Conceptual Framework and Accounting Standard (CFAS)

Midterm Examination Reviewer

1. What is the authoritative status of the Conceptual Framework?

a. It has the highest level of authority. In case of a conflict between the Conceptual
Framework and a Standard or Interpretation, the Conceptual Framework overrides the
Standard or Interpretation.
b. If there is a Standard or Interpretation that specifically applies to a transaction, it
overrides the Conceptual Framework. In the absence of a Standard or an Interpretation
that specifically applies, the Conceptual Framework should be followed.
c. If there is a Standard or Interpretation that specifically applies to a transaction, it
overrides the Conceptual Framework. In the absence of a Standard or an Interpretation
that specifically applies to a transaction, management should consider the applicability of
the Conceptual. Framework in developing and applying an accounting policy that will
result in information that is relevant and reliable.
d. The Conceptual Framework applies only when IASB develops new or revised Standards.
An entity is never required to consider the Conceptual Framework.

2. Which of the following is not a benefit associated with the FASB Conceptual Framework
Project?
a. A conceptual framework should increase financial statement users' understanding of and
confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing
conceptual framework.
c. Business entities will need far less assistance from accountants because the financial
reporting process will be quite easy to apply.
d. A coherent set of accounting standards and rules should result.

3. Accounting information is considered to be relevant when it

a. can be depended on to represent the economic conditions and events that it is intended to
represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

4. The elements directly related to the measurement of performance

a. income
b. expenses
 c. a and b
d. neither a nor b

5. Which of the following events is considered as an internal event?

a. sale of inventory on account
b. provision of capital by owners
c. borrowing of money
d. conversion of raw materials into finished goods
e. payment of liabilities

6. Revenue generally should be recognized

a. at the end of production.
b. at the time of cash collection
c. when realized.
d. when the performance obligation is satisfied

7. A CPA employed as an accountant in a government agency is considered to be in

a. private practice
b. public practice
c. academe
d. service

8. Under the Conceptual Framework, qualitative characteristics are sub-classified into

a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental and enhancing qualitative characteristics.
d. anot sub-classified

9. Which of the following statements is incorrect regarding the basic accounting concepts?
a. One of ABC Co.’s delivery trucks was involved in an accident. Although no lawsuits
have yet been filed against ABC, ABC recognized a liability for the probable loss on the
event. This is an application of the prudence or conservatism concept.
b. Under the consistency concept, the financial statements should be prepared on the basis
of accounting principles which are followed consistently.
c. Under the entity theory, the business is viewed as a separate entity. Therefore, the
personal transactions of the business owners are not recorded in the business’ accounting
records.
 d. The time period concept means that financial statements are prepared only at the end of
the life of a business.

10. The assumption that a company will not be sold or liquidated in the near future is known as
the
a. economic entity assumption
b. monetary unit assumption
c. periodicity assumption.
d. None of these answer choices are correct.

11. Recognition of amortization of an intangible asset illustrates which principle of accounting?

a. Expense recognition
b. Revenue recognition
c. Historical cost
d. Full disclosure

12. In the conceptual framework for financial reporting, what provides "the why"--the purpose of

accounting?
a. Objective of financial reporting
b. Recognition, measurement, and disclosure concepts such as assumptions, principles, and
constraints
c. Qualitative characteristics of accounting information
d. Elements of financial statements

13. The characteristic that is demonstrated when a high degree of consensus can be secured
among independent measurers using the same measurement methods is
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.

14. Which of the following is not true concerning a conceptual framework in accounting?
a. It should be a basis for standard setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of nature.
d. All of these answer choices are true.
15. Which of the following is a fundamental quality of useful accounting information?
a. Conservatism
b. Comparability
c. Faithful representation
d. Consistency

16. The objective of general-purpose financial reporting is?

a. to provide financial information about the reporting entity that is useful to present and
potential equity investors, lenders, and other creditors in making decisions in their
capacity as capital providers.
b. to provide companies with the option to select information that favors one set of
interested parties over another.
c. to provide users with financial information that implies total freedom from error.
d. to provide a metric for financial information used to determine when the boundary
between two or more entities should be disregarded and the entities considered to be a
licensing arrangement.

17. Which of the following is not one of the decisions that primary users make
a. deciding on how to run the day-to-day operations of the entity.
b. deciding on whether to hold or sell investment in stocks.
c. deciding on whether to buy investment in stocks.
d. deciding on whether to extend the loan to the reporting entity.

18. What is meant by comparability when discussing financial accounting information?

a. Information has predictive or confirmatory value.
b. Information is reasonably free from error.
c. Information is measured and reported in a similar fashion across companies.
d. Information is timely.

19. Under current GAAP, inflation is ignored in accounting due to the

a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. periodicity assumption.

20. A secondary objective of financial statements

a. is to show information regarding assets and liabilities of an entity.
 b. is to show information regarding an entity’s financial position, performance, and changes
in financial position.
c. is to show the results of the stewardship of management.
d. All of the above.

21. What is the purpose of having a conceptual framework?

a. To make sure that economic activity can be identified with a particular legal entity.
b. To segregate activities among different companies.
c. To provide comparable information for different companies.
d. To enable the profession to more quickly solve emerging practical problems and to
provide a foundation from which to build more useful standards.

22. Generally, revenue from sales should be recognized at a point when

a. Management decides it is appropriate to do so.
b. The product is available for sale to the ultimate consumer.
c. The entire amount receivable has been collected from the customer and there remains no
further warranty liability.
d. None of these answer choices are correct.

23. The information provided by financial reporting pertains to

a. individual business entities and the economy as a whole, rather than to industries or to
members of society as consumers
b. individual business entities, industries, and the economy as a whole, rather than to
members of society as consumers
c. individual entities, rather than to industries of the economy as a whole or to members of
society as consumers
d. individual business entities and industries rather than to the economy as a whole or to
members of society as consumers

24. Which of the following is a constraint in presenting financial information?

a. Cost
b. Consistency
c. Relevance
d. Full disclosure

25. Which accounting assumption or principle is being violated if a company is a party to major
litigation that it may lose and decides not to include the information in the financial
statements because it may have a negative impact on the company's stock price?
 a. Expense recognition
b. Revenue recognition
c. Historical cost
d. Full disclosure

26. What accounting concept justifies the usage of depreciation and amortization policies?
a. Going concern assumption
b. Fair value principle
c. Full disclosure principle
d. Monetary unit assumption
27. According to the Conceptual Framework, the needs of primary users that are met by financial

statements are
a. all of their needs
b. all of their common needs only
c. majority of their common needs only
d. substantially a majority of their common and specific needs only

28. If the LIFO inventory method was used last period, it should be used for the current and
following periods because of
a. consistency.
b. materiality.
c. timeliness.
d. verifiability.

29. What is meant by consistency when discussing financial accounting information?

a. Information presented by a company applies the same accounting treatment to similar
events, from period to period.
b. Information is classified, characterized, and presented clearly and concisely.
c. Information is measured and reported in a similar fashion across companies.
d. Information is verifiable.

30. This refers to the use of caution in the exercise of judgments needed in making estimates
required under conditions of uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated.
a. faithful representation
b. prudence
c. consistency
 d. relevance

31. The elements of financial statements include investments by owners. These are increases in
an entity’s net assets resulting from owners’.
a. transfers of assets to the entity.
b. rendering services to the entity.
c. satisfaction of liabilities of the entity.
d. All of these answer choices are correct.

32. Entity A’s asset has a carrying amount of ₱1M. At year end, Entity A obtains information that

the asset became obsolete, and therefore its usefulness has declined. Entity A estimates that
the asset has a recoverable amount of only ₱800K. Entity A recognizes a loss of ₱200K
for the difference. Although this accounting treatment is required, it violates which of the
following concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period

33. Financial statements are said to be a mixture of fact and opinion. Which of the following
items is factual?
a. cost of goods sold
b. discount on capital stock
c. retained earnings
d. patent amortization expense

34. What is the purpose of reporting comprehensive income?

a. To report changes in equity due to transactions with owners.
b. To report a measure of overall performance of an entity.
c. To replace profit with a better measure
d. To combine income from continuing operations with income from discontinued
operations and extraordinary items.

35. Under this qualitative characteristic, users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information
with reasonable diligence. However, information about complex matters that should be
included in the financial statements because of its relevance to the economic decision-making
 needs of users should not be excluded merely on the grounds that it may be too difficult for
certain users to understand.
a. Relevance
b. Reliability
c. Understandability
d. Comparability

36. Identify the qualitative characteristics that enhance the usefulness of financial information.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability
a. I and II
b. I and III
c. II, III, IV, V and VII
d. IV, V, VI and VII

37. According to the Conceptual Framework, it is a pervasive constraint on the information that
can be provided by financial reporting
a. Materiality
b. Historical
c. Cost
d. going concern
e. None of the above

38. Not adjusting the amounts reported in the financial statements for inflation is an example of

which basic assumption or principle of accounting?

a. Economic entity
b. Going concern
c. Monetary unit
d. Full disclosure
39. Accounting has been given various definitions, which of the following is not one of
those definitions
a. 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.
b. 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 of at least, of a financial
character and interpreting the results thereof.
c. Accounting is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating the
results to interested users.
d. Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.

40. Which of the following statements is true?

a. The basic purpose of accounting is to provide information about economic activities
intended to be useful in making economic decisions.
b. All events and transactions of an entity are recognized the books of accounts.
c. General purpose financial statements are those statements that cater to the common and
specific needs of a wide range of external users.
d. The accounting process of assigning numbers, commonly in monetary terms, to the
economic transactions and events is referred to as classifying.

41. The underlying theme of the conceptual framework is

a. decision usefulness.
b. understandability.
c. faithful representation.
d. comparability.

42. Which of the following statements is correct?

I. Accounting provides qualitative information, financial information, and quantitative
information.
II. Qualitative information is found in the notes to the financial statements only.
III. Accounting is considered an art because it is supported by an organized body of knowledge
IV. Accounting is considered a science because it involves the exercise of skill and judgment.
V. Measurement is the process of assigning numbers to objects such inventories or plant assets
and to events such as purchases or sales.
VI. All quantitative information is also financial in nature.
VII. The accounting process of assigning peso amounts or numbers to relevant objects and events
is known as identification.
a. I and V
b. I, II, VI and V
c. I, II, III, IV and V
d. II, VI and V

43. The two fundamental qualities that make accounting information useful for decision making
are
a. comparability and timeliness.
b. materiality and neutrality.
c. relevance and faithful representation.
d. faithful representation and comparability.

44. Which of the following is an ingredient of relevance?

a. Completeness
b. Neutrality
c. Timeliness
d. Materiality

45. The primary users of financial statements under the Conceptual Framework include
I. Existing and potential investors
II. Employees
III. Lenders and other creditors
IV. Suppliers and other trade creditors
V. Customers
VI. Governments and their agencies
VII. Public
VIII. Professional accountants, including auditors
a. I and III
b. I, II, III, IV, V, VI, VII
c. I, II, III, IV, V, VI
d. all of these

46. The accounting standards used in the Philippines are adapted from the standards issued by
the
a. Federal Accounting Standards Board (FASB).
b. International Accounting Standards Board (IASB)
 c. Philippine Institute of Certified Public Accountants (PICPA)
d. Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC)

47. Which of the following financial statements would not be dated as covering a certain
reporting period?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity

48. Which of the following is a characteristic describing the fundamental quality of relevance?
a. Predictive value
b. Neutrality
c. Verifiability
d. Understandability

49. All of the following statements incorrectly refer to the Conceptual Framework except
a. The framework is concerned with all-purpose financial statements including consolidated
financial statements.
b. Financial statements are prepared and presented at least annually and are directed toward
the common and specific information needs of a wide range of users.
c. Prospectuses and computations prepared for taxation purposes are outside the scope of
the framework.
d. Financial statements include such items as reports by directors, statements by the
chairman, discussion and analysis by management and similar items that may be included
in an annual report.

50. The objective of general-purpose financial reporting is to provide financial information about

a reporting entity to each of the following except

a. potential equity investors.
b. potential lenders
c. present investors.
d. All of these answers are correct.
51. Financial reporting standards continuously change primarily in response to
a. users’ needs
b. political influence
c. government regulations
 d. changes in social environments.
52. Which of the following is an argument against using historical cost in accounting?
a. Fair values are more relevant.
b. Historical costs are based on an exchange transaction.
c. Historical costs are reliable.
d. Fair values are subjective.

53. Which of the following is most likely expensed under the ‘immediate recognition’ principle?
a. cost of inventories
b. impairment loss
c. cost of equipment
d. rentals paid

54. Entity A computes for its profit or loss periodically instead of waiting until the end of the life

of the business before doing so. This is an application of which of the following

accounting concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period

55. Entity A appropriates ₱1M to fund employee benefits for the last quarter of the following
year. Entity A deposits the ₱1M fund in a payroll account. This economic activity is
most appropriately referred to as
a. production.
b. Savings
c. Exchange
d. Investment

56. Product costs include each of the following except

a. overhead.
b. officer’s salaries.
c. material.
d. labor.
57. A soundly developed conceptual framework of concepts and objectives should?
a. increase financial statement users' understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly solved.
d. All of these answer choices are correct.

58. This refers to the comparability of financial statements of the same entity but in different
periods.
a. Inter-comparability
b. Extra-comparability
c. Intra-comparability
d. Intro-comparability

59. It is the branch of accounting that focuses on the general-purpose reports of financial
position and operating results known as financial statements.
a. Financial accounting
b. Auditing
c. Managerial accounting
d. Taxation
60. The measurement principle includes the
a. fair value principle only.
b. historical cost principle only.
c. revenue recognition principle and expense recognition principle.
d. historical cost principle and the fair value principle.

61. These are events that do not involve an external party.

a. external events
b. nonreciprocal
c. internal events
d. special event
62. It is the official accounting standard setting body in the Philippines. It is composed of a chair

person and 14 members.

a. Financial Reporting Standards Committee (FRSC)
b. Financial Reporting Standards Council (FRSC)
c. Accounting Standards Committee (ASC)
 d. Accounting Standards Council (ASC)

63. Which of the following statements is incorrect concerning materiality?

a. Materiality can be assessed quantitatively or qualitatively.
b. There are no specific materiality thresholds provided under the PFRSs.
c. Materiality is a matter of judgment.
d. Materiality is a quantitative matter. It should never be assessed qualitatively.
e. None of the above

64. The PFRSs consist of all of the following except

a. PFRSs
b. PASs.
c. Interpretations.
d. Conceptual Framework.

65. The most common form of business organization is a

a. Corporation
b. sole proprietorship
c. partnership
d. All of the above

66. Financial information demonstrates consistency when

a. firms in the same industry use different accounting methods to account for the same type
of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the value of the
measuring unit.
d. None of these answer choices are correct
e. All of the above are correct

67. Which of the following is not one of the decisions that primary users make?
a. deciding on how to run the day-to-day operations of the entity
b. deciding on whether to hold or sell investment in stocks
c. deciding on whether to buy investment in stocks
d. deciding on whether to extend loan to the reporting entity

68. Generally accepted accounting principles

 a. are fundamental truths or axioms that can be derived from laws of nature.
b. derive their credibility and authority from general recognition and acceptance by the
accounting profession.
c. have been specified in detail in the FASB conceptual framework.
d. derive their authority from legal court proceedings.

69. Which of the following is a fundamental quality of useful accounting information?

a. Comparability
b. Relevance
c. Neutrality
d. Materiality

70. The Conceptual Framework sets out general recognition principles of financial statement
element which include all of the following except
a. asset recognition
b. equity recognition
c. liability recognition
d. expense recognition