CFAS

Monetary Unit Assumption

 Stable-peso assumption
 Useful standard measuring unit for business transactions
 Assuming that pesos today will buy as much as ten years ago

Revenue Recognition Principle

 It is probable that future economic benefits will flow to the company and it is possible to
reliably measure the amount

Faithful Representation
 Presentation of error-free information

Periodicity Assumption
 Yearly financial reports
 Financial statements are prepared each year
o Example scenario of Periodicity:
 The president of Ramirez Corp. believes it is foolish to report financial
information on a yearly basis. Instead, the president believes that financial
information should be disclosed only when significant new information is
available related to the company's operations.

Expense Recognition Principle

 Recording annual depreciation
o Example scenario of Expense Recognition:
 Ramirez Corp. decides to establish a large loss and related liability this year
because of the possibility that it may lose a pending patent infringement
lawsuit. The possibility of loss is considered remote by its attorneys.

Full Disclosure Principle

 Notes as part of necessary information to a fair presentation
 Summarizing significant accounting policies
 All significant post-statement of financial position events are reported

Economic Entity Assumption

 Affairs of the business distinguished from those of its owners
 Personal transactions of the proprietor are distinguished from business transactions
o Example scenario of Economic Entity:
 An officer of Ramirez Corp. purchased a new home computer for personal
use with company money, charging miscellaneous expense.

Going Concern Assumption

 Business enterprise assumed to have a long life
 A patent is capitalized and amortized over the periods benefited
 Rent paid in advance is recorded as prepaid rent
Historical Cost Principle
 Valuing assets at amounts originally paid for them

Comparability
 Application of the same accounting principles as in the preceding year
As a characteristic:
 The company employs the same inventory valuation method from period to period
 o Example Scenario for Comparability:
 Because the company's income is low this year, a switch from accelerated
depreciation to straight-line depreciation is made this year.

Relevance
 Presentation of timely information with predictive and feedback value

Materiality Constraint
 All payments less than P25 are expensed as incurred

The conceptual framework for accounting has been discovered through empirical
FALSE
research.
A conceptual framework is a coherent system of interrelated objectives and
TRUE
fundamentals that can lead to consistent standards.
The International Accounting Standards Board (IASB) uses a conceptual framework
FALSE
based on individual concepts developed by each member of the standard-setting body.
A soundly developed conceptual framework enables the International Accounting
TRUE
Standards Board (IASB) to issue more useful and consistent pronouncements over time.
A soundly developed conceptual framework enables the International Accounting
TRUE Standards Board (IASB) to quickly solve new and emerging practical problems by
referencing basic theory.
The IASB has issued a conceptual framework and has agreed to develop a common
TRUE
conceptual framework with the FASB.
The International Accounting Standards Board’s (IASB’s) Conceptual Framework
FALSE
includes supplementary information.
The International Accounting Standards Board’s (IASB’s) Conceptual Framework
TRUE
includes the elements of financial statements.
The 2nd level of the IASB’s conceptual framework provides the qualitative
TRUE characteristics that make accounting information useful and the elements of financial
statements.
One of the challenges in developing a common conceptual framework will be to agree
FALSE on how the framework should be organized since the FASB and IASB conceptual
frameworks are organized in very different ways.
The first level of the conceptual framework identifies the recognition and measurement
FALSE
concepts used in establishing accounting standards.
TRUE Decision usefulness is the underlying theme of the conceptual framework.
Users of financial statements are assumed to have no knowledge of business and
FALSE
financial accounting matters by financial statement preparers.
The foundation of the International Accounting Standards Board’s (IASB’s) Conceptual
FALSE Framework is found on the third level of the Framework and includes assumptions,
principles, and constraints.
An implicit assumption of the International Accounting Standards Board’s (IASB’s)
FALSE Conceptual Framework is that users need to be experts in business and financial
accounting matters to understand the information contained in financial statements.
Relevance and faithful representation are the two fundamental qualities that make
TRUE
accounting information useful for decision making.
 The idea of consistency does not mean that companies cannot switch from one
TRUE
accounting method to another.
FALSE Timeliness and neutrality are two ingredients of relevance.
FALSE Verifiability and predictive value are two ingredients of faithful representation.
The second level of the International Accounting Standards Board’s (IASB’s)
TRUE Conceptual Framework serves as a bridge between the “why” of accounting and the
“how” of accounting.
In the International Accounting Standards Board’s (IASB’s) Conceptual Framework,
FALSE
qualitative characteristics are considered either relevant or prudent.
In the International Accounting Standards Board’s (IASB’s) Conceptual Framework,
TRUE qualitative characteristics distinguish better information from inferior information for
decision-making purposes.
In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, an
FALSE
enhancing qualitative characteristic is predictive value.
In the International Accounting Standards Board’s (IASB’s) Conceptual Framework, an
FALSE
ingredient of a fundamental qualitative characteristic is understandability.
To be a faithful representation as described by the International Accounting Standards
FALSE
Board’s (IASB’s) Conceptual Framework, information must be confirmatory.
An enhancing quality as described by the International Accounting Standards Board’s
TRUE
(IASB’s) Conceptual Framework is comparability.
Moon, Inc. applies different accounting treatments to similar events from period to
FALSE period. Moon, Inc. is violating verifiability as described by the International
Accounting Standards Board’s (IASB’s) Conceptual Framework.
The International Accounting Standards Board’s (IASB) definition of retained earnings
FALSE
is “the residual interest in the assets of the entity after deducting all its liabilities.”
The historical cost principle would be of limited usefulness if not for the going concern
TRUE
assumption.
The economic entity assumption means that economic activity can be identified with a
FALSE
particular legal entity.
Materiality is one of the basic assumptions of accounting used by the International
FALSE
Accounting Standards Board (IASB).
Periodicity is one of the basic assumptions of accounting used by the International
TRUE
Accounting Standards Board (IASB).
Timeliness is one of the basic assumptions of accounting used by the International
FALSE
Accounting Standards Board (IASB).
The periodicity assumption of accounting (used by the International Accounting
FALSE Standards Board) makes depreciation and amortization policies justifiable and
appropriate.
The IASB conceptual framework specifically identifies accrual basis accounting as one
TRUE
of its fundamental assumptions.
One assumption made by the IASB conceptual framework is that the reporting entity is
TRUE
a going concern.
The expense recognition principle states that debits must equal credits in each
FALSE
transaction.
Revenues are recognized in the accounting period in which the performance obligation
TRUE
is satisfied.
TRUE Supplementary information may include details or amounts that present a different
 perspective from that adopted in the financial statements.
Companies consider only quantitative factors in determining whether an item is
FALSE
material.
The International Accounting Standards Board has given companies the option of using
TRUE
fair value to report financial liabilities.
Under International Financial Reporting Standards (IFRS) product costs are charged off
FALSE
in the immediate period and period costs may be carried into future periods.
Under International Financial Reporting Standards (IFRS) notes to the financial
FALSE
statements must qualify as an element.
Under International Financial Reporting Standards (IFRS) supplementary information
TRUE
may be information that is high in relevance but low in reliability.
The cost-benefit constraint included in the International Accounting Standards Board’s
FALSE conceptual framework states that financial information should be free from cost to users
of the information.
The International Accounting Standards Board’s (IASB) rule for materiality is any item
FALSE
under 5% of net income is considered immaterial.
The International Accounting Standards Board’s (IASB) conceptual framework includes
the concept of prudence or conservatism which means when in doubt, choose the
FALSE
solution that will be least likely to overstate assets or income and/or understate liabilities
or expenses.
Under International Financial Reporting Standards (IFRS) companies must consider
TRUE
both quantitative and qualitative factors in determining whether an item is material.
Under International Financial Reporting Standards (IFRS) companies need not report
FALSE immaterial items within the body of the financial statements, but must disclose them in
the notes or supplementary information that accompany the financial statements.
TRUE The conceptual framework underlying U.S. GAAP is similar to that underlying IFRS.
Relevance and faithful representation are the two primary qualities that make
TRUE
accounting information useful for decision making.
FALSE Information that helps users confirm or correct prior expectations has predictive value.
Comparability enables users to identify the real similarities and differences in economic
TRUE phenomena because the information has been measured and reported in a similar
manner for different enterprises.
Fair value is the price that would be received to sell an asset or paid to transfer a liability
TRUE
in an orderly transaction between market participants at the measurement date.
Information is immaterial if omitting it or misstating it could influence decisions that
FALSE
users make on the basis of the reported financial information.
The consistency characteristic requires that the same accounting method be used from
TRUE
one accounting period to the next.
Prudence or conservatism, when in doubt, choose the solution that will be least likely to
FALSE
overstate income and assets.
Providing information that is of sufficient importance to influence the judgment and
FALSE
decisions of an informed user is referred to as disclosure.
Corporations must prepare accounting reports at least yearly due to the periodicity
TRUE
assumption.
TRUE Revenue occurs when the performance obligation is satisfied.