MULTIPLE CHOICE

DISCUSSION EXERCISES
1. Which of the following statements is incorrect regarding the Conceptual Framework?
A. Conceptual framework applies in the preparation and presentation of general purpose financial
statement of
a profit oriented entity.
B. The conceptual framework defines the basic objectives, terms and concepts of accounting. It
provides the foundation for standards that contribute to transparency by enhancing
international comparability and quality of financial information.
C. Conceptual framework is an integral part of Philippine Financial Reporting Standards (PFRS)
and applies specifically to not-for-profit entities.
D. The conceptual framework provides a foundation for standards that strengthen accountability
by reducing information gap between the providers of capital and the people to whom they
have entrusted their money.

According to the standards of Conceptual framework out of all

choices only letter C does not fit to the definition of CF.
2. In relation to the conceptual framework, which of the following statements is true?
I. Nothing in the Conceptual Framework overrides any specific Philippine Financial Reporting Standard.
(stated)
II. Special purpose financial reports, for example, prospectuses and computations prepared
for taxation purposes, are within the scope of the Conceptual Framework. (not within scope
of CF)
A. I only C. Both I and II
B. II only D. Neither I nor II

According to the basic concept of CF is that Special purpose reports are

outside the scope of the framework.
3. Under the revised conceptual framework, which of the following is one of its explicit purposes?
I. To assist the IASB in developing future IFRS based on consistent concepts. (stated)
II. To assist local regulatory agencies such as PRC and SEC in developing and issuing rules and
regulations for a specific industry. (regulators may use it as reference, but this is not an
explicit purpose of the CF)
III. To assist all parties to understand and interpret the standards. (stated)
A. I and II C. I and III
B. II and III D. I, II and III

Out of all these choices 2nd bullet doesn’t provide any explicit purposes
under the revised CF.
4. Under the New Conceptual Framework, are the following considered as the underlying
assumption under the Framework?
A. B. C. D. E.
Periodicity Assumption Yes No Yes No Yes
Accrual Basis of Accounting No Yes No No Yes
Monetary Unit Assumption No No Yes No Yes

Under the old CF. Accrual basis is under the underlying assumption,
however with the revised CF. they are no longer under the underlying
assumption.
5. Which of the following is not an implication of the going concern assumption?
A. The historical cost principle is credible. (Going concern is the foundation of cost principle)
B. Depreciation and amortization policies are justifiable and appropriate. (Part of application of GC)
C. The current and noncurrent classification of assets and liabilities is justifiable and significant. (Part of
application of GC) (such as income and expenses, PPE, amortization of intangible assets)
D. Amortizing research and development costs over several periods is justifiable and appropriate.
(Amortization is an implication, but research and development costs are EXPENSED as incurred)
(ACCRUAL BASIS ASSUMPTION)
6. The objective of financial reporting in the Conceptual Framework for Financial Reporting:
A. Is the foundation for the Framework.
B. Includes the qualitative characteristics that make accounting information useful. (Relevance and
Faithful Repre.)
C. Is found on the third level of the Framework. (IFRS/PFRS >> Accounting Standards (e.g. PFRS 1) >>
CF)
D. All of the choices are correct regarding the objective of financial reporting.

7. As accounting information users, EMPLOYEES are interested in information

A. That enables them to determine whether their loans and interests attaching to them will be paid.
(Investors)
B. About profitability and stability of an entity in order to assess the ability of the entity to
provide remuneration, retirement benefits and employment opportunities. (Employees)
C. To regulate the activities of the entity, determine taxation policies and as a basis for
national income and similar statistics. (Government)
D. About the continuance of an entity especially when they have a long-term involvement with
or are dependent on the entity. (Customers)
8. Which of the following is not true about financial reporting under the revised
conceptual framework?
S1: Financial reporting shall provide information useful in evaluating management
stewardship. (Specific objectives)
S2: General purpose financial reports are not designed to show the value of an entity but
they provide information to help the primary users estimate the value of the entity. (part of
limitations)
A. S1 only C. Both statements
B. S2 only D. None from the statements

9. What is the quality of information that enables users to better forecast future operations?
A. Comparability C. Materiality (all material items are relevant but not all relevant items are
B. Faithful representation D. Relevance material)

Relevance means the capacity of information to make a decision made by users.

Relevance information has the following ingredients: Predictive value = the
information can help users increase the likelihood of correctly predicting or
forecasting outcome of events. Confirmatory Value = the information enables users
confirm or correct earlier expectations.
10. Under the revised conceptual framework, which of the following statements is incorrect
regarding qualitative characteristics?
I. Although related, consistency and comparability are not the same. Comparability is
the goal while consistency is the means of achieving the goal. (Enhancing Qualitative
Characteristics)
II. The ingredients of faithful representation are neutrality, free from error, completeness and prudence.
(There’s no prudence)
III. Under the revised conceptual framework, materiality is defined as the omission or
misstatement of information causing to influence the decision of the users. (Old definition)
A. I and II D. III only
B. II and III E. I and III
C. I only
11. Which of the following statements is incorrect in relation to the enhancing qualitative characteristics?
A. Verifiable financial information implies consensus. (Verifiability) (different knowledgeable and
independent observers could reach Consensus. Although not necessarily complete agreement, that a
particular depiction is a faithful representation)
B. Financial information shall be made available to users in time to influence their decisions.
(Timeliness) (Financial information must be available or communicated early enough when a decision
is to be made)
C. Financial information must exclude complex matters in order to achieve understandability.
(Understandability)
D. To be most useful, the financial information shall be compared with similar information of
 previous periods, or with information produced by other entities. (Comparability)

Financial Information must be comprehensible or intelligible if it is to be useful but

“Complex matters cannot be eliminated”. Thus, C is the correct answer.
12. Which of the following is incorrect regarding the
reporting entity? S1: The reporting is always a legal
entity. (Not necessarily a LEGAL entity).
S2: If the financial statements are prepared to include only two subsidiaries only without the
parent, the financial statements would be referred to as combined financial statements.
(reporting entity comprises two or more entities not linked by parent-subsidiary relationship)
A. True, false C. False, false
B. False, true D. True, true
13. The elements directly related to the measurement of financial performance are
I. Revenu III. Expense
II. e
A. Assets D. I, II and III
I and II
B. II and III E. Answer not
14. Which of the following represents a liability? given
A. The obligation to pay for goods that an entity expects to order from suppliers next year. (The entity
hasn't yet ordered the goods, and no actual liability has been incurred at this point)
B. The obligation to provide goods that customers have ordered and paid for during the current' year.
(Deferred Revenue) the company has an obligation to deliver goods or services in the future.
C. The obligation to pay interest on a five-year note payable that was issued the last day of the current
year. (
D. The obligation to distribute an entity's own shares next year as a result of a stock dividend
declared near the end of the current year. (Equity transaction)

15. Which is not within the new definition of an asset?

A. An asset is a present economic resource.
B. The economic resource is a right that has potential to produce economic benefit.
C. The economic resource is controlled by the entity as a result of a past event.
D. Future economic benefit is expected to flow to the entity.

16. Obligations to transfer an economic resource include all, except:

A. Obligation to pay cash
B. Obligation to deliver goods
C. Obligation to provide services
D. Obligation to transfer an economic resource even if a specified future event does not occur. (must
occur even though it is uncertain)
17. An item is recognized when:
I. It meets the definition of an asset, liability, equity, income or expense and
II. Recognizing it would provide useful information
A. I only C. Both I and II (Under Recognition Principle)
B. II only D. Either I or II
18. Which of the following correctly shows recognition of items under matching principle?
I. Depreciation expense - Direct matching (Systematic and rational allocation) allocation over the period
of time.
II. Freight in - Immediate recognition (Cause and effect)
III. Doubtful accounts expense - Systematic and rational allocation (Cause and effect)
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III
19. Which of the following best describes fair value?
A. The cost of an equivalent asset at the measurement date, comprising the consideration that
would be paid at the measurement date plus transaction costs that would be incurred on that
date. (Current Cost)
B. The present value of the cash flows or other economic benefits, that an entity expects to
derive from the use of an asset and from its ultimate disposal. (Value in Use)
C. The price that would be received to sell an asset or paid to transfer a liability in an
 orderly transaction between market participants. Fair value is not an entity specific
measurement. (Fair Value)
D. The present value of the cash or other economic resources that an entity expects to be
obliged to transfer as it fulfils a liability. (Fulfillment Value)
20. Recognizing a financial statement element requires measuring it in monetary terms. Which of
the following statements is incorrect regarding measurement?
A. The Conceptual Framework only describes measurement bases used in financial reporting but
does not specify how a particular financial statement element should be measured – this is
addressed by the standards. (there are various measurement to be used)
B. The Conceptual Framework broadly classifies the measurement bases used in financial
reporting into two, namely, historical cost and current value. (stated in the framework)
C. Measurement uncertainty will always cause the non-recognition of a financial statement element.
D. Measuring a financial statement element often requires estimation. (e.g. provisions, impairment, FV
measurements) require judgement and estimation play a key role).
21. Effective communication makes information more useful. Effective communication requires all of
the following except:
A. Focusing on presentation and disclosure objectives and principles rather than focusing on rules.
B. Classifying information in a manner that groups similar items and separates dissimilar items.
C. Aggregating information in such a way that it is not obscured either by unnecessary detail or
by excessive aggregation.
D. Using standardized descriptions, a.k.a. “boilerplate’, rather than entity-specific information.

22. Under this concept, a profit is earned only if the financial (or money amount of the net assets at
the end of the period exceeds the financial or money) amount of net assets at the
beginning of the period, after excluding any distributions to, and contributions from,
owners during the period. It can be measured in either nominal monetary units or units of
constant purchasing power.
A. Concept of capital C. Financial capital maintenance concept
B. Concept of capital maintenance D. Physical capital maintenance concept
23. Statement 1: In an attempt to clarify current reporting standards, the Conceptual Framework
established specific guidelines for materiality. (There’s no specific guidelines)
Statement 2: Profit is earned if the net asset at the end of the period exceeds the net assets at the
beginning of the period after excluding transactions with owners.
Statement 3: Conservatism means that when accountants have genuine' doubt concerning which of
two or more reporting alternatives to select, the alternative with the most favorable impact on
owners' equity should be chosen. (What if there’s an overstatement of assets and equity?)
A. B. C. D.
Statement 1 False True False True
Statement 2 True False True True
Statement 3 True False False False
24. Evaluate whether the following statements are true or false in relation to the New Conceptual
Framework for Financial Reporting:
I. According to the Conceptual Framework, comparability is uniformity. (not the same) uniformity
means applying the same accounting treatment consistently over time or across entities, which may
not always be required or desirable.
II. General purpose reports, which are the scope of the Conceptual Framework, provide all the
information that every user finds relevant. (broad range of users that are making economic
decisions)
III. According to the Conceptual Framework, the qualitative characteristics that enhance the
usefulness of information should always be present before information is included in the
financial reports. (Fundamental Qualitative Characteristics >>> EQC)
A. B. C. D. E.
Statement I True True False True False
Statement II False False True True False
Statement III True False True False False
25. Determine the false statement regarding the Conceptual Framework?
A. The Conceptual Framework is not a reporting standard and does not define standard for
any particular measurement or disclosure issue. (CF cannot overrides PFRS)
B. Under the Conceptual Framework, the concept of income encompasses both revenue and gains.
 (stated)
C. Users under the Framework that are interested in information about the continuance of an
entity when they have a long-term involvement with or are dependent on the entity pertain to
employees. (Customers not employees)
D. The Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users only. (e.g. Investors, Creditors,
Lenders)

STRAIGHT PROBLEMS
1. ABRA COMPANY reported that the following changes in account balances during the current year:
Increase
Assets 8,900,000
Liabilities 2,700,000
Share capital 6,000,000
Share premium 600,000

Except for a P1,300,000 dividend payment and the year's earnings, there were no changes in
retained earnings for the year. What is the net income for the current year?

8.9m-2.7m-6.6m+1.3m = 900k

2. The following information shows the changes in the account balances of VISAYAS INC. during 20x1.

Increase (Decrease)
Cash 260,000
Accounts receivable (2,288,000)
Allowance for Doubtful Accounts 312,000
Inventory 2,080,000
Investment in associate 1,820,000
property, plant and equipment 2,860,000
Accumulated depreciation 1,040,000
Accounts payable 2,340,000
Bonds payable (1,820,000)
Discount on bonds payable (390,000)
Share capital 2,340,000
Share premium 260,000
Revaluation surplus 2,340,000
Treasury shares 208,000

Cash dividends declared during 20x1 amounted to P260,000, share dividends declared amounted
to P520,000, and appropriations of retained earnings for the retirement of bonds amounted to
P130,000. How much is the profit (loss) for the year?
--- END OF HANDOUTS ---

Assets
Cash 260,000
AR (2,600,000)
 Inventory 2,080,000
Inv. In Asso 1,820,000
PPE 2,860,000
Acc. Depre. (1,040,000)
Total Assets 3,380,000

Liabilities
AP (2,340,000)
BP 1,430,000
Total Liabilities (910,000)

Equity
SC 2,340,000
SP 260,000