CHAPTER 1

FRAMEWORK OF ACCOUNTING
QUESTION 1-1
Define accounting.
ANSWER 1-1
The Accounting Standards Council defines accounting as follows:
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 decision.
The Committee on Accounting Terminology of the American Institute of Certified
Public Accountants defines accounting as follows:
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 at least of
a financial character and interpreting the results thereof.
The American Accounting Association in its statement of Basic Accounting Theory
defines accounting as follows:
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the information.
QUESTION 1-2
What are the three important activities in the accounting process as embodied in
the accounting definition?
ANSWER 1-2
The accounting definition provides three important activities in the accounting
process, namely:
a. Identifying
b. Measuring
c. Communicating
QUESTION 1-3
Explain fully the identifying process of accounting.

ANSWER 1-3
Identifying means the recognition or nonrecognition of accountable events. Not all
business activities are accountable.
An event is accountable or quantifiable when it has an effect on assets, liabilities
and equity. In other words, the subject matter of accounting is economic activity or
the measurement of economic resources and economic obligations. Only economic
activities are emphasized and recognized in financial accounting. Sociological and
psychological matters are beyond the province of accounting.
QUESTION 1-4
Explain the two classifications of economic transactions or events.
ANSWER 1-4
Economic activities of an entity are referred to as transactions which may be
classified as external and internal.
External transactions or exchange transactions are those economic events involving
one entity and another entity. Purchase of merchandise from a supplier, borrowing
money from a bank, sale of merchandise to customer and payment of salaries to
employees are examples of external transactions.
Internal transactions are economic events involving the entity only. These are
economic activities that take place entirely within the entity. Production and
casualty loss are examples of internal transactions.
QUESTION 1-5
Explain briefly the measuring process of accounting.
ANSWER 1-5
Measuring or measurement is the process of determining the monetary amounts at
which the elements of the financial statements are to be recognized and carried in
the balance sheet and income statement.
If accounting information is to be useful, it must be expressed in terms of a common
financial denominator. Financial statements without monetary amounts would be
largely unintelligible or incomprehensible. The Philippine peso is the unit of
measuring accountable economic transactions.
The measurement bases are historical cost, current cost, realizable value and
present value. Historical cost is the most common.
QUESTION 1-6

Explain fully the communicating process of accounting.

ANSWER 1-6
Communicating is the process of preparing and distributing accounting reports
to potential users of accounting information.
Identifying and measuring are pointless if the information contained in the
accounting records cannot be communicated in some form to potential users, like
the investors, owners, managers, creditors and other interested parties.
Actually, it is for this reason that accounting has been called the language of
business.
Implicit in the communication process are the recording, classifying and
summarizing aspects of accounting.
Recording or journalizing is the process of systematically maintaining a record of all
economic business transactions after they have been identified and measured.
Classifying is the sorting or grouping of similar and interrelated economic
transactions into their respective class. Actually, classifying is accomplished by
posting to the ledger.
Summarizing is the preparation of financial statements which include the statement
of financial position, income statement, statement of comprehensive income,
statement of cash flows and statement of changes in equity.
QUESTION 1-7
What is the basic purpose of accounting?
ANSWER 1-7
The basic purpose of accounting is to provide quantitative financial information
about a business that is useful to statement users particularly owners and creditors,
in making economic decisions.
An accountants primary task therefore is to supply information to help users, such
as shareholders, bankers and managers make informed judgment and better
decision.
QUESTION 1-8
What do you understand by the accountancy profession?
ANSWER 1-8

Republic Act No. 9298 is the law regulating the practice of accountancy in the
Philippines. This law is known as the Philippine Accountancy Act of 2004.
Accountancy has developed as a profession attaining a status equivalent to that of
law and medicine.
In the Philippines, in order to qualify to practice the accountancy profession, a
person must finish a degree in Bachelor of Science in Accountancy and pass a very
difficult government examination given by the Board of Accountancy.
Incidentally, the Board of Accountancy is the body authorized by law to
promulgate rules and regulations affecting the practice of the accountancy
profession in the Philippines.
QUESTION 1-9
Explain the accreditation to practice public accountancy.
ANSWER 1-9
Certified Public Accountants, firms and partnership of certified public accountants,
including partners and staff members thereof, are required to register with the
Board of Accountancy and Professional Regulation Commission for the practice of
public accountancy.
The PRC upon favorable recommendation of the Board of Accountancy shall issue
the Certificate of Registration to practice public accountancy which shall be valid for
3 years and renewable every 3 years upon payment of required fees.
Certified Public Accountants generally practice their profession in three main areas,
namely public accounting, private accounting and government accounting.
QUESTION 1-10
Explain the limitation of the practice of public accountancy.
ANSWER 1-10
Single practitioners and partnerships for the practice of public accountancy
shall be registered certified public accountants in the Philippines.
A certificate of accreditation shall be issued to certified public accountants in public
practice only upon showing in accordance with rules and regulations promulgated
by the Board of Accountancy and approved by the Professional Regulation
Commission that such registrant has acquired a minimum of three years of
meaningful experience in any of the areas of public practice including taxation.
The Securities and Exchange Commission shall not registerany corporation
organized for the practice of public accountancy.

QUESTION 1-11
What is public accounting?
ANSWER 1-11
Public accounting, in essence, is the practice of the accountancy profession.
Individual practitioners, small accounting firms and large multinational
organizations render independent and expert financial services to the public such as
auditing, taxation and management advisory services.
QUESTION 1-12
Explain briefly the three kinds of services rendered by a public accountant.
ANSWER 1-12
1. Auditing has traditionally been the primary service offered by most public
accounting practitioners.
Auditing or specifically external auditing is the examination of financial
statements by independent certified public accountant for the purpose of
expressing opinion as to the fairness with which the financial statements are
prepared.
2. Taxation service includes the preparation of annual income tax returns and
determination of tax consequences of certain proposed business endeavors.
The CPA not infrequently represents the client in tax investigations.
3. Management advisory service has become increasingly important in
recent years, although audit and tax services are undoubtedly the mainstay
of public accountants.
The term management advisory service has no precise coverage but is
used generally to refer to services to clients on matters of accounting,
finance, business policies, organization procedures, product costs, distribution
and many other phases of business conduct and operations.
QUESTION 1-13
Explain briefly private accounting.
ANSWER 1-13
Private accounting means that Certified Public Accountants are employed in
business entities in various capacity as accounting staff, chief accountant, internal
auditor and controller. The highest accounting officer in a business entity is the
controller.
The major objective of the private accountant is to assist management in planning
and controlling the entitys operations. This will include maintaining the records,

producing the financial reports, preparing the budgets and controlling and allocating
the cost of the business.
The private accountant has also the responsibility for the determination of the
various taxes the business is obliged to pay.
QUESTION 1-14
Explain briefly government accounting.
ANSWER 1-14
Government accounting encompass the process of analyzing, classifying,
summarizing and communicating all transactions involving the receipt and
disposition of government funds and property and interpreting the results thereof.
The focus of government accounting is the custody and administration of public
funds.
Many Certified Public Accountants are employed in many branches of the
government, more particularly the Bureau of Internal Revenue, Commission on
Audit, Department of Budget and Management, Securities and Exchange
Commission and even in a police agency like the National Bureau of Investigation.
QUESTION 1-15
Distinguish financial accounting and managerial accounting.
ANSWER 1-15
Financial accounting is primarily concerned with the recording of business
transactions and the eventual preparation of financial statements. Financial
accounting focuses on general purpose reports known as financial statements.
These financial statements are intended for internal and external users.
Financial accounting is the area of accounting that emphasizes reporting to
creditors and investors.
Managerial Accounting is the accumulation and preparation of financial reports for
internal users only.
In other words, managerial accounting is the area of accounting that emphasizes
developing accounting information for use within an entity.
QUESTION 1-16
What is the meaning of generally accepted accounting principles?
ANSWER 1-16

Generally accepted accounting principles (GAAP) encompass the conventions, rules

and procedures necessary to define what accepted accounting practice is.
Generally accepted accounting principles are conventional- that is, they become
generally accepted by agreement often tacit agreement rather than by formal
derivation from a set of postulates and basic concepts. The principles have
developed on the basis of experience, reason, custom, usage, and practically
necessity.
Simply stated, generally accepted accounting principles represent the rules,
procedures, practice and standards followed in the preparation and presentation of
financial statements.
Generally accepted accounting principles are like laws that must be followed in
financial reporting.
In the Philippines, the development of generally accepted accounting principles is
formalized initially through the creation of the Accounting Standards Council. The
accounting standards promulgated by the Accounting Standards Council
constitute the generally accepted principles in the Philippines.
The approved statements of the ASC are called previously as Statement of
Financial Accounting Standards or SFAS.
These ASC statements of Financial Accounting Standards are now known as
Philippine Accounting Standards or PAS and Philippine Financial Reporting
Standards or PFRS.
QUESTION 1-17
What is the purpose of accounting standards?
ANSWER 1-17
The overall purpose of accounting standards is to identify proper accounting
practices for the preparation and presentation of financial statements.
Accounting standards create a common understanding between preparers and
users of financial statements particularly on how items, for example the valuation of
assets, are treated.
Financial statements shall therefore comply with all applicable accounting
standards.
QUESTION 1-18
What do you understand by the Financial Reporting Standards Council or FRSC?
ANSWER 1-18

The FRSC now replaces the ASC.

The FRSC is the accounting standard setting body created by the Professional
Regulation Commission upon recommendation of the Board of Accountancy to assist
the Board of accountancy in carrying out its powers and functions provided under
R.A. Act No. 9298.
The main function is to establish and improve accounting standards that will be
generally accepted in the Philippines.
The FRSC is composed of 15 members with a chairman who had been or is presently
a senior accounting practitioner and 14 representatives from the following:
Board of Accountancy
Securities and exchange Commission
Bangko Sentral ng Pilipinas
Bureau of Internal Revenue
Commission on Audit
Major organization of preparers and users
of financial statements
Accredited national professional organization of CPAs:
Public Practice
Commerce and Industry
Academe or Education
Government
2
Total

1
1
1
1
1
1
2
2
2

14

The Chairman and members of the FRSC shall have a term of 3 years renewable for
another term. Any member of the ASC shall not be disqualified from being
appointed to the FRSC.
QUESTION 1-19
What do you understand by the Philippine Interpretations Committee?
ANSWER 1-19
The Philippine Interpretations Committee or PIC has replaced the Interpretations
Committee or IC formed by the Accounting Standards Council in May 2000.
The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC
and in the context of the framework, to provide timely guidance on financial
reporting issues not specifically addressed in current PFRS.
In other words, interpretations are intended to give authoritative guidance on
issues that are likely to receive divergent or unacceptable treatment because the
standards do not provide specific and clear cut rules and guidelines.

The counterpart of the PIC in the United Kingdom is the International Financial
Reporting Interpretations committee or IFRSC which has already replaced the
Standing Interpretations Committee or SIC.
QUESTION 1-20
What do you understand by the International Accounting Standards Committee?
ANSWER 1-20
The IASC is an independent private sector body, with the objective of achieving
uniformity in the accounting principles which are used by business and other
organizations for financial reporting around the world.
It was formed I June 1973 through an agreement made by professional accountancy
bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands,
the United Kingdom and Ireland, and the United States of America.
The IASC subsequently expanded to include representatives from over 100
countries and by year 2000 the membership included 143 bodies in 104 countries
representing over two million accountants. The IASC is headquartered in London,
United Kingdom.
QUESTION 1-21
What are the objectives of the International Accounting Standards committee?
ANSWER 1-21
a. To formulate and publish in the public interest accounting standards to be
observed in the presentation of financial statements and to promote their
worldwide acceptance and observance.
b. To work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of financial
statements.
The approved statements of the IASC are known as International Accounting
Standards or IAS.
QUESTION 1-22
What are the factors considered by the Philippines in deciding to move totally to
international accounting standards?
ANSWER 1-22
a. Support of international accounting standards by Philippine organizations,
such as the Philippine SEC, Board of Accountancy and PICPA.

b. Increasing internalization of business which has heightened interest in a

common language for financial reporting.
c. Improvement of international accounting standards- Removal of free choices
of accounting treatments.
d. Increasing recognition of international accounting standards by the Word
Bank, Asian Development Bank and World Trade Organization.
QUESTION 1-23
What do you understand by the International Accounting Standards Board?
ANSWER 1-23
The International Accounting Standards Board or IASB now replaces the
International Accounting Standards Committee or IASC. The IASB publishes its
standards in a series of pronouncements called International Financial Reporting
Standards or IFRS.
However, the IASB has adopted the body of standards issued by the IASC. The
pronouncements of the IASC continue to be designated as International
Accounting Standards or IAS.
The IASBs objective is to raise the quality and consistency of financial reporting and
to have a platform of high quality and improved standards.
The IFRS is a global phenomenon intended to bring about greater transparency
and a higher degree of comparability in financial reporting, both of which will
benefit the investors and are essential to achieve the goal of one uniform and
globally accepted financial reporting standards.
QUESTION 1-24
What are accounting assumptions?
ANSWER 1-24
Accounting assumptions are the basic notions or fundamental premises on which
the accounting process is based. Accounting assumptions are the givens and they
exist without saying.
Like a building structure that requires a solid foundation to avoid or prevent future
collapse and provide room for expansion, and so with accounting.
Accounting assumptions serve as the foundation or bedrock of accounting in order
to avoid misunderstanding but rather enhance the understanding and usefulness of
the financial statements. Accounting assumptions are also known as postulates.
QUESTION 1-25

What are the underlying accounting assumptions?

ANSWER 1-25
1.
2.
3.
4.
5.

Accrual
Going concern
Accounting entity
Time period
Monetary unit

The Framework for the Preparation and Presentation of Financial Statements

mentions two underlying assumptions, namely accrual and going concern.
However, implicit in accounting are the basic assumptions of accounting entity,
time period and monetary unit.
QUESTION 1-26
Explain fully the accrual assumption.
ANSWER 1-26
The preparation of financial statements every accounting period is usually based on
accrual accounting.
Accrual accounting means that income is recognized when earned regardless of
when received and expense is recognized when incurred regardless of when paid.
Under this basis, the effects of transactions and other events are recognized when
they occur and not as cash or its equivalent is received or paid, and they are
recorded in the accounting records and reported in the financial statements of the
period to which they relate.
The essence of accrual accounting is the recognition of accounts receivable,
accounts payable, prepaid expenses, accrued expenses, deferred income, and
accrued income.
QUESTION 1-27
Explain briefly the going concern assumption.
ANSWER 1-27
Going concern assumption means that the accounting entity is viewed as
continuing in operation indefinitely in the absence of evidence to the contrary.
In other words, financial statements are prepared normally on the assumption that
the entity shall continue in operation for the foreseeable future.

Thus, assets are normally recorded at original acquisition cost. As a rule, market
values are ignored. However, the new standards require measurement of certain
assets at fair value.
This postulate is the very foundation of the cost principle. It is also known as the
continuity assumption.
QUESTION 1-29
Explain briefly the time period assumption.
ANSWER 1-29
The time period assumption requires that the indefinite life of an entity is
subdivided into time periods or accounting periods which are usually of equal length
for the purpose of preparing financial reports on financial position, financial
performance, and cash flows.
The accounting period or fiscal period is one year or a period of twelve months. The
one-year period is traditionally the accounting period because usually it is after
one year that government reports are required.
The accounting period may be a calendar year or a natural business year. A
calendar year is a twelve-month period that ends on December 31. A natural
business year is a twelve-month period that ends on any month when the business
is at the lowest or experiencing slack season.
QUESTION 1-30
Explain fully the monetary unit assumption.
ANSWER 1-30
The monetary unit assumption has two aspects, namely quantifiability and
stability of the peso. The quantifiability aspect means that the assets, liabilities,
equity, income and expenses should be stated in terms of a unit of measure which
is the peso in the Philippines.
How awkward to see financial statements without any common unit of measure.
Such statements would be largely unintelligible and incomprehensible.
The stable peso postulate is actually an amplification of the going concern
assumptions so much so that the adjustments are unnecessary to reflect any
changes in purchasing power.
The accounting function is to account for pesos only and not for changes in
purchasing power.

In todays world, the assumption that the peso is a stable measure over
time is not necessarily valid.
Consider an equipment that was imported 10 years ago from the united States for
$100, 00 when the exchange rate was P35 to $1 or an equivalent of P3,500,000.
If the same equipment is purchased now and assuming there is no change in the
$100,000 purchase price, the replacement cost in terms of pesos would be in the
vicinity of P4, 800, 00, considering a current exchange rate of P48 to $1.
Obviously, there is a significant gap between historical cost and current
replacement cost.
In this regard, PAS 16 provides that an entity shall choose either the cost model or
revaluation model as its accounting policy to an entire class of property, plant and
equipment.
On the other hand, US GAAP encourages entities to make supplementary
disclosures relating to the impact of changing prices.
QUESTION 1-31
What do you understand by the by the framework for the Preparation and
Presentation of financial statements?
ANSWER 1-31
The framework for the Preparation and Presentation of financial statements is
promulgated by the International Accounting Standards Board and adopted by the
local Financial Reporting Standards Council.
The Framework is a summary of the terms and concepts that underlie the
preparation and presentation of financial statements. It is the underlying theory for
the development of accounting standards and revision of previously issued
accounting standards.
The Framework is an attempt to provide an overall theoretical foundation for
accounting which will guide standard-setters, preparers and users of financial
information in the preparation and presentation of statements.
In other words, the concepts are the foundation on which financial statements are
constructed, and provide a platform from which accounting standards are developed
and revised.
The Framework is concerned with general-purpose financial statements, including
consolidated financial statements.

The financial statements are prepared at least annually and are directed toward the
common needs of a wide range of users.
QUESTION 1-32
What are the basic purposes of the Framework?
ANSWER 1-32
The basic purposes of the Framework are:
a. To assist the Financial Reporting Standards Council in developing accounting
standards that represents Philippine GAAP.
b. To assist preparers of financial statements in applying accounting standards and
in dealing with issues not yet covered by GAAP.
c. To assist the Financial Reporting Standards Council in its review and adaption of
International Accounting Standards.
d. To assist users of financial statements in interpreting the information contained
in the financial statements.
e. To assist auditors in forming an opinion as to whether financial statements
conform with Philippine GAAP.
f. To provide information to those interested in the work of the Financial Reporting
Standards Council in the formulation of Philippine Financial Reporting Standards.
QUESTION 1-33
Explain the authoritative status of the Framework.
ANSWER 1-33
If there is a standard or an interpretation that specifically applies to a
transaction, the standard or interpretation overrides the Framework.
In the absence of a standard or an interpretation that specifically applies to a
transaction, management shall consider the applicability of the Framework in
developing and applying an accounting policy that results in information that is
relevant and reliable.
However, it is to be stated that the Framework is not a Philippine Financial
Reporting Standard and hence does not define standard for any particular
measurement or disclosure issue.
Nothing in the Framework overrides any specific Philippine Financial Reporting
Standard.
In case where there is a conflict, the requirements of the Philippine Financial
Reporting Standards shall prevail over the Framework.
QUESTION 1-34

What is the scope of the Framework?

ANSWER 1-34
a. Objective of financial statements.
b. Qualitative characteristics that determine the usefulness of information in
financial statements.
c. Definition, recognition and measurement of the elements from which financial
statements are constructed.
d. Concepts of capital and capital maintenance.
The Framework is applies to the financial statements of all commercial, industrial
and business reporting entities, whether in the public or private sector.
However, special purpose financial reports, for example, prospectuses and
computations prepared for taxation purposes, are outside the scope of the
Framework.
QUESTION 1-35
What is the objective of financial statements?
ANSWER 1-35
The objective of financial statements is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.
QUESTION 1-36
What is the financial position of an entity?
ANSWER 1-36
The financial position of an entity comprises its assets, liabilities and equity at a
particular date.
The financial position pertains to the economic resources, liquidity, solvency,
financial structure and capacity for adaptation of an entity. Such information is
pictured in the statement of financial position.
QUESTION 1-37
Define the following:
1.
2.
3.
4.
5.

Economic Resources
Liquidity
Solvency
Financial structure
Capacity for adaptation

ANSWER 1-37
1. Economic resources simply refer to the assets owned by the entity.
Information about the economic resources controlled by the entity and its
capacity to modify these resources is useful in predicting the ability of the
entity to generate cash and cash equivalents in the future.
2. Liquidity is the availability of cash in the near future to cover currently
maturing obligations.
3. Solvency is the availability of cash over a long term to meet financial
commitments when they fall due.
Information about liquidity and solvency is useful in predicting the ability of
the entity to comply with its future financial commitments.
4. Financial structure is the source of financing for the assets of the entity.
Financial structure indicates what amount of assets has been financed by
creditors which is the borrowed capital, and how much has been financed by
owners which is the invested or equity capital.
5. Capacity for adaptation is the ability of the entity to use its available cash
for unexpected requirements and investment opportunities.
This may be accomplished by raising cash at a short notice through
borrowing and issuance of securities or by raising cash through disposal of
assets without disrupting normal operations. Capacity for adaptation is also
known as financial flexibility.
QUESTION 1-38
What is the meaning of financial performance of an entity?
ANSWER 1-38
The financial performance of an entity comprises its revenue, expenses and net
income or loss for a period of time.
Financial performance is the level of income earned by the entity through the
efficient and effective use of its resources.
The financial performance of an entity is also known as result of operations and is
portrayed in the income statement and statement of comprehensive income.
Information about performance is useful in predicting the capacity of the entity to
generate cash flows from its operations. It is also useful in forming judgment about
the effectiveness of the entity in employing additional resources.
QUESTION 1-39
What is financial reporting?
ANSWER 1-39

Financial reporting is the provision of financial information about an entity to

external users that is useful to them in making economic decisions and for
assessing the effectiveness of the entitys management.
The principal way of providing financial information to external users is through the
annual financial statements.
However, financial reporting encompasses not only financial statements but also
other information such as financial highlights, summary of important financial
figures, analysis of financial statements and significant ratios.
Financial reports also include nonfinancial information such as descriptions of
major products and a listing of corporate officers and directors.
QUESTION 1-40
What is the objective of financial reporting?
ANSWER 1-40
The overall objective of financial reporting is to provide information that is useful
for decision making.
Specifically, the AICPA Financial Accounting Standards Board in its Statement of
financial Accounting Concepts enumerates the following objectives of financial
reporting:
a. To provide information useful in investment, credit and similar decision.
b. To provide information useful in assessing cash flow prospects.
c. To provide information about entity resources claims to those resources and
changes in them.
QUESTION 1-41
Explain the following concepts in conjunction with the objective of financial
statements.
1.
2.
3.
4.

Entity theory
Proprietary theory
Residual equity theory
Fund theory

ANSWER 1-41
1. Entity theory- The accounting objective is geared toward proper income
determination. Proper matching of cost against revenue is the ultimate end.
Thus, the entity theory emphasizes the importance of the income statement.
This is explained by the equation:
Assets= Liabilities + Capital

2. Proprietary theory- The accounting objective is directed toward proper

valuation of assets.
Thus, this theory emphasizes the importance of the balance sheet. It is
exemplified by the equation:
Assets- Liabilities= Capital
3. Residual equity theory- The accounting objective is also proper valuation
of assets. This is applicable where there are two classes of shareholders,
ordinary and preference. Thus, the equation is:
Assets- Liabilities- Preference Shareholders Equity= Ordinary Shareholders
Equity
4. Fund theory- The accounting objective is neither proper income
determination nor proper valuation of assets but the custody and
administration of funds.
The objective is directed toward cash flows exemplified by the formula cash
inflows minus cash outflows equals fund.
Government accounting and fiduciary accounting are examples of the
application of this concept.
QUESTION 1-42
Enumerate the users of financial statements and their information needs.
ANSWER 1-42
a. Investors- The providers of risk capital and their advisers are concerned with
the risk inherent in and return provided by their investments.
Investors need information to help them determine whether they should buy,
hold or sell.
Shareholders are also interested in information which enables them to assess
the ability of the entity to pay dividends.
b. Employees- Employees are interested in information about the stability and
profitability of the entity.
The employees are interested in information which enables them to assess
the ability of the entity to provide remuneration, retirement benefits and
employment opportunities.
c. Lenders- Lenders are interested in information which enables them to
determine whether their loans and interest thereon will be paid when due.
d. Suppliers and other trade creditors- These users are interested in
information which enables them to determine whether amounts owing to
them will be paid on maturity.
e. Customers- Customers have an interest in information about the
continuance of an entity especially when they have a long-term involvement
with or are dependent on the entity.
f. Government and its agencies- Government and its agencies are
interested in the allocation of resources and therefore the activities of the
entity.

These users require information to regulate the activities of the entity,

determine taxation policies and as a basis for national income and similar
statistics.
g. Public- Entities affect members of the public in a variety of ways.
For example, entities make substantial contributions to the local economy in
many ways including the number ofpeople they employ and their patronage
of local suppliers.
Financial statements may assist the public by providing information about the
trends and recent developments in the prosperity of the entity and the range
of its activities.
QUESTION 1-43 Multiple choice (ACP)
1. Accounting is a service activity and its function is to provide quantitative
information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decision. This accounting definition
is given by
a. Accounting Standards Council
b. AICPA Committee on Accounting terminology
c. American Accounting Association
d. Board of Accountancy
2. The Basic purpose of accounting is
a. To provide the information that the managers of an economic entity need
to control its operations.
b. To provide information that the creditors of an economic entity can use in
deciding whether to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful
in making rational economic decision.
3. These are the events that affect the entity and in which other entities
participate.
a. Internal events
b. External events
c. Summarizing
d. Interpreting
4. The communicating process of accounting includes all of the following,
except
a. Recording
b. Classifying
c. Summarizing
d. Interpreting
5. What is the law regulating the practice of accountancy in the Philippines?
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892
6. It is the body authorized by law to promulgate rules and regulations affecting
the practice of the accountancy profession in the Philippines.

a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
c. Securities and exchange Commission
d. Financial Reporting Standards Council
7. Accountants employed in entities in various capacity as accounting staff,
chief accountant or controller are said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
8. It is the accounting standard setting body created by PRC upon
recommendation the Board of Accountancy to assist the Board of
Accountancy in carrying out its powers and functions under R.A No.9298.
a. Accounting Standards Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards Council
9. Which is not required to be represented in the FRSC?
a. Bangko Sentral ng Pilipinas
b. Bureau of Internal Revenue
c. Commission on Audit
d. Department of Budget and Management
10.Which statement is true about the Philippine Interpretations Committee?
I.
The role of the Philippine Interpretations Committee is to prepare
interpretations of PFRS for approval by the Financial Reporting
Standards Council and in the context of the framework, to provide
timely guidance on financial accounting issues not specifically
addressed in current PFRS.
II.
The interpretations are intended to give authoritative guidance on
issues that are likely to receive divergent or unacceptable treatment
because standards do not provide specific clear cut rules and
guidelines.
a. I only
b. II only
c. Both I and II
d. Neither I or II
ANSWER 1-43
1.
2.
3.
4.
5.

a
d
b
d
a

6. a
7. b
8. d
9. d
10. c

QUESTION 1-44 Multiple choice (IAA)

1. Financial accounting is covered with
a. General-purpose reports on financial position and financial performance.

2.

3.

4.

5.

b. Specialized reports for inventory management and control

c. Specialized reports for income tax computation and recognition
d. General-purpose reports on changes in stock prices and future estimates
of market position.
Financial accounting can be broadly defined as the area of accounting that
prepares
a. General purpose financial statements to be used by parties internal to the
entity only.
b. Financial statements to be used by investors only.
c. General purpose financial statements to be used by parties both internal
and external to the entity.
d. Financial statements to be used primarily by management.
The primary focus of financial accounting has been on meeting the needs of
which of the following groups?
a. Managers of an entity
b. Present and potential creditors of an entity
c. National and local existing authorities
d. Independent auditors
Financial accounting is the area of accounting that emphasizes reporting to
a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors
Managerial accounting is the area of accounting that emphasizes
a. Reporting financial information to external users
b. Reporting to the SEC
c. Combining accounting knowledge with an expertise in data processing
d. Developing accounting information for use within an entity

ANSWER 1-44
1.
2.
3.
4.
5.

a
c
b
d
d

QUESTION 1-45
1. Generally accepted accounting principles
a. Are accounting adaptations based on the laws of economic science
b. Derive their credibility and authority from legal rulings and court
precedents
c. Derive their credibility and authority from the national government
through the SEC
d. Derive their credibility and authority from general recognition and
acceptance by the accountancy profession
2. Which of the following statements best describes generally accepted
accounting principles?

3.

4.

5.

6.

7.

8.

9.

a. They have been formulated in the public sector.

b. They have been developed on the basis of such factors as usage and
practical necessity.
c. They are the same as laws within our legal system.
d. They do not apply to small entities
Proper application of accounting principles is most dependent upon the
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
The process of establishing financial accounting standards
a. Is a democratic process in that a majority of practicing accountants must
agree with a standard before it becomes implemented.
b. Is a legislative process based on rules promulgated by government
agencies.
c. Is based solely on economic analysis of the effects each standard will have
if it is implemented.
d. Is a social process which incorporates political actions of various
interested user groups as well as professional research and logic.
Once an accounting standard has been established
a. The standard is continually reviewed to see if modification is necessary.
b. The standard is not reviewed unless SEC makes a complaint.
c. The task of reviewing the standard to see if modification is necessary is
given to the PICPA.
d. The principle of consistency requires that no revisions ever be made to the
standard.
As independent or external auditors, CPAs are primarily responsible for
a. Preparing financial statements in conformity with the GAAP
b. Certifying the accuracy of financial statements
c. Expressing an opinion as to the fairness of financial statements
d. Filing financial statements with the SEC
The singularly unique function performed by Certified Public Accountants is
a. Tax preparation
b. Management advisory services
c. The attest function
d. The preparation of financial statements
The purpose of the International Financial Reporting Standards is to
a. Issue enforceable standards which regulate the financial accounting and
reporting of multinational entities.
b. Develop a uniform currency in which the financial transactions of entities
throughout the world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
The International Accounting Standards Board was formed to
a. Enforce IFRS in foreign countries
b. Develop worldwide accounting standards
c. Establish accounting standards for multinational entities
d. Develop accounting standards for countries that do not have their
standard-setting bodies

10.It is a global phenomenon intended to bring about transparency and a

higher degree of comparability in financial reporting, both of which will
benefit the investors and are essential to achieve the goal of one uniform and
globally accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology
ANSWER 1-45
1.
2.
3.
4.
5.

d
b
d
d
a

6.c
7. c
8. c
9. b
10.a

QUESTION 1-46 Multiple choice (assumptions)

1. The framework specifically mentions two underlying assumptions, namely
a. Accrual and going concern
b. Accrual and accounting entity
c. Going concern and time period
d. Time period and monetary unit
2. Which of the following is listed in the Framework as underlying assumption
regarding financial statements?
a. The financial statements are reliable.
b. Any changes in accounting policy are neutral.
c. The financial statements are prepared under accrual basis.
d. The entity can be viewed as a liquidating concern.
3. Which of the following terms best describes financial statements whose basis
of accounting recognizes transactions and other events when they occur?
a. Accrual basis of accounting
b. Going concern basis of accounting
c. Cash basis of accounting
d. Invoice basis of accounting
4. The accrual basis of accounting is based primarily on
a. Conservatism and revenue realization
b. Conservatism and matching
c. Consistency and matching
d. Revenue realization and matching
5. Which of the following statements best describes the term going concern?
a. When current liabilities of an entity exceeds assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the
entity
d. The expenses of the entity exceeds its income
6. Which of the following is not an implication of the going concern assumption?
a. The historical cost assumption is credible.
b. Depreciation and amortization policies are justifiable and appropriate.

c. The current and noncurrent classification of assets and liabilities is

justifiable and significant.
d. Amortizing research and development costs over several periods is
justifiable and appropriate.
7. The relatively stable economic, political and social environment supports
a. Conservatism
b. Materiality
c. Timeliness
d. Going Concern
8. Which underlying concept serves as the basis for preparing financial
statements at regular intervals?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit
9. Which of the following is not an important characteristic of the financial
statements that accountants currently prepare?
a. The information in financial statements is expressed in units of money
adjusted for changing purchasing power.
b. Financial statements articulate with one another because measuring
financial position is related to measuring changes in financial position.
c. The information in financial statements is summarized and classified to
help meet users needs.
d. Financial statements can be justified only if the benefits they provide
exceed the costs.

10. Which of the following statements is incorrect?

a. The accrual method, which builds directly on the revenue and matching
principles, ignores the timing of the cash receipts or payments in determining when
to recognize revenue or expenses.
b. In accordance with the unit of measure assumption, the changing
purchasing power of money due to inflation or deflation.
c. In accordance with the going concern assumption, the life of an entity is
presumed to be indefinite.
d. Accountants prepare financial statements at arbitrary points in time during
an entitys lifetime in accordance with the accounting period.
ANSWER 1-46
1
2
3
4
5

A
C
A
D
B

6.
7.
8.
9.
10.

D
D
C
A
B

QUESTION 1-47 multiple choice (AICPA Adapted)

1

The concept of accounting entity is applicable

a Only to the legal aspects of business organizations
b Only tot the economic aspects of business organization
c Only to business organizations
d Whenever accounting is involved

When a parent and subsidiary relationship exists, consolidated financial

statements are prepared in recognition of
a Legal entity
b Economic entity
c Stable monetary unit
d Time period

The valuation of a promise to receive cash in the future at present value is

valid because of the accounting concept of
a Entity
b Time period
c Going concern
d Monetary unit
This accounting concept justifies the usage of accruals and deferrals.
a Going concern
b Materiality
c Consistency
d Stable monetary unit

During the lifetime of an entity accountants produce financial statements at

arbitrary points in time in accordance with which basic accounting concept?
a Accrual
b Periodicity
c Unit of measure
d Continuity

ANSWER 1-47
1
2
3
4
5

D
B
C
A
B

QUESTION 1-48 multiple choice (Framework)

The Framework for the Preparation and Presentation of Financial

Statements should
a Lead to uniformity of financial statements among entities within the
same industry.
b Eliminate alternative accounting principles and methods.
c Guide the PICPA in developing generally accepted auditing standards.
d Define the basic objectives, terms and concepts of accounting.

Which is not a basic purpose of the Framework?

a To assist the Financial Reporting Standards Council in developing
accounting standards.
b To assist the preparers of financial statements in applying accounting
standards.
c To assist the Financial Reporting Standards Council in reviewing and
adopting International Accounting Standards.
d To assist the Board of Accountancy in promulgating rules and
regulations affecting the practice of accountancy in the Philippines.

Which of the following is not a purpose of the Framework?

a To provide definitions of key terms of key terms and fundamental
concepts.
b To provide specific guidelines for resolving situations not covered by
existing accounting standards.
c To assist accountants and others in selecting among alternative
accounting and reporting methods.
d To assist the Financial Reporting Standards Council in the standardsetting process.

Which is a basic purpose of the Framework?

I
To assist users of financial statements in interpreting the
information contained in the financial statements.
II
To assist auditors in forming an opinion as to whether financial
statements conform with Philippine GAAP.
III
To provide information to those interested in the work of the
Financial Reporting Standards Council in the formulation of PFRS.
a
b
c
d

I and II only
I and III only
II and III only
I, II and III

What is the authoritative status of the Framework?

a The Framework has the highest level of authority

b
c

In the absence of a standard or an interpretation that specifically

applies to a transaction, the Framework shall be followed.
In the absence of a standard or an interpretation that specifically
applies to a transaction, management shall consider the applicability of
the Framework in developing and applying an accounting policy that
result in information that is relevant and reliable.
The Framework applies only when the FRSC develops new or revised
standards.

The Framework is intended to establish

a Generally accepted accounting principles in financial reporting by
entities.
b The meaning of present fairly in accordance with GAAP
c The objectives and concept for use in developing standards of financial
accounting and reporting.
d The hierarchy of sources of GAAP.

Which statements is incorrect concerning the framework?

I
The Framework applies to the financial statements of all
commercial, industrial and business reporting entities, whether in
the public and private sector.
II

Which statement is correct concerning the Framework?

I
The Framework is not a Philippine Financial Reporting Standard and
hence does not define standard for any particular measurement or
disclosure issue.
II

Special purpose financial reports, for example, prospectuses, are

within the scope of the Framework.
a I only
b II only
c Both I and II
d Neither I nor II

The Framework is concerned with general-purpose financial

statements including consolidated financial statement.
a I only
b II only
c Both I and II
d Neither I nor II

Which is not included in the scope of the Framework?

a Qualitative characteristics that determine usefulness of financial
accounting information
b Definition, recognition and measurement of the elements of financial
statements

c
d

Objective of financial statements

Generally accepted accounting principles

10 As regards the relationship between PFRS and the Framework, which of

the following statements is true?
I
The Framework is a reporting standard.
II

a
b
c
d

In case of conflict, the requirements of the Framework prevail over

those of the relevant PFRS.
I only.
II only
Both I and II
Neither I nor II

ANSWER 1-48
1
2
3
4
5

D
D
B
D
C

6. C
7. B
8. C
9. D
10. D

QUESTION 1-49 Multiple Choice (Users of Information)

1

Which of the following is an internal user of an entitys financial information?

a
b
c
d

These users require information on risk and return on investment and hence
an entitys ability to pay dividends.
a
b
c
d

Board of Directors
Shareholder in the entity
Holder of the entitys bonds
Creditor with long term contracts with the entity

Investors
Employees
Lenders
Customers

These users are interested in information about the profitability and stability
of an entity in order to assess the ability of the entity to provide
remuneration, retirement benefits and employment opportunities.
a
b
c
d

Customers
The public
Government and their agencies
Employees

These users are interested in information that enables them to determine

whether amounts owing to them will be paid when due.
a
b
c
d

These users are interested in information about the profitability and stability
of an entity in order to assess whether an entity is able to repay loans and
related interest when the loans fall due.
a
b
c
d

Governments and their agencies

Major organization of users
Bureau of internal revenue
Department of finance

These users are interested in information on trends and recent developments

where an entity makes a substantial contribution to the local economy
providing employment and using local suppliers.
a
b
c
d

Customers
Employees
Trade unions
Suppliers

These users are interested in information in order to regulate the activities of

an entity, determine taxation policies and provide a basis for national
statistics.
a
b
c
d

Lenders
Borrowers
Trade creditors
Owners

These users are interested in information about the continuance of an entity,

especially when they have a long-term involvement with or are dependent on
the entity.
a
b
c
d

Suppliers and trade creditors

Lenders
Banks
Finance entities

The public
Governments and their agencies
Finance entities
Private entities

The providers of risk capital and their advisers

I
Are concerned with the risk inherent in and return provided by their
investments.

II

a
b
c
d

Need information to help them determine whether they should buy or

sell.
I only
Ii only
Both I and II
Neither I and II

10 Which statement is correct regarding information needs?

I
All information needs of users cannot be met by financial statements.
II

a
b
c
d

As investors are providers of risk capital to the entity, the provision of

financial statements that meet their needs will also meet most of the
needs of other users that financial statements can satisfy.
I only
II only
Both I and II
Neither I and II

ANSWERS 1-49
1
2
3
4
5

A
A
D
A
A

6. A
7. A
8. A
9. C
10. C

QUESTIONS 1-50 Multiple Choice (AICPA Adapted)

1

The theory of accounting which best describes the accounting equation

expressed assets + equity is the
a
b
c
d

Entity theory
Fund theory
Proprietary theory
Residual equity theory

What theory of ownership equity is enumerated by the following equation:

assets minus liabilities minus preference share equity equals ordinary share
equity?
a
b
c
d

Fund
Entity
Proprietary
Residual equity

Classifying preference dividends as expense is an application of what

concept?
a
b
c
d

The primary accounting objective is fair presentation of the financial

performance of the entity.
a
b
c
d

Entity
Proprietary
Residual equity
Fund

Entity
Proprietary
Residual equity
Fund

Fiduciary accounting is an application of

a
b
c
d

Entity theory
Proprietary theory
Residual equity theory
Fund theory

ANSWER 1-50
1
2
3
4
5

A
D
C
A
D

QUESTION 1-51 multiple choice (IAA)

1

The overall objective of financial reporting is to provide information

a
b
c
d

That is useful for decision making

About an entitys assets, liabilities and owners equity
About an entitys financial performance during a period
That allows owners to assess managements performance

Which of the following statements concerning the objective of financial

reporting is correct?
a

The objectives are intended to be specific in nature.

b
c
d

Information about financial structure is useful in predicting

a
b
c
d

Future borrowing needs and how future profits and cash flows will be
distributed among those with an interest in the entity
The ability of the entity to meet its financial commitments as they fall due
over a longer term.
The ability of the entity to use its available cash for unexpected
requirements and investment opportunities.
The capacity of the entity to generate cash flows from its operations.

Which of the following statements best describes the term financial

position?
a
b
c
d

The objectives are directed primarily toward the needs of internal users of
accounting information.
The objectives are the end result of the conceptual framework project.
The objectives encompass not only financial statement disclosures but
other information as well.

The net income and expenses of an entity.

The net of financial assets less liabilities of an entity
The potential to contribute to the flow of cash and cash equivalents to the
entity
The assets, liabilities and equity of an entity

Which of the following best describes financial performance of an entity?

a
b
c
d

The
The
The
The

revenue, expenses and net income or loss for a period of an entity.

assets, liabilities and equity of an entity
total assets minus total liabilities
total cash inflow minus cash outflows

ANSWER 1-51
1
2
3
4
5

A
D
A
D
A

QUESTION 1-52 multiple choice (AICPA Adapted)

1

The objectives of financial reporting for entities are based on

a
b
c

The need for conservatism

Reporting on managements ownership
Generally accepted accounting principles

d
2

The information provided by financial reporting pertains to

a
b
c
d

Individual business entities, rather than to industries or an economy as a

whole or to members of society as consumers
Individual business entities and an economy as a whole or to members of
society as consumers
Individual business entities and an economy as a whole, rather than to
industries or to members of society as consumers
Individual business entities, industries and an economy as a whole, rather
than to members of society as consumers

During a period when an entity is under the direction of a particular

management, financial reporting will directly provide information about
a
b
c
d

The needs of the users of the information

Both entity performance and management performance

Management performance but not entity performance
Entity performance but not management performance
Neither entity performance nor management performance.

Which one of the following items is not listed as major objectives of the
financial reporting?
a
b
c
d

Financial reporting shall provide information

to those resources and changes in them.
Financial reporting shall provide information
managements stewardship.
Financial reporting shall provide information
and similar decisions.
Financial reporting shall provide information
prospects.

about entity resources, claims

useful in evaluating
useful in investment, credit
useful in assessing cash flow

Which of the following statements is not normally an objective of financial

reporting?
a
b
c
d

To provide information
assets.
To provide information
uses of cash.
To provide information
To provide information

about an entitys assets and claims against those

that is useful in assessing an entitys sources and
that is useful in lending and investing decisions.
about an entitys liquidation value

ANSWER 1-52
1 D
2 A
3 C
4 B
5 D
QUESTION 1-53 Multiple Choice (PHILCPA Adapted)
1

The principles which constitute the ground rules for financial reporting are
termed generally accepted accounting principles. To qualify as generally
accepted, an accounting principle must
a
b
c
d

Under generally accepted accounting principles

a
b
c
d

Usually guide corporate managers in preparing financial statements,

which will be understood by widely scattered shareholders.
Guide corporate managers in preparing financial statements, which will be
used, for collective bargaining agreement with trade unions.
Guide an entrepreneur of the choice of an accounting entity like single
proprietorship or corporation.
Receive substantial authoritative support.

Income and expenses, assets and liabilities are measured based on the
occurrences of changes in the economic resources and obligations
Assets and liabilities are measures on the basis of their liquidation value.
Income and expenses are recognized on the basis of cash receipts and
payments, including depreciation of property, plant and equipment.
Financial position and financial performance are measured on the basis of
cash received and cash paid.

The four phases of accounting are recording, classifying, summarizing and

interpreting. The phase whereby the liquidity, solvency and profitability of an
entity are significantly portrayed is known as
a
b
c
d

Summarizing
Classifying
Recording
Interpreting

4. Four types of money prices are used in measuring resources in financial accounting. The
measurement which uses such concepts as present value, discounted cash flow and value in
use is known as

a.
b.
c.
d.

Price is a current purchase exchange

Price in past purchase exchange
Price based on future exchange
Price in a current sale exchange

5. External events include all of the following, except

a.
b.
c.
d.

Sale of merchandise
Borrowing from bank
Donation received from shareholder
Casualty loss caused by flood, earthquake or other natural disaster

ANSWER 1-53
1.
2.
3.
4.
5.

d
a
d
c
d