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FINANCIAL ACCOUNTING AND REPORTING (FAR)

Module 3 The Conceptual Framework

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 deals with


1. The objective of financial reporting
2. The qualitative characteristics of useful information
3. The definition, recognition and measurement of the elements from which financial
statements are constructed
4. Concepts of capital and capital maintenance

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.

3.2. Objective of Financial Reporting


The objective of general-purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing resources to the entity.

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.

Information on economic resources, claims and changes in them


a. Financial position – information on economic resources (assets) and claims against
the reporting entity (liabilities and equity). Assists users to
i. assess that entity's financial strengths and weaknesses
ii. assess liquidity and solvency
iii. assess its need and ability to obtain financing
iv. predict how future cash flows will be distributed among those with a claim on the
reporting entity (information about claims and payment requirements)
b. Changes in economic resources and claims – information on financial performance
and other transactions and events that lead to changes in financial position
i. Financial performance reflected by accrual accounting (statement of
comprehensive income)
ii. Financial performance reflected by past cash flows (statement of cash flows)
iii. Changes in economic resources and claims not resulting from financial performance
(statement of changes in equity)

3.3. Underlying Assumptions


Normally, two assumptions underlying the preparation and presentation of financial
statements are the accrual basis and going concern.

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.

The accrual basis assumption is also addressed in IAS 1, Presentation of Financial


Statements, which clarifies that when the accrual basis of accounting is used, items are
recognized as assets, liabilities, equity, income, and expenses (the elements of financial
statements) when they satisfy the definitions and recognition criteria for those elements in
the Framework.

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.

3.4. Qualitative Characteristics of Useful Information


These identify the types of information that are likely to be most useful to the primary users
for making decisions about the reporting entity on the basis of information in its financial
report.

The following chart represents an overview of the qualitative characteristics:


Predictive value
Relevance
Confirming value

Fundamental
Completeness

Faithful
Neutrality
representation
Qualitative
Characteristics Freedom from
Comparability
material error

Timeliness
Enhancing
Verifiability

Understandability

Fundamental qualitative characteristics


1. Relevance – capability of making a difference in the decisions made by users.
Ingredients are:
a. Predictive value – can be used as an input in predicting or forecasting future
outcomes.
b. Confirmatory (feedback) value – provides feedback about previous evaluations.
c. Materiality – its omission or misstatement could influence decisions that users
make. It is an entity-specific aspect of relevance based on the nature or magnitude
(or both) of the items to which the information relates in the context of an
individual entity's financial report.

2. Faithful representation – financial reports represent economic phenomena in words


and in numbers that it purports to represent. Ingredients are:
a. Completeness – all information necessary for the understanding of the
phenomenon being depicted shall be provided.
b. Neutrality – financial information are selected or presented without bias.
c. Free from error – does not mean accurate in all respects, there are no errors or
omissions in the description of the phenomenon and the process used to produce
the reported information has been selected and applied with no errors in the
process.

NOTE: Information must be both relevant and faithfully represented if it is to be


useful.

Enhancing qualitative characteristics


1. Comparability – can be compared with similar information about other entities (inter-
comparability) and with similar information about the same entity for another period
or another date (intra-comparability). It enables users to identify and understand
similarities in, and differences among, items.
2. Verifiability – different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a
faithful representation. Verification can be done through direct observation (direct) or
checking inputs to a model, formula and other technique and recalculating the outputs
using the same methodology (indirect).

3. Timeliness – information is available to decision-makers in time to be capable of


influencing their decisions.

4. Understandability – information is classified, characterized and presented clearly and


concisely. While some phenomena are inherently complex and cannot be made easy to
understand, to exclude such information would make financial reports incomplete and
potentially misleading. Financial reports are prepared for users who have a reasonable
knowledge of business and economic activities and who review and analyze the
information with diligence.

NOTE: Enhancing qualitative characteristics should be maximized to the extent


necessary. However, enhancing qualitative characteristics (either individually or
collectively) cannot make information useful if that information is irrelevant or not
represented faithfully.

3.5. The Cost Constraint on Useful Financial Reporting


Cost is a pervasive constraint on the information that can be provided by general purpose
financial reporting. Reporting such information imposes costs and those costs should be
justified by the benefits of reporting that information. The IASB assesses costs and benefits
in relation to financial reporting generally, and not solely in relation to individual reporting
entities. The IASB will consider whether different sizes of entities and other factors justify
different reporting requirements in certain situations.

3.6. The Elements of Financial Statements


1. Elements directly related to financial position (balance sheet):
a. Asset – 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. Liability – 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. Equity – the residual interest in the assets of the entity after deducting all its
liabilities.

2. Elements directly related to performance (income statement):


a. Income – increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.
i. Revenue – arises in the course of the ordinary activities of an entity and is
referred to by a variety of different names including sales, fees, interest,
dividends, royalties and rent.
ii. Gain – other items that meet the definition of income and may, or may not, arise
in the course of the ordinary activities of an entity.
b. Expense – decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity participants.
i. Expense – arise in the course of the ordinary activities of the entity include, for
example, cost of sales, wages and depreciation.
ii. Loss – other items that meet the definition of expenses and may, or may not,
arise in the course of the ordinary activities of the entity.

Recognition of the elements of financial statements


Recognition is the process of incorporating in the balance sheet or income statement an
item that meets the definition of an element and satisfies the following criteria for
recognition:
a. It is probable that any future economic benefit associated with the item will flow to
or from the entity; and
b. The item's cost or value can be measured with reliability

Based on these general criteria:


a. An asset is recognized in the balance sheet when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value that can
be measured reliably.
b. A liability is recognized in the balance sheet when it is probable that an outflow of
resources embodying economic benefits will result from the settlement of a present
obligation and the amount at which the settlement will take place can be measured
reliably.
c. Income is recognized in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably. This means, in effect, that recognition of
income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of
goods or services or the decrease in liabilities arising from the waiver of a debt
payable).
d. Expenses are recognized when a decrease in future economic benefits related to
a decrease in an asset or an increase of a liability has arisen that can be
measured reliably. This means, in effect, that recognition of expenses occurs
simultaneously with the recognition of an increase in liabilities or a decrease in
assets (for example, the accrual of employee entitlements or the depreciation of
equipment).
i. Direct association – costs are recognized as expenses when the related revenue
is recognized
ii. Systematic and rational allocation – applied when economic benefits are
expected to arise over several accounting periods
iii. Immediate recognition

Measurement of the elements of financial statements


Measurement involves assigning monetary amounts at which the elements of the financial
statements are to be recognized and reported. (historical cost, current cost, realizable
(settlement) value, present value)
NOTE: Historical cost is the measurement basis most commonly used today, but it is usually
combined with other measurement bases. The IFRS Framework does not include concepts
or principles for selecting which measurement basis should be used for particular
elements of financial statements or in particular circumstances. Individual standards
and interpretations do provide this guidance, however.

3.7. Concepts of Capital and Capital Maintenance


Concepts of capital
a. Financial concept of capital – capital is synonymous with the net assets or equity of
the entity.
b. Physical concept of capital – capital is regarded as the productive capacity of the
entity based on, for example, units of output per day.

Concepts of capital maintenance


a. Financial capital maintenance – a profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial (or money)
amount of the net assets at the beginning of the period, after excluding any distributions
to, and contributions from, owners during the period. Does not require the use of a
particular basis of measurement.
b. Physical capital maintenance – a profit is earned only if the physical productive
capacity (or operating capability) of the entity (or the resources or funds needed to
achieve that capacity) at the end of the period exceeds the physical productive capacity
at the beginning of the period, after excluding any distributions to, and contributions
from, owners during the period. Requires the adoption of the current cost basis of
measurement.

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

2. The objective of general purpose financial reporting is


a. to provide information regarding the economic resources of an entity
b. to provide users with relevant and reliable information needed to oversee the day-to-day operations
of an entity
c. to provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity
d. all of these

3. 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

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

6. Which of the following is one of the fundamental qualitative characteristics?


a. Relevance b. Reliability c. Comparability d. Unfaithful representation

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

10. The elements of relevance do not include


a. predictive value b. feedback value c. materiality d. timeliness

11. 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. Thus, it should not be assessed qualitatively.

12. The elements of faithful representation do not include


a. comparability b. completeness c. neutrality d. free from error

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

14. Which of the following statements regarding comparability is incorrect?


a. The usefulness of financial information is greatly enhanced if it can be compared with information
produced by another entity or with similar information prepared in previous periods.
b. Comparability and consistency are interrelated but they are not the same. Comparability is the means
while consistency is the goal.
c. Information is comparable if it is prepared and presented consistently.
d. Comparability and consistency are interrelated but they are not the same. Comparability is the goal
while consistency is the means.

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

17. The elements directly related to the measurement of performance


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

18. Assets and liabilities are recognized if


a. they meet the definition of an element
b. they have probable future economic benefits and have cost or value that are measured reliably
c. a and b
d. neither a nor b

19. Which of the following statements is correct?


a. An item that has probable economic consequence but has no value that can be measured reliably is
not recognized in the financial statements but is always disclosed in the notes.
b. An item that has probable economic consequence and can be measured reliably is always recognized
in the financial statements and disclosed in the notes if disclosure provides relevant information to
users.
c. An item that has probable economic consequence and can be measured reliably may not be
recognized in the financial statements.
d. All of these

20. The cost of purchases of inventory is recognized as expense


a. immediately c. by systematic allocation
b. using the matching concept d. any of these as a matter of accounting policy choice

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

24. Which is not a basic purpose of the Conceptual Framework?


a. To assist FRSC in developing accounting standards that represents GAAP in the Philippines.
b. To assist FRSC in reviewing and adopting existing international accounting standards.
c. To promulgate rules and regulations affecting the practice of the accountancy profession in the
Philippines.
d. To assist auditors in forming an opinion as to whether financial statements conform to accounting
standards.

25. The Conceptual Framework for Financial Reporting deals with


I. Objectives of financial reporting
II. Qualitative characteristics of useful financial information
III. Definition, recognition and measurement of elements from which financial statements are
constructed
IV. Concepts of capital and capital maintenance
a. I and II only b. I and III only c. I, II and III only d. I, II, III and IV

26. The “primary users” of financial information include


I. Existing and potential investors
II. Existing and potential lenders and other creditors
III. User group such as employees, customers, governments and their agencies, and the public
a. I only b. I and II only c. I and III only d. I, II and III

27. Which statement is true in relation to information needs?


I. Information that meets the needs of primary users is likely to meet the needs of other users, such as
employees, customers, governments and their agencies, and the public.
II. The management is also interested in financial information but it need not rely on general purpose
financial reports because it can access additional information internally.
a. I only b. II only c. Both I and II d. Neither I nor II

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.

29. Which of the following is not normally an objective of financial reporting?


a. To provide information about an entity’s assets, claims against those assets and changes in them.
b. To provide information that is useful in assessing an entity’s sources and uses of cash.
c. To provide information that is useful in lending and investing decisions.
d. To provide information about an entity’s liquidation value.

30. Which statement in relation to financial reporting is incorrect?


a. General purpose financial reports do not and cannot provide all of the information needs of primary
users.
b. General purpose financial reports are designed to show the value of the entity.
c. General purpose financial reports an intended to provide common information to users.
d. General financial reports are largely based on estimate and judgment rather than exact depiction.

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

32. Which of the following is not an underlying assumption of financial statements?


a. Going concern b. Accounting entity c. Time period d. Accrual

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.

38. What are '‘qualitative characteristics” of financial statements?


a. Qualitative characteristics are the attributes that make the information provided in the financial
statements useful to users.
b. Qualitative characteristics are broad classes of the financial effects of transactions and other events.
c. Qualitative characteristics are non-qualitative aspects of an entity’s financial position, performance
and changes in financial position.
d. Qualitative characteristics measure the extent to which an entity has complied with all relevant PFRS.

39. The “fundamental” qualitative characteristics are


a. Relevance and reliability c. Relevance, faithful representation and materiality
b. Relevance and materiality d. Relevance and faithful representation

40. Which statement is true in relation to relevance?


I. Relevant financial information is capable of making a difference in the decision made by users.
II. Financial information is capable of making a difference in decisions if it has predictive value or
confirmatory value or both.
a. I only b. II only c. Both I and II d. Neither I nor II

41. Which statement is incorrect in relation to materiality?


a. Information is material if its omission or misstatement could influence decisions that users make on
the basis of financial information about an entity.
b. The Conceptual Framework cannot specify a uniform qualitative threshold for materiality or
predetermine what could be material in a particular situation.
c. Materiality depends on the absolute size of the item or error judged in the particular circumstances of
its omission or misstatement.
d. Materiality is a sub-quality or an aspect of relevance because immaterial information does not affect
the decision of users.

42. What are the ingredients of faithful representation?


a. Completeness and neutrality
b. Completeness, free from error and substance over form
c. Completeness, neutrality, free from error and prudence
d. Completeness, neutrality and free from error
43. Which of the following is the best description of “faithful representation” in relation to information in
financial statements?
a. Influence on the economic decisions of users c. Freedom from material error
b. Inclusion of a degree of caution d. Comprehensibility

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

48. The “enhancing” qualitative characteristics are


a. Comparability and understandability
b. Verifiability and timeliness
c. Comparability understandability and verifiability
d. Comparability, understandability, verifiability and timeliness

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

51. Financial information exhibits the characteristic of consistency when


a. Expenses are reported as charges against revenue in the period in which they are paid.
b. Accounting entities give accountable events the same accounting treatment from period to period.
c. Gains and losses are not included on the income statement.
d. Accounting procedures are adopted which give a consistent rate of net income.

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

65. Which of the following statements is true?


a. Income encompasses both revenue and gain c. Gain encompasses both income and revenue
b. Revenue encompasses both income and gain d. Income encompasses revenue only

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

69. An expense is recognized immediately in the income statement


I. When an expenditure produces no future economic benefits.
II. When cost incurred ceases to qualify for recognition as an asset in the statement of financial position.
III. When a liability is incurred without recognition of an asset as when a liability under a product
warranty arises.
a. I only b. I and II only c. I and III only d. I, II and III

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

74. Which category of expenses is subject to immediate recognition?


a. Utility expense for production line of a manufacturer
b. Repair and maintenance on production equipment
c. Salary of the production foreman
d. Salary of the president

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

77. Historical cost is the


a. Amount of cash or cash equivalent paid or the fair value of the consideration given at the time of
acquisition.
b. Amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently.
c. Amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly
disposal.
d. Discounted value of the future net cash inflows that an item is expected to generate in the normal
course of business.

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

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