Conceptual Framework and Accounting Standards Test Bank PDF

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS Long quiz (80 points) 1. 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. 2. 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. 3. 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). 4. 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.

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5. 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. 6. 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 7. These are events that do not involve an external party. a. external events b. nonreciprocal c. internal events d. special event 8. 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 9. 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 10. The bottom part of each of Entity A’s financial statements states the following “This statement should be read in conjunction with the accompanying notes.” This is most likely an application of which of the following accounting concepts? a. articulation b. consistency c. accrual basis d. time period 11. 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

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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 12. 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 13. Which of the following events is considered as an external event? a. production b. payment of taxes c. gifts and charitable contributions d. provision of capital by owners e. b, c and d 14. 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 15. The most common form of business organization is a a. corporation b. sole proprietorship c. partnership d. cell phone stand 16. This concept defines the area of interest of the accountant. It determines which transactions are recognized in the books of accounts and which are not. a. Articulation b. Matching c. Separate entity d. Full disclosure 17. 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.

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18. 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 Explanation: II – not only in the notes but also on the face of the financial statements. III and IV are inter-changed. VI – all financial information are quantitative. VII – measuring not identification. 19. Which of the following statements about the Norwalk Agreement is correct? a. The Norwalk Agreement requires all domestic companies in the U.S. to prepare financial statements in accordance with the IFRSs. b. The Norwalk Agreement is a short-term convergence between the FASB and the IASB which has long-time been abolished. c. The Norwalk Agreement is a convergence between the FASB and the IASB to make their existing financial reporting standards compatible and coordinate their future work programs to ensure that once achieved, compatibility is maintained. d. The Norwalk Agreement does not affect the financial reporting standards in the Philippines. 20. The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called a. financial accounting. b. tax accounting. c. managerial accounting. d. auditing. 21. The PFRSs consist of all of the following except a. PFRSs. b. PASs. c. Interpretations. d. Conceptual Framework. 22. It is the official accounting standard setting body in the Philippines. It is composed of a chairperson and 14 members. a. Financial Reporting Standards Committee (FRSC) b. Financial Reporting Standards Council (FRSC)

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c. Accounting Standards Committee (ASC) d. Accounting Standards Council (ASC) 23. Financial reporting standards continuously change primarily in response to a. users’ needs. b. political influence. c. government regulations. d. changes in social environments. 24. Accounting is often called the "language of business" because a. it is easy to understand. b. it is fundamental to the communication of financial information. c. all business owners have a good understanding of accounting principles. d. accountants in many companies share financial information. 25. You are the accountant of ABC Co. During the period, your company purchased staplers worth ₱1,500. Although the staplers have an estimated useful life of 10 years, you have charged their cost as expense. Which of the following is most likely to be true? a. You are applying the concept of matching. b. You are applying the concepts of materiality and cost-benefit consideration. c. You are applying the concept of verifiability. d. You are just lazy to compute for the periodic depreciation.  26. 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. e. The framework applies to the financial statements of all commercial, industrial and business reporting entities, but only for the private sector. 27. 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

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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. 28. The foundation of the Conceptual Framework is formed from a. the qualitative characteristics that makes information useful to users. b. the objective of general purpose financial reporting. c. the concept of reporting entity. d. the various measurement requirements which results to fair presented financial information. 29. What is the objective of financial statements according to the Conceptual Framework? a. To provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. b. To prepare and present a balance sheet, an income statement, a cash flow statement, and a statement of changes in equity. c. To prepare and present comparable, relevant, reliable, and understandable information to investors and creditors. d. To prepare financial statements in accordance with all applicable Standards and Interpretations. 30. 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. b. c. d.

I and III I, II, III, IV, V, VI, VII I, II, III, IV, V, VI all of these

31. 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. not sub-classified 32. Identify the fundamental qualitative characteristics under the Conceptual Framework. I. Relevance II. Reliability III. Faithful representation IV. Comparability

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V. VI. VII. a. b. c. d.

Verifiability Timeliness Understandability

I and II I and III I, II, III, IV, V and VI IV, V, VI and VII

33. 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. b. c. d.

I and II I and III II, III, IV, V and VII IV, V, VI and VII

34. Which of the following are related to the qualitative characteristic of relevance under the Conceptual Framework? I. Predictive value II. Confirmatory value III. Timeliness IV. Materiality a. b. c. d.

I and II I, II and III I, II and IV I, II, III and IV

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

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36. The Conceptual Framework sets out general recognition principles of financial statement elements which include all of the following except a. asset recognition b. equity recognition c. liability recognition d. expense recognition 37. 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 38. 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. b and c 39. 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. 40. The elements of faithful representation do not include a. Comparability b. Neutrality c. Completeness d. Free from error 41. The ability through consensus among measurers to ensure that information represents what it purports to represent is an example of the concept of a. Relevance b. Comparability c. Verifiability d. Feedback value 42. 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 43. The elements directly related to the measurement of performance

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a. b. c. d.

income expenses a and b neither a nor b

44. Assets and liabilities are recognized if a. they meet the definition of an element. b. have probable future economic benefits and have cost or value that are measured reliably. c. a and b d. neither a nor b 45. The cost of purchases of inventory is recognized as expense a. immediately. b. using the matching concept. c. by systematic allocation. d. any of these as a matter of accounting policy choice 46. “I say red, you say green.” The information lacks which of the following qualitative characteristics? a. Relevance b. Verifiability c. Timeliness d. Colorfulness 47. 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 48. Entity A is making a materiality judgment. Entity A considers an item to be material, and therefore needs to be disclosed in the notes to the financial statements, if the item pertains to a related party transaction. What type of materiality assessment is Entity A using? a. quantitative b. qualitative c. faithful representation d. relevance 49. 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 50. This refers to the comparability of financial statements of the same entity but in different periods.

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a. b. c. d.

Inter-comparability Extra-comparability Intra-comparability Intro-comparability

51. 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 52. Comprehensive income (or total comprehensive income) includes a. Profit or loss b. Other comprehensive income c. Transactions with owners d. a and b e. All of these 53. 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. 54. 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 55. Which of the following statements is correct when an entity departs from a provision of a PFRS? a. The entity’s financial statements would be grossly incorrect; therefore, PAS 1 does not allow such a departure. b. PAS 1 permits such a departure if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure. c. PAS 1 requires certain disclosures when an entity departs from a provision of a PFRS. d. b and c 56. Which of the following statements is correct regarding the classification of financial liabilities as current or noncurrent in accordance with PAS 1?

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a. Currently maturing obligations are presented as current liabilities even if their original term is longer than one year and even if a refinancing agreement is completed after the end of the reporting period but before the financial statements are authorized for issue. b. Currently maturing obligations are presented as noncurrent liabilities only if their original term is longer than one year. c. Currently maturing obligations are presented as noncurrent liabilities only if a refinancing a...