(BOOK BASED) Chapter 2

B) To assist the Professional Regulatory Board of Accountancy in the regulation of the accounting profession in the Philippines

Which among the following is not a purpose of the IASB’s Conceptual Framework for Financial Reporting?

A) To assist the local standard-setting bodies, such as the Financial and Sustainability Reporting Standards Council, in the adoption of the IFRS
B) To assist the Professional Regulatory Board of Accountancy in the regulation of the accounting profession in the Philippines
C) To assist the auditors in forming an opinion as to the fairness of the presentation of the financial statements
D) To assist the users in interpreting the information presented on the financial statements

C) In case of conflict between the IFRS and the Conceptual Framework, the IFRS shall prevail

Which of the following is a valid statement regarding the status of the Conceptual Framework?

A) The Conceptual Framework is an IFRS
B) The Conceptual Framework is a PFRS
C) In case of conflict between the IFRS and the Conceptual Framework, the IFRS shall prevail
D) In case of conflict between the IFRS and the Conceptual Framework, the Conceptual Framework shall prevail

C) I, II, and III

The IASB's Conceptual Framework deals with the

I. objectives of the financial statements
II. qualitative characteristics that make the financial statement useful to user
III. concepts of capital and capital maintenance
IV. generally accepted accounting principles

A) I and II
B) II and III
C) I, II, and III
D) I, II, III and IV

B) of the users for accounting information

The objectives of financial reporting are based on the need

A) to comply with prudence
B) of the users for accounting information
C) to report management's stewardship
D) for compliance with generally accepted accounting principles

D) Existing and potential investors, lenders, and other creditors

Under the Conceptual Framework for Financial Reporting, who are considered the primary users of financial reporting?

A) Internal and external users
B) Existing investors, lenders, and other creditors
C) Potential investors, lenders, and other creditors
D) Existing and potential investors, lenders, and other creditors

C) To provide information about the economic decisions of the enterprise

Which of the following is not an objective of financial statements

A) To provide information about the financial position of an enterprise
B) To provide information about the performance of an enterprise
C) To provide information about the economic decisions of the enterprise
D) To provide information about the changes in financial position of an enterprise

C) completeness

Making the financial information available when a decision is to be made achieves the characteristic of

A) timeliness
B) neutrality
C) completeness
D) comparability

B) faithful representation

Adequate disclosure in financial statements to meet the needs and purposes of their users is a means of attaining the quality of

A) verifiability
B) faithful representation
C) understandability
D) neutrality

B) Substance over form

What is the underlying concept that supports the immediate recognition of a loss?

A) Matching
B) Substance over form
C) Prudence
D) Consistency

C) Cost

Which of the following is a pervasive constraint on the information that can be provided by financial reporting?

A) Timeliness
B) Neutrality
C) Cost
D) Materiality

B) not be biased or prejudiced

Neutrality means that financial accounting information should

A) not influence or affect the decisions of users
B) not be biased or prejudiced
C) not have undesirable or negative consequences
D) All of the above

C) going-concern

Continuation of an enterprise in the absence of evidence to the contrary is an example of the concept of

A) accounting entity
B) consistency
C) going-concern
D) substance over form

A) accrual basis recognizes that events affecting enterprise operations during a period often do not coincide with cash receipts and payments.

Information about enterprise earnings and its components measured under accrual basis provides a better measure of an enterprise's performance than information about cash receipts and payments because

A) accrual basis recognizes that events affecting enterprise operations during a period often do not coincide with cash receipts and payments.
B) accrual basis relates accomplishments and efforts in measuring and reporting enterprise's earnings and its components.
C) accrual basis provides estimates of future earnings.
D) cash receipts and cash payments information cannot adequately indicate whether or not an enterprise's performance is successful.

C) substance over form

Under a lease where the lessee acquires the benefits of ownership of an asset, the lessee often recognizes the present value of future rental payments as an asset even though legal title to the property is not acquired. This is an example of the application of

A) form over substance
B) prudence
C) substance over form
D) consistency

C) business firms shall continue to operate indefinitely

The going-concern concept assumes that

A) market values of assets are relevant
B) long-lived assets are adjusted to current prices
C) business firms shall continue to operate indefinitely
D) enterprises will curtail their operations in the succeeding period

A) Going-concern

What concept justifies the use of accruals and deferrals?

A) Going-concern
B) Consistency
C) Materiality
D) Timeliness

D) and reported in the financial statements when they occur

Under the accrual basis of accounting, the effects of transactions and other events are recorded in the accounting records

A) when they occur but reported in the financial statements when cash is received or paid
B) when cash is received or paid but reported in the financial statements when they occur
C) and reported in the financial statements when cash is paid or received.
D) and reported in the financial statements when they occur

C) Lenders

Which users of financial statements are interested in information that enables them to determine whether their loans and interest attached to them will be paid when due?

A) Suppliers
B) Investors
C) Lenders
D) Trade creditors

A) measurement

The process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the financial statements is known as

A) measurement
B) recognition
C) presentation
D) maintenance

D) Value in use

The Conceptual Framework defines this as the present value of the cash inflows or other economic benefits that an entity expects to derive from using and eventually disposing of an asset

A) Present value
B) Realizable value
C) Current cost
D) Value in use

B) comparability

Under the Conceptual Framework, the qualitative characteristic that enables the users to compare the financial statements of an enterprise through time to identify trends in its financial position and performance is

A) verifiability
B) comparability
C) completeness
D) understandability

A) A and B

Which of the following are among the four (4) enhancing characteristics of financial information?

A. Comparability
B. Timeliness
C. Relevance
D. Materiality
E. Neutrality

A) A and B
B) A and C
C) B and D
D) B and E

C) Financial concept

Under this concept, capital is regarded as an enterprise's net assets or equity

A) Physical concept
B) All-inclusive concept
C) Financial concept
D) Physical capital maintenance concept

C) the amount is deemed large enough to make a difference in the decision or evaluation of the user

An item would be considered material and therefore should be disclosed in the financial statements if

A) the expected benefits of disclosure exceed the additional costs to provide the information
B) the FRSC's definition of materiality is met
C) the amount is deemed large enough to make a difference in the decision or evaluation of the user
D) the effect on earnings is more than 10%

B) Current cost

Which measurement basis is adopted by the physical capital maintenance concept?

A) Historical cost
B) Current cost
C) Realizable value
D) Present value

A) Providing information that possesses confirmatory value

Which among the following DOES NOT necessarily contribute to representational faithfulness of accounting information?

A) Providing information that possesses confirmatory value
B) Providing complete information within the bounds of materiality and cost
C) Providing information that is free from bias
D) Informing the users of the accounting policies and changes in accounting policies employed in the preparation of the financial statements

A) Confirmatory value

Which of the following relates to relevance?

A) Confirmatory value
B) Representational faithfulness
C) Neutrality
D) Comparability

A) Accounting period

Which is the best basis for the classification of assets and liabilities as current and non-current?

A) Accounting period
B) Going concern
C) Judgment
D) Materiality

C) Prudence

What underlying concept supports the recognition of impairment in the value of non-monetary assets held by an enterprise?

A) Substance over form
B) Consistency
C) Prudence
D) Neutrality

A) a decrease in asset from primary operations.

An expense may result from

A) a decrease in asset from primary operations.
B) a decrease in an asset from incidental transactions.
C) an increase in liability from incidental transactions.
D) an increase in asset from primary operations

C) Capital maintenance concept

Under this concept, a profit is earned when the amount of the capital at the end of the period exceeds the amount of capital at the beginning, after excluding the effects of transactions with owners

A) Transaction approach
B) Entity concept
C) Capital maintenance concept
D) Going concern concept

A) Recognition

It is the process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an element of the financial statements

A) Recognition
B) Measurement
C) Realization
D) Allocation

D) Accrual basis emphasizes the timing of cash receipts and cash disbursements in recognition of income and expenses

Which of the following is NOT a valid statement relating to the accrual basis of accounting?

A) Revenues are recorded in the period that they are earned rather than in the period in which cash is collected
B) Expenses are recorded in the period they are incurred rather than in the period cash is paid
C) Accrual basis results in more complete financial information compared to the cash basis
D) Accrual basis emphasizes the timing of cash receipts and cash disbursements in recognition of income and expenses

D) Understandability

For the information to be useful, there must be a linkage between the information and the decisions that the users must make. This linkage is

A) Materiality
B) Relevance
C) Reliability
D) Understandability

B) Relevance

The quality of information that makes it needed and worthy for the purpose it was prepared is

A) Understandability
B) Relevance
C) Reliability
D) Completeness

B) To promote comparability between financial statements of different reporting periods

The major objective of applying consistency in accounting policies is

A) To promote comparability between the financial statements of different enterprises
B) To promote comparability between financial statements of different reporting periods
C) To match the appropriate revenues and expenses in a particular reporting period
D) To accurately reflect the transaction or other circumstance the information purports to represent

A) The entity gives accountable events the same accounting treatment from period to period

The characteristic of consistency in financial information is best depicted when

A) The entity gives accountable events the same accounting treatment from period to period
B) Expenses are deducted from revenue in the same reporting period
C) Accounting procedures are adopted that give the entity a consistent rate of return
D) The reported profit is consistent from period to period

B) Is complete, neutral, and free from error

An information is representationally faithful if it

A)Is current, so users of financial statements can use it to make decisions
B) Is complete, neutral, and free from error
C) Allows users to make comparisons across financial statements
D) Is presented the same way period after period

A) Fair

Neutrality provides assurance that the information presented on the financial statements are

A) Fair
B) Complete
C) Reliable
D) Prudent

D) Understandability

This enhancing characteristic requires that users be well-informed and diligent for information to be useful

A) Comparability
B) Relevance
C) Reliability
D) Understandability

B) Neutrality

An information that achieves the all-encompassing concept of fairness achieves the characteristic of

A) Completeness
B) Neutrality
C) Relevance
D) Understandability

D) Recognition

Under the IASB’s Conceptual Framework, the process of reporting an item in the financial statements of an enterprise is

A) Allocation
B) Matching
C) Measurement
D) Recognition

C) Measurement

Which process is the assigning of peso amounts to the accountable economic transactions and events?

A) Communication
B) Summarizing
C) Measurement
D) Identification

B) It derives its value from a future potential to produce economic benefits

Which is not an essential characteristic of an asset?

A) It is a result of a past event or transaction
B) It derives its value from a future potential to produce economic benefits
C) It derives its value from a present potential to produce future economic benefits
D) It is controlled by the entity

B) I, II, and IV

Which of the following are elements relating to the entity’s financial position?

I. Present economic resource controlled by the entity as a result of past events
II. The residual interest in the assets of the entity after deducting all its liabilities
III. Outflow or using up of an economic resource or incurrence of an obligation from delivering or producing goods or rendering services
IV. Present obligation of an entity to transfer an economic resource as a result of past events

A) I, II, III, and IV
B) I, II, and IV
C) II, III, and IV
D) I and III

a. I only

Fair value may be observed:

I. Directly
II. Indirectly

a. I only
b. II only
c. Either I or II
d. Neither I nor II

C) Fair value

Which of the following is an exit value?

A) Current cost
B) Historical cost
C) Fair value
D) Amortized cost

C) Fulfillment value

Which of the following is an entry value?

A) Current cost
B) Fair value
C) Fulfillment value
D) Value in use

A) Asset - Historical cost

Fulfillment value is associated with measuring (A) _______ at (B) _______

A) Asset - Historical cost
B) Asset - Current value
C) Liability - Historical cost
D) Liability - Current value

D) The choice of the initial measurement basis is affected by the nature of the information that the measurement basis will produce, the characteristics of the asset or liability, and their contributions to the entity's cash flows

Which of the following statements relating to initial measurement is incorrect?

A) When an asset or liability is measured at cost, transaction costs are included in the initial measurement basis to arrive at historical cost
B) When an asset is acquired through donation, the asset's fair value at the date of donation is its "deemed cost"
C) When an asset or liability is initially measured at fair value, transaction costs increase the initial measurement basis for that asset or liability
D) The choice of the initial measurement basis is affected by the nature of the information that the measurement basis will produce, the characteristics of the asset or liability, and their contributions to the entity's cash flows

C) I, III, IV

Financial statements must effectively convey financial information that possesses relevance and faithful representation to the users. Which of the following must an enterprise observe to achieve this purpose?

I. Focus on presentation and disclosure objectives rather than on rules
II. Classify information that groups similar items and separates dissimilar items
III. Offset an item from another to simplify and present the net
IV. Aggregate financial statement elements that share the same characteristics so as not to obscure the financial statements with a large volume of details

A) I, II, III, IV
B) I, II, III
C) I, III, IV
D) II, III, IV

A) Capturing, for inclusion in the statement of financial position or the statement of financial performance, an item that meets the definition of an element of financial statements

Recognition is the process of:

A) Capturing, for inclusion in the statement of financial position or the statement of financial performance, an item that meets the definition of an element of financial statements
B) Determining where an item should be presented in the financial statements
C) Sorting assets, liabilities, equity, income, or expenses on the basis of shared characteristics
D) Adding together assets, liabilities, equity, income or expenses that have shared characteristics

D) Adding together assets, liabilities, equity, income or expenses that have shared characteristics

Aggregation is the process of:

A) Capturing, for inclusion in the statement of financial position or the statement of financial performance, an item that meets the definition of an element of financial statements
B) Determining where an item should be presented in the financial statements
C) Sorting assets, liabilities, equity, income, or expenses on the basis of shared characteristics
D) Adding together assets, liabilities, equity, income or expenses that have shared characteristics

D) All of the above

What does the Conceptual Framework state about derecognition?

A) For an asset, derecognition normally occurs when the entity loses control of all or part of the recognized asset
B) For a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the recognized liability
C) Derecognition is the removal of all or part of a recognized asset or liability from an entity's statement of financial position
D) All of the above

A) The exercise of caution when making judgments under conditions of uncertainty

The Conceptual Framework describes prudence as:

A) The exercise of caution when making judgments under conditions of uncertainty
B) A bias towards understating assets or income and overstating liabilities or expenses
C) A preference towards the earlier recognition of expenses and liabilities than of income and assets
D) A mechanism for smoothing profits over time (understate profits in good years and overstate profits in bad years)