be received to sell an asset,or
. 1 ity that the entity hasevents. An obligation
no practical is a duty or
ability to avoid. paid to transfer a liability, in an orderly transaction between
^ market participants at the measurement;date. It reflects
^^^^iawfties^*^^^ interest in the assets ofthe entity after deducting market participants' current expectations about the amount,
timing and uncertainty offuture cash flows,
> Definitions ofthe Elements Jtelafing to Performance o Value in use (for assets) and fulfilment value (for liabilities) -
reflects entity-specific current expectations about the amount,
timing and uncertainty offuture cash flows,
increaw 1^*^®^®^ ^ssets or decreases in liabilities that result in o Current cost - reflects the current amount that would be paid
holders ofequi> ^aimt^'^ ^ose relating to contributions from to acquire an equivalent asset; or received to take on an
.equivalent liability.
in assets or increases in liabilities that result in
holders ofequh^ d^'nis^®' distributions to Chapter 7:.Presentation and Disclosure ^

> This chapter states that presentation and disclosure are communication tools.
❖ Chapters: Recognition and Derecognition Effective communication ofinformation in financial statements requires:

^ Reco^ition -the process ofcapturingfor inclusion in the statement offinancial •' fdciising on presentation and disclosure obje^ves and principles
position or the statement of financial performance an item that meets the rather than focusing on rules;
definition ofan asset^a liability, equity,income or expenses. • classifying information in a manner that groups similar items and
separates dissimilar items; and
\

16 17
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

• aggregating information in such a way that it is not obscured either by Q Adopted if the users of financial statements are primarily
unnecessaiy detail or by excessive aggregation. concerned with the maintenance of nominal invested capit^
or the purchasing power ofinvested capital.
Classification - is the sorting ofassets,liabilities, equity,income or expenses on
the basis of shared characteristics for presentation and disclosure purposes. • Physical concept of capital
Such characteristics include—but are not limited to—the nature of the item,its o Capital is regarded as the productive capacity of the entity
role (or function) within the business activities conducted by the entity, and based on,for example,units of output per day.
how it is measured.' o Ifthe main concern of users is with the operating capability of
the entity,a physical concept of capital should be used.
• Classification of assets and liabilities - classification is applied to the
unit of account selected for an asset or a liability. However, it may > Concepts of capital and capital maintenance
sometimes be appropriate to separate an asset or liability into
components that have different characteristics and to classify those • Financial capital maintenance
■components separately. o A profit is earned only if the financial (or money) amount of
the net assets at the end ofthe period exceeds the financial(or
• Offsetting - oc^rs when an entity recognizes and measures both an money) amount of net assets at the beginning of the period,
asset and liability as separate units of account, but groups them into a after excluding any distributions to, and contributions from,
single net amount in the statement of financial position. owners during the period.
o Financial capital maintenance can be measured in either
equity - to provide useful information, it may be nominal monetary units or units of constant purchasing
power. '
hpvp classify equity claims separately if those equity claims
it mtvl characteristics. Similarly, to provide useful information, • Physical capital maintenance
of thn ® to classify components of equity separately if some o A profit is earned only if the physical productive capacity (or
requireme^^"^'^*^ subject to particular legal, regulatory or other operating capability) of the entity (or the resources or funds
needed to achieve that capacity) 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.

separately cnaracteristics and are identinea

are classified income - income and expenses

outside the statement of or loss; or
P ^oss, in Other comprehensive income.
> Aggregation - the adding toaethpt.
expenses that have shared equity, income or
classificktion. ^""acteristics and are included in the same

❖ Chapter8:ConceptsofCapitalandCap,taIMal„te„ance
> Concepts of capital
• Financial concept of capital
Adopted by most entities in preparing their financial
statements.
o Capital is synonymous with the net assets or equity of the
entity.

18 19
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

TRUE OR FALSE QUESTIONS Prudence or conservatism means when in doubt, choose the solution that will
be least likely to overstate liabilities or expenses.
1. Users of financial statements are assumed to need no knowledge of business
and financial accounting matters to understand information contained in The expense recognition principle states that debits must equal credits in each
financial statements. transaction.

2. Relevance and faithful representation are the two primary qualities that make When a company issues its annual financial reports within one month ofthe end
accounting information useful for decision making. of the year depicts the characteristic of timeliness

3. Verifiability and predictive value are two ingredients offaithful representation.

4. Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
5. Revenues are realizable when assets received or held are readily convertible .Ill '>• I'.r.-- V."< '-t '.' •
into cash or claims to cash.
.. . , i • - . • . •
^ f- ■ J j ■ V ; , i..'" •• I u . • •. V. -' ••
.• • 1 . !

accountina°mo^h"!i^''^"'^
accounting means
method to another. that companies cannot switch from one
v.' ■ -j ^ V V-' ■ ■
allow new and emerging practicalframework
problems toofbe more quickly solved. should • -J?' L''':"-';,':*/"-! <-',1 •■'•1 '' ' -'i; .
conceptual concepts and objectives : '•.•'T-'v -.r-'v' ' '' •

derlying theme ofthe conceptual framework is decision usefulness, I. v -V ' . '-Ml i"'. ^

■ > j • • •• ' . <

over ano^^.^^"^ that information cannot favor one set of interested parties •I'.v.".'- -1," I- ., ■ !
. 'r " V i: '.r

benefits to*^hp^H«r'^
^ to ^ particular
be derived from it must measurement
equal the costs associatedorwith
disclosure,
it. the
"s • • . "I f-. : ■ "'V" ^ v" "
meiiness and neutrality are two ingredients of relevance. . >• i'/^ ""y -iJ ' li'i '.y' -y'-
12 d
called a loss assets arising from peripheral or incidental transactions is • , •;'| .iTvi V y y:*''- * i . -i' .i •» '. h.'- /. '\J' !'. ■
Revenue generally should be recognized V • '• ' ■ ■ 1 i' ■' ' -^y af''"- t
at the end of production.
An expenditure should be recorded
amount is material.
as an asset rather than an expense when the
•V; -v r!;' ... r
The Conceptual Framework should be a basis for standard-setting. . ' • . V , ; ' ^ ^ -i . 1 , ' • - 'V
c, v'' ^ '.''■■J'''
The historical cost principle would be oflimited usefulness if not for the going ■" •' V:' ' •> U " , • •• .v".
concern assumption. ^ ^ • ■ ' • • I . • ' ..a f. A-
" • ■ . • • . '1 ,

The Conceptual Framework should be based on fundamental truths that are -a:': ', .'/,
derived from the laws of nature.
• •'
 Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

FINANCIAL ACCOUNTING THEORY QUESTIONS 6. The primary users to whom general purpose financial reports are directed.
I. Existing and potential investors
1. Which ofthe following is not a chapter in the lASB Conceptual Framework? II. Rating agencies
a. The objective of financial statements III. Lenders and other creditors
b. The elements of financial statements IV. Government
c. Concepts of income and expenditure ' V. Employees
d. Concepts of capital and capital maintenance
a. I only
2.
Rtst Step withln hierarchy of guidance to which b. I and II
c. I, II, III, IV, V
accounting poHcies? applicability at considers, when selecting d. I and III

^ the definitions, recognition criteria, and 7. Financial statements are prepared and presented for external users by many
h Annlv thrrT Conceptual Framework. entities around the world. Although such financial statements may appear
c. Consider PFRS dealing with similar and related issues. similar from country to countr^, there are differences which have probably
\ to the extent thpv P^'onouncements ofother standard-setting bodies been caused by a variety of social, economic and legal circumstances and by
d. Apply a standard from'ppRs'if h"''' ^ n"" Framework? different countries having in mind the needs of different users of financial
event, or condition. specifically relates to the transaction, statements when setting national requirements. These different circumstances
have led/ resulted to all of the following except
3. a. differences in the scope of the financial statements and the disclosures
be^een''tlS^°Conc^^ 'n ® number of cases there may be a conflict
Standard.In those cases wherTtherefs Tconflirt Reporting made in them.
b. different audit opinions resulting to various losses, litigations and
a.
differences in audit standards.
b.
c. use of different criteria for the recognition of items in the financial
necessitate disclosurt in the should prevail and this may •statements and in a preference for different bases of measurement.
c. the requirements of the ^
d. use of a variety of definitions of the elements of financial statements; that
Philippine Financial ReportinSL^ is, for example,assets, liabilities, equity,income and expenses.
d. the requirements of tho Dv,-i-
over those ofthe Conceptual Seworr"^'Reporting Standard prevail 8. How does the conceptual framework describe the qualitative characteristics of
financial statements?
4.
Which ofthe following statements is false^ a. Non-qualitative aspects of financial position and financial performance
a. Nothing in the Concentiiai u , b. Measure the extent to which an entity has complied with all relevant
requirement
To meet the inobjective
a Standa^
n^f ao framework
i overrides any Standard or any standards and interpretations
b.
c. Broad classes of financial effects of transactions and other events
may sometimes sbecifv financial reporting, the Board d. Attributes that make the information provided in financial statements
Conceptual Framework that depart from aspects of the useful to users
c.
Conceptual Framework fr>r c- .,
International Accountina Reporting was issued by the 9. Which of the following characteristics replaces the "reliability" characteristic
revised in March 2018 Board in September 2010. It was under the old Conceptual Framework?
d.
Revisions of the Concentiiai n,.
a. Faithful representation
to the Standards. framework will automatically lead to changes b. Prudence
c. Substance over form
d. Verifiability
5. '^^^^nable to require^hr^^ ^"tended to meetthe information needs ofusers who
:redflSnfo™a?iorni^^^^ offinancial reports tailored to meettheir 10. If accounting information has confirmatory value,it
,3 Feasibility reports a. is prepared on an annual basis. '
f," General purpose financial reports b. is neutral in its representations.
c. Special purpose financial reports c. has been verified by external audit j'
^ Prospectus d. confirms or corrects prior expectations.

22 23
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

11. To be a perfectly faithful representation, a depiction would have three 17. Which of the following is most likely to prepare the most accurate financial
characteristics. Which ofthe following is not included? forecast for a corporate enterprise based on empirical evidence?
a. No "errors or omission in the description of the phenomenon or a. Financial analysts
transactions.
b. Corporate management
b. The information contained in the financial statements must be free from
• c. Independent certified public accountants
bias.
d. Investors using statistical models to generatie forecasts
Relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. 18. The providers ofrisk capital and their advisers '
d. When the information can help users increase the likelihood of correctly a. are interested in information about the stability and profitability of the
predicting or forecasting outcome of events.
employers.
b. are interested in information that enables them to determine whether their
12. The qualitative objective of financial accounting that is directed towards
meeting th6 common needs of users and is independent of presumptions about moans and the interest attaching to them will be aid when due.
particular needs and desires ofspecific uses ofthe information is known as c. are concerned with the risk inherent in and return provided by their
a. comparabUity.- investments arid need information to help determine whether they should
b. neutrality. buy or sell.
c. relevance. d. have an interest in information about the continuance of an enterprise,
d. verifiability. especially when they have a long-term involvement with or are dependent
' on the enterprise.
13.
characteristi^^o^finf^'^ri^^ framework describe, the enhancing qualitative 19. Which statement is incorrect concerning the users and their information needs?
1 sS^es^^ statements[Choose the incorrect statement)? a. Government and their agencies are interested in the allocation ofresources
and therefore the activities ofthe enterprise
C." EnWes information, b. Employees and their representative groups are interested in information
a faithful representation of relevant and provides about the stability and profitability ofthe enterprise
d. Allstateme^reSrrth f c. Enterprises affect members ofthe public in a variety of ways,including the
14.
ements relate to the enhancing qualitative characteristics. . number of people they employ and their patronage oflocal suppliers
d. Suppliers and trade creditors have an interest in information about the
continuance, of an enterprise,. especially when they have a long-term
involvement with or are dependent on the enterprise.
c." cSeSiSs '•epresentation.
d. comparabilitji^.verifiabmtrtit^T''"'"'^"'"®'''""'''
iy» eliness,and understandability. 20. Financial information exhibits the characteristic of consistency when
a. gains and losses are shown separately on the income statement
15.
Which of the following statemeni- ^
• b. accoui|ting entities give similar events the same accounting treatment each
"comparability" characteristics? ® feature of financial information's p.ei:iod'.
a. comparison requires at lp»aci-<^A expenditures are reported as expenses and netted against revenue in the
b. Consistency,althouS c.

period in which they are paid.

c. Comparability is uniformity ^P^rability,is not the same. accounting procedures are adopted which smooth net income and make
d. the goal;consistency helps to achieve thai goal. d.
results'consistent between years.

16. Which among the following is an ina- 21. Verifiability implies

information? mairect user of financial accounting a. consensus
a. A stockholder ofthe corporation b. legal evidence
b. A potential supplier ofthe entemrise c. legal verdict
c. A bank which intends to grantIn,-. d. logic ,
d. The trade association to whichh tho "the enterprise
the enterprise belongs as a member

24
25

,1
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The ConceptualFramework for Financial Reporting

22. An essential quality ofthe information provided in financial statements is that How should he deal with this situation?
it is readily understandable by users. For this purpose, users are a. He should deliver his presentation just to those who are financially
qualified.
I. Assumed to have a reasonable knowledge of business and economic b. He should classify, characterize and present the information clearly and
activities and accounting and a willingness to study the information with precisely.
reasonable diligence. t c. He should open his presentation with the advice that some ofthem may
II. Informed ofthe accounting policies employed and changes in those policies not understand all of it
and the effects ofsuch changes. '■ M'
at d. In doing his presentation he should omit any complex issues, so that
everybody can understand what he is saying.
a. 1
b. II 26. Which concept or qualitative characteristic has influenced the decision in (I)
c. Both I and II above?
■ ii'ii
d. Neither 1 nor II
a. Accruals
b. Comparability
23. Objectivity is assumed to be achieved when an accounting transaction iil c. Faithful representation
a. allocates revenue or expenses in a rational and systematic manner. d. Verifiability
b. is recorded in a fixed amount of pesos. 'I
c. involves an arm s length transaction between two independent parties. 27. In looking at issue (11) above,the accountant decides that the properties should
d. involves the payment or receipt of cash. m
be revalued. Which concept or qualitative characteristic has been applied in
24. Overetating an expense in the current period is acceptable making this decision?
a. because it is conservative. a. Going concern
b. as long as it is consistently done. b. Materiality
c. only when the amount involved is immaterial. ^c. Relevance
• It relieves the future period of additional burden. d. Timeliness
I
25. ^]p. 28. Because ofloss on operating the shops,the accountant is considering the issue
events'^and'l^w°^!p^^jf considering a number oftransactions and ofgoing concern. If it were decided that MAU was no longer a going concern at
qrsJtotive cha«l®^ « ® accordance with the concepts and 31 March 20x1, which of the .following would apply in accordance with the
Framework. Durinir^-h^^ offinancial information as set out in the Conceptual I Conceptual Framework?
a. All the assets should be liquidated.
% b. Financial statements do not need to be prepared.
(| c. The financial statements should be prepared on a diffei^ent basis.
its useful life company and leased it back for the remainder of I d. The financial statements should be prepared as normal and the going
secmXam has decided that this should be treated as a I. concern status disclosed in the notes.

showedTfoM
increase in thefro'm
valueope"^^^^
ofits nrLe^i a' company ishistorical
aware thatcosts
the
29. Which ofthe following does not describe a reporting entity?
a. A reporting entity is not necessarily a legal entity.
operating loss. ^^rmg the period far outweighed the b. An entity that is required,or chooses)to prepare financial statements.
c. A reporting entity can be a single entity or a portion of an entity or can
consWering^han^n^'to^^
March 20x1.
accountant i?
weighted average method for the year to 31
comprise more than one entity.
d. All ofthese statements describe a reporting entity.
'

Vf members of the Board of MAU have little

fi"* nl-ial statements at the Board meeting.
financial Worried aboUt hls presentation of the

26 27
Chapter2 Chapter 2
The Copceptual Framewoiic for Financial Reporting The Conceptual Framework for Finiancial Reporting

30. " When should an item that meets the.definition of an element be recognized, 3 6. Which of the following rights that do not correspond to an obligation of another
according to the Conceptual Framework? party?
a. When the element has a cost or value that can be measured with reliability. a. Rights to receive cash
b. When the entity obtains control ofthe rights or obligations associated with b. Rights to use intellectual property
the item. c. Rights to receive goods or services
c. When it is probable that any future economic benefit associated with the d. Rights to exchange economic resources with another party on favorable'
item will flow to or from the entity. terms

d. When it is probable that any future economic benefit associated with the
item will flow to or from the entity and the item has a cost or value that can 37. It is the right or the group of rights, the obligation or the group of obligations,
be measured with reliability. or the group of rights and obligations, to which recognition criteria and
measurement concepts.are applied.
31. Which of the following relate to financial position in a set of financial a. Asset
statements? b. Bank account
a. Income and expenses c. Chart of account
b. Assets,liabilities and equity d. Unit of account
c. Income,expenses and liabilities ■Hi
IhI
d. Assets,liabilities,income and expenses 38. The revised definition of asset excludes which of the following?
a. Controlled by the entity
32. Which of the following relate to financial performance in a set of financial b. As a result of past events
statements? c. A present economic resource
a. Income and expenses d. From which future economic benefits are expected to flow to the entity.
b. Assets,liabilities and equity
c. Income,expenses and liabilities 39. The three aspects in the revised definition of asset, excludes which of the
d. ^sets,liabilities,income and expenses following?
a. Right
33. A n^tthat has the potential to produce economic benefits b. Control
a. Economic entity c. Ownership
b. Economic resource d. Potential to produce economic benefits
c. Economic right
d. Legal right 40. Which of the following represents a liability?
34.
a. The obligation to pay for goods that an entity expects "to order from
suppliers nert year. ^
entitling or engine
enoumg r do oneproduce
enabimg it to or more economic benefits
ofthe following for an
excent entity by b. The obligation to provide goods that customers have ordered and paid for
during the current year.
c. The obligation to pay interest on a five-year note payable that was issued
c. exchange ecohnm' economic resource the last day of the current year.
d. receive cash or economic resources byparty onthe
selling unfavorable
economicterms :
resource d. The obligation to distribute an entitj^s own shares next year as a result of a
stock dividend declared near the end of the current year.
35.
a. Con^oT entity has no practical ability to avoid.
b. Economic condition
c. Obligation
d. Pledge .

28 29
Chapter 2 Chapter 2
The Conceptual Framework for Financial Reporting The Conceptual Framework for Financial Reporting

41. The following statements relate to liabilities. Which of the following is (are) 46. This pertains to the removal of all or part ofa recognized asset or liability from
false? an entity's statement offinancial position.
a. Derecognition
I. Liabilities may be measured by estimates of a definite character when the b. Realization
amount ofthe liability cannot be measured precisely. c. Recognition
II. All monetary liabilities should be stated in the balance sheet at their present d. Write-off
(discounted) values.
III. Under current GAAP, there are instances when an increase in liability is 47. The two measurement bases mentioned in the Conceptual Framework are
matched with an increase in revenue. a. historical cost and fair value.
b. current value and historical cost.
a. 1 and 11 only c. replacement cost and current value.
b. I and 111 only d. historical cost and replacement cost.
c. II and in only
d. I, II and III Historical cost means that assets are recorded at the
48.
a. discounted value ofthe future net cash flows from the use of an asset
42. Which one ofthe following would be classified as a liability? b. amount of cash or cash equivalents that would have to be paid if the same
a. PDAC has estimated the tax charge on its profits for the year just ended as asset was acquired currently.
P16S.000. 6 F j j c. amount of cash or cash equivalents that could currently be obtained from
b. SBCl is planning to invest in new machinery and has been quoted a price of the sale of an asset in an orderly disposal. ' ,
P570,000. d. amount of cash or cash equivalents paid, or the fair value of the
c: BRCI s business manufactures a product under license. In 12 months'time consideration given to acquire them at the time ofacquisition.
the license expires and BRCI will have to pay P50,000 for it to renewed.
PGMI purchased an investment9 months ago for P120,000.The market for 49. A Muntinlupa City business paid P25,000 cash for equipment used in the
these investments has now fallen and PGMI's investment is valued at business. At the time of purchase, the equipment had a list price of P30,000.
P90,000. When the balance sheet was prepared,the value ofthe equipment later rose to
P32,000. What is the relevant measure ofthe value ofthe equipment?
43. Income
X..UUUIC refers
rerers to
ro in assets,or in liabilities,that result in a. Historical cost, P25,000
in equity,other than those relating to distributions to holders of equity claims. b. Fair market cost, P30,000
a. increases,increases,increases c. Current market cost, P32,000
b. increases,increases, decreases d. P25,000 on the day of purchase,P32,000 on balance sheet date
c. increases, decreases,increases
d. increases, decreases,decreases 50. The net worth method,otherwise known as the capital maintenance approach,
is a concept in which
44. Expenses refers, to in assets, or in liabilities, that result in a. profit equals the change in the market value of the net assets during a
in equity, other than those relating to distributions to holders of equity period.
claims. b. market values adjusted for the effects of inflation or deflation are used to
a. increase,increases, decreases measure profit.
b. decreases,increases,decreases c. the financial statement effects of business events classified as revenues,
c. decreases, decreases,increases gains,expenses and losses, which are used to measure and define profit.
d. decreases,decreases,decreases d. profit is measured as the amount that an enterprise could distribute to its
owners and be as well off at the end ofthe period as it was at the beginning
45. Which ofthe following statements conforms to the realization concept? ofthe period.
a. Cash was collected on accounts receivable.
b. Depreciated equipment was sold in exchange for a note receivable. 51. Which measurement basis is adopted in the physical capital maintenance
c. Product unit costs were assigned to cost ofgoods sold when the units were concept?
sold. a. Current cost
d. Equipment depreciation was assigned to a production department and then b. Fair value
to product unit costs. c. Historical cost
d. Present value

30 31
Chapter 2
The Conceptual Framework for Financial Reporting

52. Under a financial capital maintenance concept,a profit is earned if

a. the financial amount ofthe net assets at the beginning exceeds the financial
amount ofthe assets at the end.
b. the financial amount of the net assets at the end exceeds the financial
amount ofthe net assets at the beginning.
c. the financial amount of net assets at the beginning exceeds the financial
amount of net assets at the end after excluding any distribution and
contribution from ovymers. .
d. the financial amount of the net assets at the end exceeds the. financial
amount of the net assets at the beginning after excluding any distribution
and contiibution from owners. ■

53. This concept should be used ifthe main concern of users is with the operating
capability ofthe entity.
a. Financial capital concept
b. Invested capital concept
c. Operating capital concept
d. Physical capital concept

32