CHAPTER 01: CONCEPTUAL FRAMEWORK

Conceptual Framework
Refers to the theoretical basis or a set of concept for general purpose financial reporting. The underlying theme
of the Conceptual Framework is “decision usefulness”. The purpose of the conceptual framework are:
1. Assist the Internal Accounting Standards Board in developing Standards that are based on consistent
concepts.
2. Assist preparers in developing consistent accounting policies when no Standards applies to a particular
transaction or when a standard allows a choice of accounting policy.
3. Assist all parties in understanding and interpreting the standards.

Authoritative Status of the Conceptual Framework

The Conceptual Framework is not a standard. If there is a conflict between a standard and the Conceptual
Framework, the requirement of the Standard will prevail. The authoritative status of the Conceptual Framework
is depicted in the hierarchy of guidance shown below:

1st PFRs
2nd Other PFRS dealing with similar transactions
3rd Conceptual Framework
4th Pronouncements issued by other standard-setting bodies
5th Other accounting literature and industry practice

Scope of the Conceptual Framework

The Conceptual Framework is concerned with general purpose financial reporting. General purpose financial
reporting involves the preparation of general purpose financial statements. The conceptual framework provides
the concepts that underlie general purpose financial reporting with regard to the following:

Chapter 1 – The objective of general purpose financial reporting (GPFR)

Chapter 2 – Qualitative characteristics of useful financial information
Chapter 3 – Financial statements and the reporting entity
Chapter 4 – The elements of financial statements
Chapter 5 – Recognition and derecognition
Chapter 6 – Measurement
Chapter 7 – Presentation and disclosure
Chapter 8 – Concepts of capital and capital maintenance

The 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.

Primary Users:
1. Existing and potential investors
2. Lenders and other creditors

These users cannot demand information directly from reporting entities and must rely on general purpose
financial reports for much of their financial information needs. Lenders refers to those who extend loans (e.g.,
banks), while other creditors refer to those who extend other forms of credit (e.g., supplier).

Other Users:
1. Entity’s management
2. Regulators
3. Public

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CHAPTER 01: General Purpose Financial Reporting
Deals with providing information that caters to the common needs of the primary users. Therefore, general
purpose financial reports do not and cannot provide all the information needs of primary users. These users will
need to consider other sources for their other information needs (for example, general economic conditions and
expectations, political events and political climate, and industry and company outlooks).

General purpose financial reports provides information on economic resources, claims and changes.

1. Economic Resources and Claims – Information about the nature and amounts of an entity’s economic
resources (assets) and claims (liabilities and equity) can help users to identify the entity’s financial strengths
and weaknesses. That information can help users in assessing the entity’s:

a. Liquidity – refers to an entity’s ability to pay short-term obligations

b. Solvency – refers to an entity’s ability to meet its long-term obligation.
c. Needs for additional financing
d. Management’s stewardship on the use of economic resources

2. Changes in economic resources and claims – changes in economic resources and claims result from:

a. Financial performance (income and expenses)

b. Other events and transactions

CHAPTER 02: Qualitative Characteristics

Are the attributes that identify the type of information provided in financial reports that are most likely to be
useful to users for making decisions. The Conceptual Framework classifies qualitative characteristics into the
following:

1. Fundamental characteristics – these are the characteristics that makes the information useful to the users.
They consist of the following:
a. Relevance
b. Faithful representation

2. Enhancing qualitative characteristics – these are the characteristics that enhance the usefulness of
information. They consists of the following:
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

Fundamental Characteristics – are essential to the usefulness of information; meaning, information must be
both relevant and faithfully represented for it to be useful. For example, neither a relevant information that is
erroneous nor a correct information that is irrelevant helps users make good decisions.

1. Relevance – information is relevant if it can make a difference in the decisions of users. Relevant information
has the following:
a. Predictive value – information can help users in making predictions about future outcomes.
b. Confirmatory value (feedback value) – the information can help users in confirming their previous
predictions.

Materiality – information is material if omitting, misstating or obscuring it could reasonably be expected to

influence decisions of users of the general purpose financial reports.

The Conceptual Framework states that materiality is an ‘entity-specific’ aspect of relevance, meaning
materiality depends on the facts and circumstances surrounding a specific entity. Accordingly, the
Conceptual Framework and the Standards do not specific a uniform quantitative threshold for materiality.
Materiality is a matter of judgment.

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2. Faithful Presentation – information provides a true, correct and complete depiction of the economic
phenomena that it purports to represent. Faithfully represented information has the following
characteristics:

a. Completeness – all information necessary for users to understand the phenomenon being depicted is
provided. These include description of the nature of the item, numerical depiction.

b. Neutrality – information is selected or presented without bias. Information is not manipulated to

increase probability that users will receive it favorably or unfavorably.

c. Free from error – Free from errors means there are no errors in the description and in the process by
which the information is selected and applied.

Enhancing Characteristics – only enhance the usefulness of information that is both relevant and faithfully
represented but cannot make information that is irrelevant or erroneous to be useful.

1. Comparability – The qualitative characteristic that enables users to identify and understand similarities in,
and differences among, items.

2. Verifiability – Information is verifiable if different users could reach a general agreement as to what the
information purports to represent.

3. Timeliness – Information is timely if it is available to users in time to be able to influence their decisions.

4. Understandability – Information is understandable if it is presented in a clear and concise manner.

Understandability does not mean that complex matters should be excluded to make information
understandable to users because this would make information incomplete and potentially misleading.
Accordingly, financial reports are intended for users:
a. Who have reasonable knowledge of business activities
b. Who are willing to analyze the information diligently

Cost Constraint
Providing information entails cost and this can only be justified by the benefits expected to be derived from
using the information. Accordingly, an optimum balance between costs and benefits is desirable such that costs
do not outweigh the benefits.

CHAPTER 03: Financial Statements and the Reporting Entity

The objective of general purpose financial statements is to provide financial information about the reporting
entity’s assets, liabilities, equity, income and expenses that is useful in assessing:

a. The entity’s prospects for future net cash inflows

b. Management’s stewardship over economic resources

The information is provided in the

a. Statement of financial position (for recognized assets, liabilities and equity);
b. Statement(s) of financial performance (for income and expenses);
c. Other statements and notes (for additional information on recognized assets and liabilities, information on
unrecognized assets and liabilities, information on cash flows, information on contribution
from/distributions to owners, and other relevant information).

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Reporting Period
To help users of financial statements in evaluating changes and trends, financial statements also provide
comparative information for at least one preceding reporting period.

Going Concern Assumption

Financial statements are normally prepared on the assumption that the reporting entity is a going concern,
meaning the entity has neither the intention nor the need to end its operations in the foreseeable future.

Implication of going concern:

a. The historical cost principle is credible
b. Depreciation and amortization are justifiable and appropriate
c. The current-non-current of asset and liabilities is justifiable and significant

The Reporting Entity

Is one that is required, or chooses, to prepare financial statements, and is not necessarily a legal entity. It can
be a single entity or a portion of entity or can comprise of more than one entity.

1. Consolidated financial statement – Comprises both the parent and its subsidiaries.
2. Unconsolidated financial statement – Comprise of parent alone.
3. Combined financial statements – Comprises two or more entities that are not all linked by a parent-
subsidiary relationship.

CHAPTER 04: Elements of Financial Statements

1. Assets – Present economic resource controlled by the entity as a result of past events. An economic resource
is a right that has the potential to produce economic benefits. The definition of asset has three aspects:
a. Rights
b. Potential to produce economic benefit
c. Controlled

2. Liabilities – Present obligation of the entity to transfer an economic resource as a result of past event. The
definition of liability has the following aspects:
a. Obligation
b. Transfer of economic resource
c. Present obligation as a result of past event

An obligation is always owned to another party. However, it is not necessary that the identity of that party
is known.

3. Equity – The residual interest in the asset of the entity after deducting all its liabilities. Stated otherwise,
Equity is the claims in the asset of the proprietor, partners or shareholders.

4. Income – Are the increases in assets, or decreases in liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity claims.

5. Expenses – Are decreases in assets, or increases in liabilities, that result in decrease in equity, other than
those relating to distributions to holders of equity claims.

CHAPTER 05: Recognition and Derecognition

Recognition
Is the process of including in the statement of financial position or the statement of financial performance an
item that meets the definition of one of the financial statement elements (i.e., asset, liability, equity, income or
expense). This involves recording the item in words and in monetary amount.

The amount at which an asset, a liability or equity is recognized in the statement of financial position is referred
to as its “carrying amount” or “book value”.
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Recognition Criteria
An item is recognized if:
a. It meets the definition of an asset, liability, equity, income or expense; and
b. Recognizing it would provide useful information, i.e., relevant and faithfully represented information.

Both the criteria above must be met before an item is recognized.

Derecognition
Is the opposite of recognition. It is the removal of a previously recognized asset or liability from the entity’s
statement of financial position.

Derecognition occurs when the item no longer meet the definition of an asset or liability, such as when the entity
loses control of all or part of the asset, or no longer has a present obligation for all or part of the liability.

CHAPTER 06: Measurement:

Measurement
Elements recognized in F/S are quantified in monetary terms. The measurement bases in the Framework are:
1. Historical cost (price that gave rise to item being measured)

2. Current value (reflect conditions at measurement date)

a. Fair value
b. Value in use (for assets) and fulfillment value (for liabilities)
c. Current cost

CHAPTER 07: Presentation and Disclosure

Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics
for presentation and disclosure purposes.

Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared
characteristics and are included in the same classification.

Offsetting occurs when an entity recognizes and measures both an asset and liability as separate units of
account, but groups them into a single net amount in the statement of financial position.

For equity, it may be necessary to classify equity claims separately if those equity claims have different
characteristics. Income and expenses are classified and included either:
• in the statement of profit or loss (P&L); or
• in other comprehensive income (OCI).

Income and expenses included in OCI in one period are recycled to P&L in a future period when doing so results
in more relevant information or faithful representation; otherwise, no subsequently recycling of such items.

Chapter 8: Concepts of Capital and Capital Maintenance

The two broad concepts of capital maintenance are:

1. Financial capital maintenance (most adopted) –

• Capital is synonymous with the entity’s net assets or equity (invested money or purchasing power).
• Profit is earned only if the financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding
any distributions to, and contributions from, owners during the period.
• Measured in either nominal monetary units or units of constant purchasing power.
• Nominal monetary units – Holding gains (increases in the prices of assets held over the period) are
not recognized until later sold.
• Constant purchasing power – Holding gains are recognized.

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2. Physical capital maintenance –
• Capital refers to physical productive capacity.
• 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 current cost basis of measurement.

The selection of the appropriate concept of capital by an entity should be based on the needs of the users
of its financial statements.

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DISCUSSION:

1. This refers to the theoretical basis or a set of concepts for general purpose financial reporting.
a. Conceptual Framework
b. Philippine Financial Reporting Standards (PFRS)
c. Philippine Standards on Auditing (PSA)
d. Management Discussion and Analysis (MD&A)

2. Which of the following refers to the underlying theme of the Conceptual Framework?
a. Relevance.
b. Faithful representation.
c. Decision usefulness.
d. Consistency.

3. The purpose of the Conceptual Framework includes all of the following, except
a. To assist the Financial Reporting Standards Council (FRSC) to develop accounting standards.
b. To assist preparers to develop consistent accounting policies when no Standard applies to a
particular transaction or other event, or when a Standard allows a choice of accounting policy.
c. To assist all parties to understand and interpret the Standards.
d. To assist the Securities and Exchange Commission (SEC) in performing its duties to the public.

4. Which of the following correctly describes the authoritative status of the Conceptual Framework for
Financial Reporting?
a. It is not a Standard, and nothing in it overrides any Standard.
b. It is more authoritative than the Standard.
c. It shall be applied in the absence of a Standard that specifically applies to a transaction.
d. The FRSC may sometimes depart from it without explaining the departure.

5. What is the objective of general purpose financial reporting according to the Conceptual Framework?
a. To prepare and present a complete set of financial statements.
b. To prepare and present a complete set of financial statements that meet the qualitative
characteristics of useful information.
c. To provide information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions relating to providing resources to the entity.
d. To prepare and present a complete set of financial statements in accordance with all applicable
Standards and other regulatory requirements.

6. These users are those who must rely on and cannot require reporting entities to provide general
purpose financial reports for much of the financial information they need. Consequently, they are the
users to whom general purpose financial reports are directed.
a. Primary users
b. Secondary users
c. Tertiary users
d. Other users

7. Primary users of general purpose financial reports does not include:

a. Investors.
b. Lenders.
c. Creditors.
d. Management.

8. Other users of general purpose financial reports exclude

a. Employees.
b. Regulators.
c. Public.
d. Creditors.

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9. What are qualitative characteristics of financial information according to the Conceptual Framework?
a. They are the categories or grouping of accounts of the financial effects of transactions and other
events in the financial reports.
b. They are notes to financial statements.
c. They are the attributes that identify the type of information provided in financial reports that are
most likely to be useful to users for making decisions.
d. They are the declaration of a reporting entity of compliance with the Standards.

10. What are the two fundamental qualitative characteristics of useful financial information in accordance
with the Conceptual Framework?
a. Relevance and reliability.
b. Reliability and going concern.
c. Going concern and relevance.
d. Relevance and faithful representation.

11. Relevant financial information

a. is information that is verifiable.
b. is information that is capable of making a difference in a decision made by users.
c. is information that is useful.
d. is information that is neutral.

12. Financial information is capable of making a difference in decisions (i.e., relevance fundamental
qualitative characteristic) if it has
a. Predictive value and understandability.
b. Verifiability and neutrality.
c. Confirmatory value and comparability.
d. Predictive value and confirmatory value.

13. To be a perfectly faithful representation according to the Conceptual Framework, a depiction of

financial information would have the three characteristics of
a. Completeness, neutrality, and freedom from error.
b. Predictive value, confirmatory value, and materiality.
c. Comparability, consistency, and materiality.
d. Predictive value, consistency, and reliability.

14. Neutrality of financial information means

a. A depiction includes all information necessary for a user to understand the phenomenon being
depicted, including all necessary descriptions and explanations.
b. A depiction is without bias in the selection or presentation of financial information.
c. Not supported by the exercise of prudence.
d. Slanted or manipulated to increase the probability that financial information will be received
favorably or unfavorably by users.

15. This refers to the exercise of caution when making judgements under conditions of uncertainty. It
means that assets and income are not overstated and liabilities and expenses are not understated.
Equally, it does not allow for the understatement of assets or income or the overstatement of
liabilities or expenses.
a. Professional judgment.
b. Prudence.
c. Perfection.
d. Estimation.

16. Which of the following statements about materiality is not correct?

a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a
reasonable person.
d. It is not an entity-specific aspect of relevance with a specified uniform quantitative threshold.

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17. Financial information should be verifiable in order to enhance
a. Relevance.
b. Comparability.
c. Faithful representation.
d. Consistency.

18. The qualitative characteristic that enables users to identify and understand similarities in, and
differences among, items.
a. Comparability.
b. Verifiability.
c. Understandability.
d. Timeliness.

19. The Conceptual Framework identifies four enhancing qualitative characteristics of financial
information. For which of these characteristics is disclosure of accounting policies particularly
important?
a. Verifiability
b. Timeliness
c. Comparability
d. Understandability

20. It refers to the use of the same methods for the same items, either from period to period within a
reporting entity or in a single period across entities.
a. Comparability.
b. Consistency.
c. Matching.
d. Conformity.

21. It helps assure users that information faithfully represents the economic phenomena it purports to
represent. It means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
a. Comparability.
b. Verifiability.
c. Understandability.
d. Timeliness.

22. This means having information available to decision-makers in time to be capable of influencing their
decisions.
a. Comparability.
b. Verifiability.
c. Understandability.
d. Timeliness.

23. Information that is presented in a clear fashion, so that reasonably informed users of that information
can interpret it is an example of
a. Relevance.
b. Faithful representation.
c. Understandability.
d. Comparability.

24. According to the conceptual framework, the relevance of providing information in financial
statements is subject to the constraint of
a. Comparability.
b. Cost-benefit.
c. Reliability.
d. Faithful representation.

25. Which of the following best describes the cost-benefit constraint?

a. The benefits of the information must be greater than the costs of providing it.
b. Financial information should be free from cost to users of the information.
c. Costs of providing financial information are not always evident or measurable, but must be
considered.
d. All of the choices are correct.
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26. To help users of financial statements to identify and assess changes and trends, financial statements
also provide comparative information for at least
a. One preceding reporting period.
b. Two preceding reporting periods.
c. Three preceding reporting periods.
d. Four preceding reporting periods.

27. The Conceptual Framework identifies an underlying assumption in preparing financial statements.
This is:
a. Going concern
b. Materiality
c. Substance over form
d. Accruals

28. Which of the following is an implication of the going concern assumption?

a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and significant.
d. All of these.

29. According to the Conceptual Framework, which of the following is incorrect about the reporting
entity?
a. It is an entity that is required, or chooses, to prepare financial statements.
b. It can be a single entity or a portion of an entity or can comprise more than one entity.
c. It is not necessarily a legal entity.
d. It is the perspective of any particular group of the entity's existing or potential investors, lenders
or other creditors.

30. If a reporting entity comprises both the parent and its subsidiaries, the reporting entity's financial
statements are referred to as
a. Consolidated financial statements.
b. Unconsolidated financial statements.
c. Combined financial statements.
d. Complete set of financial statements.

31. If a reporting entity is the parent alone, the reporting entity's financial statements are referred to as
a. Consolidated financial statements.
b. Unconsolidated financial statements.
c. Combined financial statements.
d. Complete set of financial statements.

32. If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary
relationship, the reporting entity's financial statements are referred to as
a. Consolidated financial statements.
b. Unconsolidated financial statements.
c. Combined financial statements.
d. Complete set of financial statements.

33. The elements of financial statements linked to a reporting entity’s financial position (economic
resources and claims) do not include
a. Assets.
b. Liabilities.
c. Equity.
d. Income.

34. The elements of financial statements linked to changes in economic resources and claims reflecting a
reporting entity’s financial performance include
a. Income.
b. Expenses.
c. Both a and b.
d. Neither a nor b.

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35. Which of the following types of accounts show how resources came (claim) into a firm?
a. Liabilities.
b. Equity.
c. Assets.
d. Both liabilities and equity.

36. Equity is
a. A present economic resource controlled by the entity as a result of past events. An economic
resource is a right that has the potential to produce economic benefits.
b. A present obligation of the entity to transfer an economic resource as a result of past events.
c. The residual interest in the assets of the entity after deducting all its liabilities.
d. Contributions from holders of equity claims, and distributions to them.

37. According to the Conceptual Framework, the definition of an asset does not include
a. Right.
b. Potential to produce economic benefits.
c. Control.
d. Increases in assets, or decreases in liabilities, that result in increases in equity, other than those
relating to contributions from holders of equity claims.

38. Rights that have the potential to produce economic benefits take many forms, including
a. Rights to receive cash, goods or services.
b. Rights to exchange economic resources with another party on favorable terms.
c. Rights to benefit from an obligation of another party to transfer an economic resource if a
specified uncertain future event occurs.
d. All of the above.

39. Which of the following statements about ‘potential to produce economic benefits’ in the definition of
an asset is incorrect according to the Conceptual Framework?
a. An economic resource is a right that has the potential to produce economic benefits.
b. For potential to produce economic benefits to exist, it needs to be certain that the right will
produce economic benefits.
c. A right can meet the definition of an economic resource, and hence can be an asset, even if the
probability that it will produce economic benefits is low.
d. Low probability to produce economic benefits might affect what information to provide about the
asset and how to provide that information, including decisions about whether the asset is
recognized and how it is measured.

40. According to the Conceptual Framework, which of the following provides a link of economic resource
to an entity?
a. Right.
b. Potential to produce economic benefits.
c. Control.
d. Past event.

41. It refers to the present ability of an entity to direct the use of the economic resource and obtain the
economic benefits that may flow from it. It also includes the present ability to prevent other parties
from directing the use of the economic resource and from obtaining the economic benefits that may
flow from it.
a. Right.
b. Potential to produce economic benefits.
c. Control.
d. Past event.

42. According to the Conceptual Framework, for a liability to exist, three criteria must all be satisfied.
Which is not one of them?
a. The entity has an obligation.
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of past events.
d. The obligation has high probability of transfer of an economic resource.

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43. It refers to a duty or responsibility that an entity has no practical ability to avoid.
a. Transfer.
b. Obligation.
c. Settlement.
d. Incurrence.

44. It refers to a contract, or a portion of a contract, that is equally unperformed—neither party has
fulfilled any of its obligations, or both parties have partially fulfilled their obligations to an equal
extent.
a. Executory contract.
b. Financial contract.
c. Unfulfilled contract.
d. Unsigned contract.

45. According to the Conceptual Framework, the process of reporting an item in the financial statements
of a reporting entity is
a. Allocation.
b. Matching.
c. Realization.
d. Recognition.

46. The amount at which an asset, a liability or equity is recognized in the statement of financial position
is referred to as its
a. Carrying amount.
b. Fair value.
c. Cost.
d. Realizable value.

47. This measurement basis provides monetary information about assets, liabilities and related income
and expenses, using information derived, at least in part, from the price of the transaction or other
event that gave rise to them.
a. Historical cost.
b. Fair value.
c. Value in use.
d. Current cost.

48. Current value measures provide monetary information about assets, liabilities and related income
and expenses, using information updated to reflect conditions at the measurement date. Current
value measurement bases include
a. Fair value.
b. Value in use for assets and fulfilment value for liabilities.
c. Current cost.
d. All of the above.

49. It refers to the price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date.
a. Fair value.
b. Value in use.
c. Fulfilment value.
d. Current cost.

50. It refers to the present value of the cash flows, or other economic benefits, that an entity expects to
derive from the use of an asset and from its ultimate disposal.
a. Fair value.
b. Value in use.
c. Fulfilment value.
d. Current cost.

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51. It refers to the present value of the cash, or other economic resources, that an entity expects to be
obliged to transfer as it fulfils a liability. Those amounts of cash or other economic resources include
not only the amounts to be transferred to the liability counterparty, but also the amounts that the
entity expects to be obliged to transfer to other parties to enable it to fulfil the liability.
a. Fair value.
b. Value in use.
c. Fulfilment value.
d. Current cost.

52. It refers to the cost of an equivalent asset at the measurement date, comprising the consideration
that would be paid at the measurement date plus the transaction costs that would be incurred at that
date.
a. Current cost of an asset.
b. Historical cost of an asset.
c. Current cost of a liability.
d. Historical cost of a liability.

53. Which of the following is incorrect regarding value in use and fulfilment value?
a. They do not include transaction costs, except those that an entity expects to incur on the ultimate
disposal of the asset or on fulfilling the liability
b. They reflect entity-specific assumptions.
c. They reflect market-participant assumptions.
d. They are determined using cash-flow-based measurement techniques.
54. It refers to the sorting of assets, liabilities, equity, income or expenses on the basis of shared
characteristics for presentation and disclosure purposes. Such characteristics include—but are not
limited to—the nature of the item, its role (or function) within the business activities conducted by
the entity, and how it is measured.
a. Classification.
b. Grouping.
c. Segregation.
d. Aggregation.

55. This occurs when an entity recognizes and measures both an asset and liability as separate units of
account, but groups them into a single net amount in the statement of financial position. This is
generally not appropriate when used for dissimilar items.
a. Unit of account.
b. Offsetting.
c. Classification.
d. Grouping.

56. Income and expenses are classified and included in

a. Profit or loss.
b. Other comprehensive income.
c. Either a or b.
d. Neither a nor b.

57. Which of the following is the correct concept of capital according to the Conceptual Framework?
Financial capital Physical capital
(money or purchasing (operating capability)
power)
a. Net assets or equity Productive capacity
b. Productive capacity Net assets or equity
c. Net assets or equity Net assets or equity
d. Productive capacity Productive capacity

58. Which concept of capital is adopted by most entities in preparing their financial statements.
a. Financial capital.
b. Physical capital.
c. Either a or b.
d. Neither a nor b.

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59. The selection of the appropriate concept of capital by an entity should be based on the needs of the
users of its financial statements. If the users of financial statements are primarily concerned with the
maintenance of nominal invested capital or the purchasing power of invested capital, which of the
following concept of capital should be adopted?
a. Financial capital.
b. Physical capital.
c. Either a or b.

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