3.1. Introduction
The Framework for the Preparation and Presentation of Financial Statements (the
“Framework”) sets out the concepts that underlie the preparation and presentation of
financial statements, that is, the objectives, assumptions, characteristics, definitions, and
criteria that govern financial reporting. Therefore, the Framework is often referred to as the
“conceptual framework.”
The Framework does not have the force of a Standard. Instead, its purposes include, first,
to assist and guide the International Accounting Standards Board (IASB) as it develops new
or revised Standards and, second, to assist preparers of financial statements in applying
Standards and in dealing with topics that are not addressed by a Standard. Thus, in case of
a conflict between the Framework and a specific Standard, the Standard prevails over
the Framework.
The Framework notes that general-purpose financial reports cannot provide all the
information that users may need to make economic decisions. They will need to
consider pertinent information from other sources as well.
Accrual Basis
When financial statements are prepared on the accrual basis of accounting, 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 periods to which they relate.
Going Concern
When financial statements are prepared on a going concern basis, it is assumed that the
entity has neither the intention nor the need to liquidate or curtail materially the
scale of its operations, but will continue in operation for the foreseeable future. If this
assumption is not valid, the financial statements may need to be prepared on a different
basis and, if so, the basis used is disclosed.
The going concern assumption is also addressed in IAS 1, which requires management to
make an assessment of an entity’s ability to continue as a going concern when preparing
financial statements.
Fundamental
Completeness
Faithful
Neutrality
representation
Qualitative
Characteristics Freedom from
Comparability
material error
Timeliness
Enhancing
Verifiability
Understandability
NOTE: The principal difference between the two concepts of capital maintenance is the
treatment of the effects of changes in the prices of assets and liabilities of the entity.
1. The Conceptual Framework (choose the incorrect statement)
a. is not a PFRS
b. in the absence of a Standard, shall be considered by management when making its judgment in
developing and applying an accounting policy that result in information that is relevant and reliable
c. is concerned with general purpose financial statements only
d. prevails over the PFRSs in case of conflicts
4. Which of the following are the primary users of general purpose financial reports?
a. existing and potential investors c. government and public
b. lenders and other creditors d. a and b
5. According to the Conceptual Framework, the needs of primary users that are met by financial statements
are
a. all of their needs c. majority of their common needs only
b. all of their common needs only d. majority of their common and specific needs only
7. According to the Conceptual Framework, the correct classifications of Relevance and Reliability,
respectively, are
a. Fundamental, Enhancing c. Fundamental, Fundamental
b. Enhancing, Fundamental d. Fundamental, None
8. The qualitative characteristics that enhance the usefulness of financial information includes all of the
following, except
a. Comparability b. Verifiability c. Timeliness d. Materiality
9. This element is essential so that users may find fundamentally prepared financial information to be
useful.
a. fundamental qualitative characteristics c. comparability
b. relevance d. understandability
13. 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. verifiability c. comparability d. feedback value
15. 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
16. The elements directly related to the measurement of financial position in the balance sheet
a. assets b. liabilities c. equity d. all of these
21. It is the accounting standard setting body created by the Professional Regulation Commission upon
recommendation of the Board of Accountancy to assist the BOA in carrying out its powers and functions
under R.A. 9298, otherwise known as the Philippine Accountancy Act of 2004.
a. Financial Reporting Standards Council c. Education Technical Council
b. Accounting Standards Council d. Auditing and Assurance Standards Council
22. Philippine Financial Reporting Standards include which of the following?
I. Philippine Financial Reporting Standards corresponding to IFRS issued by IASB.
II. Philippine Accounting Standards corresponding to IAS issued by IASC.
III. Philippine Interpretations corresponding to IFRIC and SIC Interpretations, and Interpretations
developed by PIC.
a. I only b. I and II only c. I and III only d. I, II and III
23. Which statement is true concerning the Conceptual Framework for Financial Reporting?
I. The Conceptual Framework is not a reporting standard and therefore does not define standard for
any particular measurement or disclosure issue.
II. The Conceptual Framework is concerned with general purpose financial statements including
consolidated financial statements.
III. In cases of conflict, the requirements of the Conceptual Framework prevail over those of the relevant
PFRS.
a. I only b. I and II only c. II and III only d. I, II and III
28. What is the objective of financial reporting according to the Conceptual Framework?
a. To prepare financial statements in accordance with applicable Standards and Interpretations.
b. To provide information about the financial position, financial performance and cash flows of an entity.
c. To prepare and present relevant information to all users.
d. To provide financial information about an entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity.
31. Which of the following statements best describes the term “financial position”?
a. The income, expenses and profit or loss of an entity c. The monetary assets less monetary liabilities
b. The financial assets less liabilities of an entity d. The assets, liabilities and equity of an entity
33. Which of the following terms best describes financial statements whose basis of accounting recognizes
transactions and other events when they occur?
a. Accrual basis b. Going concern basis c. Cash basis d. Invoice basis
34. Which of the following statements best describes the term “going concern”?
a. When current liabilities exceed current assets.
b. The financial statements are normally prepared on the assumption that an entity will 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 exceed income.
35. 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
36. During the lifetime of an entity, accountants prepare financial statements at arbitrary points in time.
a. Accrual b. Time period c. Unit of measure d. Continuity
37. 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 needs of users.
d. Financial statements can be justified only if the benefits exceed the cost.
44. Which of the following terms best describes information in financial statements that is neutral?
a. Understandable b. Reliable c. Relevant d. Unbiased
45. This means that the financial reports should include all information necessary for a user to understand
the phenomenon being depicted including all necessary description and explanations.
a. Completeness b. Neutrality c. Free from error d. Substance over form
46. The financial information represents the substance of an economic phenomenon rather than merely
representing merely its legal form.
a. Substance over form b. Form over substance c. Reliability d. Relevance
47. It is the inclusion of a degree of caution in the exercise of judgment needed in making estimates under
conditions of uncertainty such that assets and income are not overstated, or liabilities and expenses are
not understated.
a. Prudence b. Materiality c. Objectivity d. Relevance
49. It is the enhancing qualitative characteristic that enables users to identify and understand similarities
and differences among items.
a. Comparability b. Consistency c. Verifiability d. Timeliness
50. When information about two different entities has been prepared and presented in a similar manner, the
information exhibits the characteristic of
a. Relevance b. Reliability c. Consistency d. Comparability
52. Users are assumed to have a reasonable knowledge of business and economic activities and a willingness
to study the information with reasonable diligence.
a. Relevance b. Reliability c. Understandability d. Comparability
53. Classifying, characterizing and presenting information clearly and concisely makes it
a. Comparable b. Understandable c. Verifiable d. Timely
54. This enhancing qualitative characteristic is demonstrated when a high degree of consensus can be
secured among independent measurers using the same measurement method.
a. Comparability b. Understandability c. Verifiability d. Timeliness
55. This means having information available to decision-makers in time to be able of influencing their
decisions.
a. Comparability b. Understandability c. Verifiability d. Timeliness
56. It is the pervasive constraint on the information that can be provided by financial reporting.
a. Cost constraint b. Materiality c. Timeliness d. Substance over form
57. Financial statements portray the financial effects of transactions and other events by grouping them into
broad classes according to their economic characteristics. These broad classes are termed as
a. Elements of financial statements c. Accounting constraints
b. Features of accounting d. Concepts of capital and capital maintenance
58. Which statement is true concerning the elements of the financial statements?
I. The elements directly related to the measurement of financial position are assets, liabilities and
equity.
II. The elements directly related to the measurement of financial performance are income and expenses.
a. I only b. II only c. Both I and II d. Neither I nor II
59. It is the process of incorporating or reporting in the statement of financial position or statement of
comprehensive income an item that meets the definition of an element of financial statements.
a. Recognition b. Allocation c. Realization d. Summarization
60. An item that meets the definition of an element should be recognized when
I. It is probable that any future economic benefit associated with the item will flow to or from the
entity.
II. The item has a cost or value that can be measured with reliability.
a. I only b. II only c. Either I or II d. Both I and II
61. An asset is
a. A resource controlled by the entity as a result of past events and from which future economic benefits
are expected to flow to the entity.
b. A present obligation of the entity arising from past events the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits.
c. The residual interest in the assets of the entity after deducting all of its liabilities.
d. Equivalent to comprehensive income of the entity.
62. Which of the following statements best describes the term ’liability'?
a. An excess of equity over current assets.
b. Resources to meet financial commitments as they fall due.
c. The residual interest in the assets of the entity after deducting all of its liabilities.
d. A present obligation of the entity arising from past events.
63. It is an increase in economic benefit during an accounting period in the form of an inflow or increase in
asset or decrease in liability that results in increase in equity, other than contribution from owners in
their capacity as owners.
a. Income b. Revenue c. Profit d. Gain
64. Technically, this arises in the course of the ordinary regular activities of an entity and is referred to by a
variety of different names including sales, interest, dividends, royalties and rent.
a. Income b. Gain c. Profit d. Revenue
66. It is a decrease in economic benefit in the form of decrease in asset or increase in liability that results in
decrease in equity, other than distribution to owners in their capacity as owners.
a. Cost b. Expense c. Loss d. Impairment
67. It is the process that involves the simultaneous or combined recognition of revenue and expense that
result directly and jointly from the same transactions and other events.
a. Matching of cost with revenue c. Systematic and rational allocation
b. Matching of revenue with cost d. Immediate recognition
68. When economic benefits are expected to arise over several accounting periods and the association with
income can only be broadly or indirectly determined, expenses are recognized on the basis of
a. Strict matching c. Immediate recognition
b. Systematic and rational allocation d. Realization
70. Which of the following is an example of expense recognition principle of associating cause and effect?
a. Allocation of insurance cost c. Depreciation
b. Sales commission d. Officers’ salaries
71. Which of the following is an application of the principle of systematic and rational allocation?
a. Amortization of intangible asset c. Research and development cost
b. Cost of goods sold d. Salesmen’s salaries
72. The write-off of worthless patent is an example of which expense recognition principle?
a. Cause and effect association c. Systematic and rational allocation
b. Immediate recognition d. Objectivity
73. The recognition of bad debt expense is an example of
a. Direct matching c. Immediate recognition
b. Systematic and rational allocation d. None of these
75. Which of the following is not an acceptable basis for the recognition of expense?
a. Systematic and rational allocation c. Immediate recognition
b. Direct matching d. Cash disbursement
76. It is the process of determining the monetary amounts at which the elements are to be recognized and
carried in the financial statements.
a. Measurement b. Recognition c. Reporting d. Interpreting
78. Which of the following terms best describes assets recorded at the amount that represents the immediate
purchase cost of an equivalent asset?
a. Historical cost b. Realizable value c. Present value d. Current cost
79. Under the financial capital concept, which of the following statements is true in relation to the term
“profit”?
I. Profit is any amount over and above that required to maintain the capital at the beginning of the
period.
II. Profit is the residual amount that remains after expenses have been deducted from income.
a. I only b. II only c. Both I and II d. Neither I nor II
80. The physical capital concept requires the adoption of which measurement basis?
a. Historical cost b. Current cost c. Realizable value d. Present value