Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L.

Desabille, CPA
Relevant Sources: Conceptual Framework for Financial consider the applicability of the Conceptual Framework
Reporting & Various review materials in developing and applying an accounting policy that
results in information that is relevant and reliable.
Definition and Background:  If FRSC specifies a requirement in a standard that
 The Conceptual Framework is a summary of the terms depart from aspects of the Conceptual Framework, it will
and concepts that underlie the preparation and explain the departure in
presentation of financial statements. the Basis for Conclusions on that Standard.
 It is the underlying theory for the development of
accounting standards and revision of previously issued Scope of the Conceptual Framework
accounting standards. The Conceptual Framework deals with:
 It is concerned with general purpose financial  The Objective of General-Purpose Financial reporting
statements, including consolidated financial statements. [Part I]
 However, special purpose financial reports, for example,  Qualitative Characteristics of useful financial
prospectuses and computations prepared for taxation information [Part II]
purposes, are outside the scope of the Conceptual  Financial statements and the reporting entity [Part III]
Framework.  The Elements of financial statements [Part IV]
 Recognition and derecognition [Part V]
Underlying Theme  Measurement [Part VI]
The underlying theme of the framework is the usefulness of  Presentation and disclosure [Part VII]
the financial information in making economic decisions.
 Concepts of Capital and capital maintenance [Part VIII]
Purpose of the Framework
Part I - The Objective of General-Purpose Financial Reporting
Definition of Financial Reporting
Financial Reporting is the provision of financial information
about an entity to external users that is useful to them in
making economic decisions and for assessing the
effectiveness of the entity’s management. The principal way of
providing financial information to external users is through the
annual financial statements.

Users of Financial Information

Under the Conceptual Framework for Financial Reporting, the
users of financial information may be classified into two,

Authoritative Status of the Framework

 If there is a standard or an interpretation that
specifically applies to a transaction, the standard or
interpretation overrides the Conceptual Framework.
 In the absence of a standard or an interpretation that
specifically applies to a transaction, management shall
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
namely primary users and other users: accommodate every request for information, however,
it will seek to provide the information set that will meet
the needs of the maximum number of primary users.
[1.8-1.10]
 To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions. [1.11]

Information about resources, claims and changes thereto

 General purpose financial reports provide information
about the


 financial position of a reporting entity.
Objectives of Financial Reporting  Financial position is information about the entity's
Overall Objective: To provide financial information about the economic resources and the claims against the reporting
reporting entity that is useful to existing and potential entity.
investors, lenders and other creditors in making decisions  The economic resources are the assets and the claims
relating to providing resources to the entity [1.2]. are the liabilities and equity of the entity.

Specific Objectives: Economic sources and claims

 To provide information useful in assessing an entity's  Identify strengths and weaknesses
prospects for future net cash inflows. [1.3-1.4]  Asses liquidity, solvency and flexibility
 To provide information useful in assessing how  Assess management stewardship
effectively and efficiently management has discharged
their responsibilities to use the entity's existing What is Liquidity?
resources (i.e., stewardship). [1.3-1.4 and 1.22 to 1.23] Liquidity is the availability of cash in the near future to cover
 To provide information about entity resources, claims currently maturing obligations.
and changes in resources and claims. [1.12-1.16]

Limitations on Financial Reporting What is Solvency?

 General purpose financial reports do not and cannot Solvency is the availability of cash over a long term to meet
provide all of the information that existing and potential financial commitments when they fall due.
investors, lenders and other creditors need. [1.6]
 General purpose financial reports are not designed to What is Flexibility?
show the value of a reporting entity; but they provide Flexibility is the capacity of the entity to adapt to changes.
information to the primary users to estimate the value
of the reporting entity. [1.7] Changes in resources and claims
 General purpose financial reports are intended to  Financial performance helps users to understand returns
provide common information to users and cannot and future returns.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
 In order to assess and understand changes in resources Relevance
and claims, there are three things we need to consider, Definition
that is, accrual basis, past cash-flows and other Means "the capacity of information to make a difference in a
changes. decision made by users." The major ingredients of relevance
are predictive value and confirmatory value.
What is Financial performance reflected by accrual accounting?
Accrual accounting depicts the effects of transactions and Ingredients of Relevance
other events and circumstances on a reporting entity’s Financial information has predictive value if it can be used as
economic resources and claims in the periods in which those an input to processes employed by users to predict or
effects occur, even if the resulting cash receipts and payments forecast future outcomes.
occur in a different period.
Financial information has confirmatory value if it provides
What is Financial performance reflected by past cash flows? feedback (confirms or changes) about previous evaluations.
Information about cash flows helps users understand a
reporting entity’s operations, evaluate its financing and Note that: The predictive value and confirmatory value of
investing activities, assess its liquidity or solvency and financial information are interrelated. Information that has
interpret other information about financial performance. predictive value often also has confirmatory value.

What are Other Changes? Materiality

A reporting entity’s economic resources and claims may also Information is material if omitting, misstating or obscuring it
change for reasons other than financial performance, such as could reasonably be expected to influence decisions that the
issuing debt or equity instruments. primary users of general-purpose financial reports make on
the basis of those reports, which provide financial information
Part II - Qualitative Characteristics of useful financial about a specific reporting entity.
information
Definition Materiality is NOT an ingredient of relevance but rather an
Qualitative characteristics are the qualities or attributes that entity-specific aspect of relevance as there is no uniform
make financial accounting information useful to the users. quantitative threshold for materiality or predetermination of
Under the Conceptual Framework for Financial Reporting, what could be material in a particular situation (nature or
qualitative characteristics are classified into Fundamental magnitude).
qualitative characteristics and enhancing qualitative Meaning, all materials items are relevant but not all relevant
characteristics. items are material.

Fundamental Qualitative Characteristics Faithful Representation

The fundamental qualitative characteristics relate to the Definition
content or substance of financial information that make the Faithful Representation means that the information provides a
information useful in making economic decisions. The true, correct, and complete depiction of the economic
fundamental qualitative characteristics are relevance and phenomena that it purports to represent. Simply worded,
faithful representation. faithful representation means that the actual effects of the
transactions shall be properly accounted for and reported in the
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
financial statements. To be a perfectly faithful representation, “When monetary amounts in financial reports
a depiction would have three characteristics. It would be cannot be observed directly and must instead be
complete, neutral and free from error. estimated, measurement uncertainty arises. The
 Completeness - A complete depiction includes all use of reasonable estimates is an essential part of
information necessary for a user to understand the the preparation of financial information and does
phenomenon being depicted, including all necessary not undermine the usefulness of the information if
descriptions and explanations. Completeness is the the estimates are clearly and accurately described
result of the adequate disclosure standard or the and explained. Even a high level of measurement
principle of full disclosure. uncertainty does not necessarily prevent such an
estimate from providing useful information.”
The "standard of adequate disclosure" means that
all significant and relevant information leading to
the preparation of financial statements shall be TAKE NOTE:
clearly reported. Adequate disclosure however 1. Substance over form and conservatism or prudence are
does not mean disclosure of just any data. The not ingredients or characteristics of faithful
accountant shall disclose a material fact known representation and are specific aspect only.
to him which is not disclosed in the financial 2. If there is a conflict between substance and form, the
statements but disclosure of which is necessary economic substance of the transactions shall prevail
in order that the statements would not be over the legal form. Examples of situation where
misleading. substance over form is applied: (a) accounting for non-
 Neutrality - Neutrality means that the financial interest-bearing notes receivable/payable (b) finance
statements should not be prepared so as to favor one lease accounting.
party to the detriment of another party. A neutral 3. In the 2010 version of the conceptual framework,
depiction is without bias in the selection or presentation prudence or conservatism was not included as an aspect
of financial information. of faithful representation because including either would
be inconsistent with neutrality. In the current version,
Neutrality is supported by the exercise of prudence assists information to be neutral.
prudence. Prudence is the exercise of caution Enhancing Qualitative Characteristics
when making judgements under conditions of Are qualitative characteristics that enhance the usefulness of
uncertainty. The exercise of prudence means that information that both is relevant and provides a faithful
assets and income are not overstated/understated representation of what it purports to represent. The enhancing
and liabilities and expenses are not qualitative characteristics are verifiability, comparability,
understated/overstated. understandability, and timeliness (VCUT).
 Free from error - there are no errors or omissions in the  Verifiability - means that different knowledgeable and
description of the phenomenon, and the process used to independent observers could reach consensus, although
produce the reported information has been selected and not necessarily complete agreement, that a particular
applied with no errors in the process. Free from error depiction is a faithful representation.
does not mean perfectly accurate in all respects.
Verification can be direct or indirect. Direct
verification means verifying an amount or other
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
representation through direct observation.
Indirect verification means checking the inputs to
a model, formula or other technique and Part III - Financial statements and the reporting entity
recalculating the outputs using the same Objective and scope of financial statements
methodology. To provide financial information about the reporting entity’s
 Comparability - Enables users to identify and assets,
understand similarities in, and differences among, items. liabilities, equity, income and expenses that is useful to users
Comparison may make be classified into the following: of financial statements (a) in assessing the prospects for future
(a) intra-comparability, single entity but different periods; net cash inflows to the reporting entity and (b) in assessing
and, (b) inter-comparability, difference entities in a single management’s stewardship of the
period. entity’s economic resources.

Comparability is assisted by consistency which That information is provided:

refers to the use of the same methods for the same (a) in the statement of financial position (assets, liabilities and
items. Comparability is the goal; consistency equity)
helps to achieve that goal. Comparability, (b) in the statement(s) of financial performance (income and
however, is not uniformity. For information to be expenses); and
comparable, like things must look alike and (c) in other statements and notes.
different things must look different.
 Understandability – Requires that financial information Reporting period of Financial Statements
must be comprehensible or intelligible to be if it is to be To help users of financial statements to identify and assess
useful but complex matters cannot be eliminated. Because changes and trends, financial statements also provide
of this, the framework requires the users to have a comparative information for at least one preceding reporting
reasonable knowledge of business and economic activities period.
and must review and analyze the information diligently.
 Timeliness – Means having information available to decision Information about possible future transactions and other
makers in time to influence decisions. In other words, possible future events (forward-looking information) is included
timeliness requires that financial information must be in financial statements if it
available or communicated early enough when a decision is (a) relates to the entity’s assets or liabilities—including
to be made. Relevant information may lose its relevance if unrecognized assets or liabilities—or equity that existed at the
there is undue delay in its reporting. end of the reporting period, or during the reporting period, or
Cost Constraint on Useful Information to income or expenses for the reporting period; and (b) is useful
Cost is a pervasive constraint on the information that can be to users of financial statements.
provided by financial reporting. The benefit derived from the
information should exceed the cost incurred in obtaining the Perspective adopted in financial statements
information. Otherwise, the financial accounting information Viewed from the perspective of the reporting entity as a whole,
may not be reported. However, the evaluation of the cost not from the perspective of any particular group of the entity’s
constraint is a judgmental process. Assessing whether the cost existing or potential investors, lenders or other creditors.
of reporting outweighs or falls short of the benefit is difficult to
measure and becomes a matter of professional judgment. Going concern assumption
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
Going concern assumption means that the accounting entity is
viewed as continuing in operation indefinitely in the absence of
evidence to the contrary. Examples of application of going
concern principle: (a) The current and non-current
classifications of assets and liabilities
(b) The accrual of income and expenses and prepayments and
unearned income (c) depreciation of PPE, amortization of
intangible assets, etc.

The Reporting Entity

Reporting entity is an entity who must or chooses to prepare
the financial statements and is NOT necessarily a legal entity.
As a result, we have a few types of Financial Statements:
 Consolidated – a parent and subsidiary report as a
single reporting entity.
 Unconsolidated or Individual – the parent alone provides
reports.
 Combined – the reporting entity compromises two or
more entities not linked by parent-subsidiary
relationship.

Part IV – The Elements of Financial Statement

The elements of Financial Statements refer to the quantitative Distinguish income from revenue and gain.
information shown in the Statement of Comprehensive Income, The definition of income encompasses both revenue and gain.
namely: Assets, Liabilities, Equity, Income and Expenses. Revenue arises in the course of the ordinary regular activities
These elements are classified into: and is referred to by a variety of different names including
sales, fees, interest, dividends, royalties and rent. The essence
of revenue is regularity. Gain represents an item that meets
the definition of income and does not arise in the course of
ordinary regular activities.

Distinguish expenses and losses.

The definition of expense encompasses losses as well as those
expenses that arise in the course of the ordinary regular
activities of the entity. Expenses that arise in the course of
ordinary regular activities of the entity include, for example,
cost of sales, wages and depreciation. Losses represent other
items that meet the definition of expenses and do not arise in
the course of the ordinary regular activities of the entity.
Examples include losses resulting from disasters such as fire
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
and flood, as well as those arising from disposal of noncurrent Control - an entity controls an economic resource if it has the
assets. present ability to: (a) direct the use (b) obtain the economic
benefits – of the economic resource
Control includes the present ability to prevent other parties from
Definitions: directing the use of the economic resource and from obtaining
Rights – have the potential to produce economic benefits, the economic benefits that may flow from it.
including:
 Rights that correspond to an obligation of another party. Obligation – is a duty or responsibility that an entity has no
(a) rights to receive cash. (b) rights to receive goods or practical ability to avoid. An obligation is always owed to
services. (c) rights to exchange economic resources with another party (or parties).
another party on favorable terms. (d) rights to benefit from
an obligation of another party to transfer an economic An obligation can arise from (a) a contract, legislation or similar
resource if a specified uncertain future event occurs. means and are legally enforceable (b) from an entity’s customary
 Rights that do not correspond to an obligation of practices, published policies or specific statements if the entity
another part. (a) rights over physical objects, such as has no practical ability to act in a manner inconsistent with
property, plant and equipment or inventories. (b) rights those mentioned (constructive obligation).
to use intellectual property.
Take note that: Transfer of an economic resource – To satisfy this criterion, the
An entity cannot have a right to obtain economic obligation must have the potential to require the entity to
resource from itself. (a) debt/equity instruments issued transfer an economic resource to another party (or parties).
and repurchased, and (b) if a reporting entity comprises
more than one legal entity, debt instruments or equity An obligation to transfer includes (a) paying cash (b) deliver
instruments issued by one of those legal entities and held goods (c) provide services (d) to exchange economic resources
by another are not economic resources of the reporting with another party on unfavorable terms (e) transfer an
entity. economic resource if a specified uncertain future event occurs (f)
to issue a financial instrument.
Potential to produce economic benefits – For potential to
exist. It does not need to be certain, or even likely, that Present obligation as a result of past events - A present
the right will produce economic benefits. It is only obligation exists as a result of past events only if:
necessary that the right already exists and that, in at (a) the entity has already obtained economic benefits or taken
least one circumstance benefits beyond those available an action; and (b) as a consequence, the entity will or may have
to all other parties. Ex. (a) receive contractual cash flows to transfer an economic resource that it would not otherwise
or another economic resource (b) exchange economic have had to transfer.
resources with another party on favorable terms (c)
produce cash inflows or avoid cash outflows. (d) receive Part V – Recognition and Derecognition
cash or other economic resources by selling the economic
resource (e) extinguish liabilities by transferring the Recognition –means the process of reporting an asset, liability,
economic resource. income or expense on the face of the financial statements of an
entity. In other words, recognition involves the inclusion of
peso amount in the entity's financial statements.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
The Conceptual Framework provides that "income is recognized
The following are conditions that must be present for the in the income statement when it is probable that an increase in
recognition of an item that meets the definition of an element: future economic benefits related to an increase in an asset or a
(a) It is probable that any future economic benefit decrease in a liability has arisen and that the increase in
associated with the item will flow to or from the entity. economic benefits can be measured reliably."
(b) The item has a cost or value that can be measured with
reliability. Thus, two conditions must be present for the recognition of
income, namely:
The four recognition principles: a. It is probable that future economic benefits will flow to the
(a) Asset recognition principle entity as a result of an increase in an asset or a decrease in a
(b) Liability recognition principle liability.
(c) Income recognition principle b. The economic benefits can be measured reliably.
(d) Expense recognition principle
Expense recognition principle – The Conceptual Framework
Asset Recognition Principle – An asset is recognized in the provides that "expenses are recognized in the income statement
statement of financial position when it is probable that future when it is probable that a decrease in future economic benefits
economic benefits will flow to the entity and the asset has a related to a decrease in an asset or an increase in liability has
cost or value that can be measured reliably. Thus, two occurred and the decrease in economic benefits can be
conditions must be present for the recognition of an asset: measured reliably".
a. It is probable that future economic benefits will flow to the
entity. Thus, two conditions must be present for the recognition of
b. The cost or value of the asset can be measured reliably. expenses:
a. It is probable that a decrease in future economic benefits
Liability Recognition Principle – A liability is recognized in the has occurred.
statement of financial position when it is probable that an b. The decrease in economic benefits can be measured reliably.
outflow of resources embodying economic benefits will be
required for the settlement of a present obligation and the The expense recognition principle is the application of the
amount of the obligation can be measured reliably. matching principle. The generation of revenue is not without
Thus, two conditions must be present for the recognition any cost. There has got to be some cost in earning a revenue.
of a liability: Accordingly, the matching principle requires that "those costs
a. It is probable that an outflow of economic benefits will be and expenses incurred in earning a revenue should be reported
required for the settlement of a present obligation. in the same period". In other words, there should be
b. The amount of obligation can be measured reliably. simultaneous or combined recognition of revenue and expenses
that result directly from the same transactions and events.
Income Recognition principle or realization principle – The The basic expense recognition principle means that "expenses
basic principle is that "income shall be recognized when are recognized when incurred". But the question is when are
earned". But the question is when is income considered to be expenses incurred?
earned?
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
Expenses are incurred in conformity with the three the accountant's general guide for dealing with uncertain
applications of the matching principle, namely: situations.
a. Cause and effect association
b. Systematic and rational allocation An expense is recognized immediately when an expenditure
c. Immediate recognition produces no future economic benefits or when future economic
benefits do not qualify, or cease to qualify for recognition in the
The Cause-and-effect Association principle – The cause-and- statement of financial position as an asset.
effect association principle means that "the expense is
recognized when the revenue is already recognized" on the Derecognition – is the opposite of recognition. It is the removal
basis of a presumed direct association of the expense with of a previously recognized asset or liability from the entity’s
specific revenue. This is actually the "strict matching concept". statement of financial position. Derecognition occurs when the
item no longer meets the definition of an asset or liability, such
The best example is the cost of merchandise inventory. Such as when the entity control of all or part of the asset; or no
cost is considered as an asset in the meantime that the longer has a present obligation for all or part of the liability.
merchandise is on hand. When the merchandise is sold, the On the derecognition, the entity:
cost thereof is expensed in the form of "cost of sales" because (a) Derecognizes the assets and liabilities that have expired
at such time revenue may be recognized. Other examples or have been consumed, collected, fulfilled or transferred
include doubtful accounts, warranty expense and sales and recognized any resulting income and expenses.
commissions. (b) Continues to recognize any assets and liabilities
retained after derecognition,
Systematic and Rational Allocation principle – Under the Note: Derecognition is not appropriate if the entity retains
systematic and rational allocation principle, some costs are substantial control of a transferred asset.
expensed by simply allocating them over the periods benefited.
The reason for this principle is that the cost incurred will
benefit future periods and that there is an absence of a direct Part VI – Measurement
or clear association of the expense with specific revenue.
Measurement – is the process of determining the monetary
When economic benefits are expected to arise over several amounts at which the elements of the financial statements are
accounting periods and the association with income can only to be recognized and carried in the statement of financial
be broadly or indirectly determined, expenses are recognized position and income statement.
on the basis of systematic and allocation procedures. Concrete
examples include depreciation, amortization and allocation of Historical cost — This measurement is based on the
prepayments. transaction price at the time of recognition of the element. The
historical cost of an asset is the consideration paid to acquire
Immediate recognition principle – Under immediate recognition the asset plus transaction costs. The historical cost of a
principle, the cost incurred is expensed outright because of liability is the consideration received to incur the liability
uncertainty of future economic benefits or difficulty of reliably minus transaction costs.
associating certain costs with future revenue. Actually, this
principle reflects a conservative or prudent approach which is
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
Current value — It measures the element updated to reflect the Effective communication makes information more useful.
conditions at the measurement date. Current value Effective communication requires:
measurement bases include the following: (1) Focusing on presentation and disclosure objectives
(1) Fair Value — is the price that would be received to and principles rather than on rules.
sell an asset or paid to transfer a liability in an orderly (2) Classifying information by grouping similar items
transaction between market participants. Fair value is and separating dissimilar items.
not an entity specific measurement. (3) Aggregating information in a manner that it is not
(2) Value in use is the present value of the cash flows or obscured either by excessive detail or by excessive
other economic benefits, that an entity expects to derive summarization.
from the use of an asset and from its ultimate disposal. NOTE: Classification refers to the sorting of assets liabilities,
Fulfilment value is the present value of the cash or other equity, income or expenses with similar nature, function and
economic resources that an entity expects to be obliged measurement basis for presentation and disclosure purposes.
to transfer as it fulfils a liability. Aggregation is the adding together of assets, liabilities, equity,
income or expenses that have shared characteristics and are
NOTE: Value in use and fulfilment value DO NOT include included in the same classification.
transaction costs in acquiring an asset or incurring the liability
but include transactions costs expected to be incurred on the Part VIII: Concepts of Capital and Capital Maintenance
ultimate disposal of the asset or fulfilment of the liability.
Financial Capital Physical Capital
(3)Current cost of an asset is the cost of an equivalent Concept of Invested money or Productive
asset at the measurement date, comprising the capital invested purchasing capacity of the
consideration that would be paid at the measurement power entity
date plus transaction costs that would be incurred on Adopted by
that date. Current cost of liability is the consideration most entities?
that would be received for an equivalent liability at the Measurement Historical cost Current cost
measurement date minus transaction costs that would
be incurred on that date. The "capital maintenance approach" or net assets approach
NOTE: Current cost and historical cost are ENTRY VALUES means that net income occurs only after the capital used from
while value in use, fulfilment value and fair value are EXIT the beginning of the period is maintained.
VALUES.
Under the financial capital concept, net income occurs "when
The framework points out that it can be appropriate to the financial or nominal amount of the net assets at the end of
measure some components of equity directly but it is not the year exceeds the financial or nominal amount of the net
possible to measure total equity directly. assets at the beginning of the period, after excluding
distributions to and contributions by owners during the
period."
Part VII: Presentation and Disclosure
Information about assets, liabilities, equity, income and Under the physical capital concept, net income occurs
expenses is communicated through presentation and 'When the physical productive capital of the entity at the end of
disclosure in the financial statements. the year exceeds the physical productive capital at the
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
beginning of the period, also after excluding distributions to
and contributions from owners during the period "

Most of the problem-solving questions regarding capital

maintenance approach is based on financial capital. With
such, the template below might be of help in answering.

Net changes in equity xxx

Less: Additional investment by owners (xxx)
Add: Withdrawals and distributions to owners xxx
Comprehensive income xxx
Less: Other comprehensive income (xxx)
Add: Other comprehensive loss (xxx)
Profit or Loss I Net Income xxx

Reminders in using the template:

a) Please be mindful of the requirement of the problem. Profit
or loss is different from comprehensive income.
b) The computation of net changes in equity depends on the
given information. If the given information is already the
beginning and ending balance of equity then is easy to solve.
But if the given information are the changes on the assets and Multiple Choice – Theory
liabilities then you have to evaluate each line item's impact on Preface
equity. In evaluating the impact on the equity remember that: Introduction
(1) Asset is directly related to equity while (2) liability is 1. The primary focus of financial reporting has been on
inversely related to equity. meeting the needs of which of the following groups?
A. Independent CPAs
B. Managers of an entity
C. National and local taxing authorities
D. Existing and potential investors, lenders and other
creditors

2. The primary responsibility for the preparation and

presentation of the financial statements of an entity is
reposed in the
A. Controller C. Internal auditor
B. External auditor D. Management of the
entity

Objectives of Financial Reporting

Underlying Assumptions
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
3. The most useful information to existing and potential 8. Which of the following is an application of the principle of
investors, lenders and other creditors in predicting future conservatism?
cash flows is A. A liability is accrued for a guarantee of the indebtedness
A. Information about current cash flows of others.
B. Current earnings based on accrual accounting B. An expected loss on a long-term construction-type
C. Information regarding the accounting policies used by contract is recognized in full immediately.
management C. A dollar-denominated note payable is adjusted for a peso
D. Information regarding the results obtained by using a devaluation that occurs after the end of the reporting
wide variety of accounting policies period.
D. A provision for a temporary decline in value of a debt
4. The accrual basis of accounting is most useful for security classified as "financial asset at amortized cost"
A. Determining the amount of dividends an entity should is recognized.
pay.
B. Predicting the long-term financial performance of an 9. The conservative approach in the measurement of financial
entity. position is best illustrated in which of the following?
C. Predicting the short-term financial performance of an A. Recognition of a fictitious liability.
entity. B. An intangible asset is measured at nominal amount.
D. Determining the amount of income tax an entity should C. Inventory is measured at cost or net realizable value,
pay. whichever is lower.
D. Arbitrary reduction of a property item to report a
Qualitative Characteristics conservative asset position.
5. In the event of conflict between the economic substance of
a transaction and the legal form, the economic substance Elements of Financial Statements
shall prevail. Recognition of the Elements of Financial Statements
A. Completeness C. Relevance Measurement of the Elements of Financial Statements
B. Form over substance D. Substance over form Recognition of the Elements of Financial Statements
Concepts of Capital & Capital Maintenance
6. Conservatism is best described as selecting an accounting
alternative that Multiple Choice – Theory (Revised)
A. Overstates liabilities Preface
B. Understates assets and net income' 10. This is a complete, comprehensive and single document
C. Has the least favorable impact on owners' equity promulgated by IASB establishing the concepts that
D. Is least likely to mislead users of financial information underlie financial reporting.
A. Conceptual Framework
7. What is the underlying concept governing the generally B. Conceptual Framework for Business Entities
accepted accounting principles pertaining to recording gain C. Conceptual Framework for Financial Reporting
contingencies? D. Conceptual Framework for Financial Statements
A. Conservatism C. Relevance
B. Consistency D. Reliability Introduction
11. What is a purpose of the Conceptual Framework?
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
I. To enable the accountancy profession to solve more 15. Which is not a basic purpose of the Conceptual Framework?
quickly emerging practical problems. A. To assist preparers of financial statements in applying
II. To provide a foundation from which to build more useful accounting standards.
financial accounting standards. B. To assist the Financial Reporting Standards Council in
A. I only C. Both I and II developing accounting standards.
B. II only D. Neither I nor II C. To assist the Financial Reporting Standards Council in
reviewing and adopting International Accounting
12. Which is a basic purpose of the Conceptual Framework? Standards.
I. To assist users of financial statements in interpreting the D. To assist the Board of Accountancy in promulgating
information contained in the financial statements. rules and regulations affecting the practice of
II. To assist auditors in forming an opinion as to whether accountancy in the Philippines. FA © 2014
financial statements conform with Philippine GAAP.
III. To provide information to those interested in the work of 16. Which of the following is not a purpose of the Conceptual
the Financial Reporting Standards Council in the Framework?
formulation of PFRS. A. To provide definitions of key terms and fundamental
A. I and II only C. II and III only concepts.
B. I and III only D. I, II and III TOA © B. To assist the Financial Reporting Standards Council in
2013 the standard-setting process.
C. To provide specific guidelines for resolving situations not
13. Which is a basic purpose of the Conceptual Framework? covered by existing accounting standards.
A. To assist preparers of financial statements in applying D. To assist accountants and others in selecting among
accounting standards. alternative accounting and reporting methods.
B. To provide information to those interested in the work of
the FRSC in the formulation of PFRS. 17. What is the authoritative status of the Conceptual
C. To assist users of financial statements in interpreting the Framework?
information contained in the financial statements. A. The Conceptual Framework has the highest level of
D. All of these are considered basic purpose of the authority.
Conceptual Framework. B. In the absence of a standard or an interpretation that
specifically applies to a transaction, the Conceptual
14. Which of the following is not a purpose of the Conceptual Framework shall be followed.
Framework? C. The Conceptual Framework applies only when the
A. To provide definitions of key terms and fundamental Financial Reporting Standards Council develops new or
concepts. revised standards. FA © 2014
B. To assist the International Accounting Standards Board D. In the absence of a standard or an interpretation that
in the standard-setting process. specifically applies to a transaction, management shall
C. To assist accountants in selecting among alternative consider the applicability of the Conceptual Framework
accounting and reporting methods. in developing and applying an accounting policy that
D. To provide specific guidelines for resolving situations not results in information that is relevant and reliable.
covered by existing accounting standards. FA © 2014
18. As regards the relationship between PFRS and the
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
Conceptual Framework, which of the following statements II. Enhance comparability of financial statements across
is true? entities.
I. The Conceptual Framework is a reporting standard. III. Allow new and emerging practical problems to be solved
II. In case of conflict, the requirements of the Conceptual more quickly.
Framework prevail over those of the relevant PFRS. A. I only C. I and III only
A. I only C. Both I and II B. I and II only D. I, II and III FA © 2014
B. II only D. Neither I nor II FA ©
2014 23. Users of financial reports include which of the following?
I. Creditors
19. The Conceptual Framework is intended to establish II. Government agencies
A. The hierarchy of sources of GAAP. III. Unions
B. The meaning of "present fairly in accordance with GAAP" A. I only C. I and III only
C. Generally accepted accounting principles in financial B. I and II only D. I, II, and III FA ©
reporting by entities. 2014
D. The objectives and concepts for use in developing
standards of financial accounting and reporting. FA © 24. The "primary users" of financial information include
2014 A. Existing and potential investors only
B. Existing and potential lenders and other creditors only
20. The Conceptual Framework should C. Existing and potential investors, lenders and other
A. Eliminate alternative accounting principles and creditors.
methods. D. User group, such as employees, customers, governments
B. Define the basic objectives, terms and concepts of and their agencies, and the public FA © 2014
accounting.
C. Guide the PICPA in developing generally accepted 25. The "primary users" of financial information include
auditing standards. FA © 2014 I. Existing and potential investors
D. Lead to uniformity of financial statements among entities II. Existing and potential lenders and other creditors
within the same industry. III. User group such as employees, customers, governments
and their agencies, and the public
21. Which is not included in the scope of the Conceptual A. I only C. I and III only
Framework? B. I and II only D. I, II and III FA © 2014
A. Supplementary information
B. Objective of financial reporting 26. The existing and potential investors
C. Qualitative characteristic of useful financial accounting I. Are interested in information which enables them to
information FA © 2014 assess the ability of the entity to pay dividends.
D. Definition, recognition and measurement of the elements II. Need information to help them determine whether they
of financial statements should buy or sell.
A. I only C. Both I and II
22. A soundly developed Conceptual Framework should B. II only D. Neither I nor II FA ©
I. Increase financial statement users' understanding and 2014
confidence in financial reporting.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
27. Which of the following is an internal user of financial B. Lenders and other creditors D. Trade creditors FA ©
information? 2014
A. Board of Directors C. Creditor with long-
term contract 33. These users are interested in information about the
B. Bondholder D. Shareholder FA © continuance of an entity when they have a long-term
2014 involvement with or are dependent on the entity.
A. Customers C. Suppliers
28. Which of the following is an internal user of financial B. Employees D. Trade unions FA ©
information? 2014
A. Board of Directors
B. Shareholder in the entity 34. These users are interested in information in order to
C. Holder of the entity's bonds regulate the activities of an entity, determine taxation
D. Creditor with long-term contract with the entity FA © policies and provide a basis for national statistics.
2014 A. Bureau of Internal Revenue C. Governments and
their agencies
29. Users of financial reports include which of the following? B. Department of Finance D. Major organization of
I. Creditors users FA © 2014
II. Government agencies
III. Unions 35. These users need information on trends and recent
A. I only C. I and III only developments where an entity makes a substantial
B. I and II only D. I, II, and III TOA © contribution to the local economy providing employment
2013 and using local suppliers.
A. Finance entities C. Private entities
30. These users require information on risk and return on B. Governments and their agencies D.
investment. The public FA © 2014
A. Customers C. Investors
B. Employees D. Lenders FA © 2014 36. The primary focus of financial reporting has been on
meeting the needs of which of the following groups?
31. These users are interested in information about the A. Independent CPAs
profitability and stability of an entity in order to assess the B. Managers of an entity
ability of the entity to provide remuneration, retirement C. National and local taxing authorities
benefits and employment opportunities. D. Existing and potential investors, lenders and other
A. Customers C. Governments and creditors TOA © 2013
their agencies
B. Employees D. The public FA © 2014 37. Which of the following statements in relation to information
needs is true?
32. These users are interested in information that enables them I. Information that meets the needs of specified primary
to assess whether their loans, the related interest thereon, users is likely to meet the needs of other users, such as
and other amounts owing to them will be paid when due. employees, customers, governments and their agencies,
A. Borrowers C. Owners and the public.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
II. The management is also interested in financial 42. What is the objective of financial reporting?
information but it need not rely on general purpose A. To prepare financial statements in accordance with all
financial reports because it can access additional applicable standards and interpretations.
information internally. B. To provide information about the financial position,
A. I only C. Both I and II financial performance and changes in financial position
B. II only D. Neither I nor II FA © of an entity.
2014 C. To provide financial information about an entity that is
useful to existing and potential investors, lenders and
Objectives of General-Purpose Financial Reporting other creditors in making decisions about providing
38. In the Conceptual Framework for Financial Reporting, what resources to the entity.
provides the "why" of accounting? D. To prepare and present a statement of financial position,
A. Element of financial statement an income statement, a statement of comprehensive
B. Objective of financial reporting income, a statement of cash flows and a statement of
C. Measurement and recognition concept changes in equity. FA © 2014
D. Qualitative characteristic of accounting information FA
© 2014 43. What is a major objective of financial reporting?
A. To provide information that excludes claims against the
39. The objectives of financial reporting are based on resources.
A. The need for conservatism B. To provide information that clearly portrays nonfinancial
B. Reporting on management's stewardship transactions.
C. Generally accepted accounting principles C. To provide information that is useful to management in
D. The needs of the users of the information FA © 2014 making decisions.
D. To provide information that is useful to assess the
40. The overall objective of financial reporting is to provide amounts, timing, and uncertainty of prospective cash
information receipts. FA © 2014
A. That is useful for decision making
B. About an entity's assets, liabilities and owners' equity 44. One element of the objective of financial reporting is to
C. About an entity's financial performance during a period provide
D. That allows owners to assess management's A. Information that will attract new investors.
performance FA © 2014 B. Information about the investors in the entity.
C. Information that is useful in assessing cash flow
41. Which is an objective of financial reporting? prospects. FA © 2014
A. To provide information that is useful to management. D. Information about the liquidation value of the resources
B. To provide information about those investing in the held by the entity.
entity.
C. To provide information that is useful to those making 45. Which of the following statements best describes the term
investing and credit decisions. "financial position"?
D. To provide information about ways to solve internal and A. The net income and expenses of an entity
external conflicts about the entity. FA © 2014 B. The assets, liabilities and equity of an entity
C. The net of financial assets less liabilities of an entity FA
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
© 2014 D. Information about the financial effects of cash receipts
D. The potential to contribute to the flow of cash and cash and cash payments is generally considered the best
equivalents to the entity indicator of an entity's present and continuing ability to
generate favorable cash flows. FA © 2014
46. Which of the following best describes "financial
performance" of an entity? 50. As part of the objective of general-purpose financial
A. The total assets minus total liabilities reporting, there is an emphasis on "assessing cash flow
B. The total cash inflows minus cash outflows prospects." This is interpreted to mean
C. The assets, liabilities and equity of an entity A. Cash basis accounting is preferred over accrual basis
D. The revenue, expenses and net income or loss for a accounting.
period of an entity. FA © 2014 B. Over the long run, trends in revenue and expenses are
generally more meaningful than trends in cash receipts
47. In measuring financial performance, accrual accounting is and disbursements.
used because C. Information about the financial effects of cash receipts
A. It is one of the implicit assumptions. and cash payments is generally considered the best
B. Cash flows are considered less important. FA © 2014 indicator of an entity's present and continuing ability to
C. It provides a better indication of ability to generate cash generate favorable cash flows.
flows than cash basis. D. All of the choices are correct regarding "assessing cash
D. It recognizes revenue when cash is received and flow prospects". TOA © 2013
expenses when cash is paid.
51. The information provided by financial reporting pertains to
48. Which definition is correct relating to financial A. Individual business entities and an economy as a whole
performance? or to members of society as consumers
A. Gains are increases in equity from major operations. B. Individual business entities, rather than to industries or
B. Losses are all decreases in equity other than an economy as a whole or to members of society as
transactions with owners. consumers
C. Revenues are inflows or other enhancements of assets or C. Individual business entities and an economy as a whole,
settlements of liabilities from major operations. rather than to industries or to members of society as
D. Expenses are outflows of assets or liabilities incurred consumers
from peripheral or incidental transactions. TOA © 2013 D. Individual business entities, industries and an economy
as a whole, rather than to members of society as
49. As part of the objective of financial reporting, the phrase consumers FA © 2014
"assessing cash flow prospects" is interpreted to mean
A. Cash basis accounting is preferred over accrual basis 52. During a period when an entity is under the direction of a
accounting. particular management, financial reporting will directly
B. All of the choices are correct regarding "assessing cash provide information about
flow prospects". A. Management performance but not entity performance
C. Over the long run, trends in revenue and expenses are B. Entity performance but not management performance
generally more meaningful than trends in cash receipts C. Both entity performance and management performance
and disbursements. D. Neither entity performance nor management
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
performance. FA © 2014 assessing cash flow prospects.
B. Financial reporting shall provide information useful in
53. Which one of the following is not listed as a major objective investment, credit and similar decision.
of financial reporting? C. Financial reporting shall provide information useful in
A. Financial reporting shall provide information useful in evaluating stewardship of management.
assessing cash flow prospects. D. Financial reporting shall provide information about
B. Financial reporting shall provide information useful in resources, claims against those resources and changes
investment, credit and similar decisions. in them. FA © 2014
C. Financial reporting shall provide information useful in
evaluating management's stewardship. The Reporting Entity
D. Financial reporting shall provide information about Qualitative Characteristics
entity resources, claims to those resources and changes 57. The underlying theme of the Conceptual Framework is
in them. FA © 2014 A. Comparability C. Timeliness
B. Decision usefulness D. Understandability FA
54. Which of the following statements is not normally an © 2014
objective of financial reporting?
A. To provide information about an entity's liquidation 58. The overriding qualitative characteristic of accounting
value information is
B. To provide information that is useful in lending and A. Decision usefulness C. Relevance
investing decisions FA © 2014 B. Faithful representation D. Understandability
C. To provide information about an entity's assets and
claims against those assets 59. The overriding criterion by which accounting information
D. To provide information that is useful in assessing an can be judged is that of
entity's sources and uses of cash A. Comparability C. Freedom from bias
B. Usefulness for decision making D.
55. Which of the following statements in relation to financial Timeliness FA © 2014
reporting is incorrect?
A. General purpose financial reports are designed to show 60. What are qualitative characteristics of financial
the value of the reporting entity. information?
B. General purpose financial reports are intended to A. Qualitative characteristics are broad classes of financial
provide common information to users. effects of transactions and other events.
C. Financial reports are largely based on estimate and B. Qualitative characteristics are the attributes that make
judgment rather than exact depiction. the information provided in financial statements useful
D. General purpose financial reports do not and cannot to users.
provide all of the information that primary users need. C. Qualitative characteristics measure the extent to which
FA © 2014 an entity has complied with all relevant standards and
interpretations.
56. Which of the following is not a specific objective of financial D. Qualitative characteristics are nonqualitative aspects of
reporting? an entity's financial position and performance and
A. Financial reporting shall provide information useful in changes in financial position. FA © 2014
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
B. Faithful representation D. Relevance FA © 2014
61. Qualitative characteristics
A. Are considered either fundamental or enhancing. 67. If there is undue delay in the reporting of information, it may
B. Contribute to the decision-usefulness of financial lose its
reporting information. A. Relevance C. Faithful
C. Distinguish better information from inferior information representation TOA © 2013
for decision-making purposes. B. Usefulness D. Relevance and
D. All of the choices are correct. FA © 2014 faithful representation

Fundamental (relevance & faithful representation) 68. According to the Conceptual Framework, predictive value
62. The fundamental qualitative characteristics are and confirmatory value are ingredients of
A. Relevance and reliability A. Comparability C. Relevance
B. Faithful representation and materiality B. Faithful representation D. Understandability
C. Relevance and faithful representation TOA © 2013
D. Relevance, faithful representation and materiality FA ©
2014 69. The ingredients of relevant financial information are
A. Predictive value and confirmatory value
63. Which is a fundamental quality of useful accounting B. Predictive value, confirmatory value and timeliness
information? C. Predictive value, confirmatory value and materiality
A. Comparability C. Materiality D. Predictive value, confirmatory value, timeliness and
B. Consistency D. Relevance FA © 2014 materiality FA © 2014

64. Which of the following terms best describes information that 70. Which of the following statements is incorrect concerning
influences the economic decisions of users? the qualitative characteristic of relevance?
A. Faithfully represented C. Relevant A. The relevance of information is affected by its nature and
B. Prospective D. Understandable FA © materiality.
2014 B. The predictive and confirmatory roles of information are
not interrelated. TOA © 2013
65. Accounting information is considered relevant when it C. Relevance is the capacity of the information to influence
A. Is verifiable and neutral. an economic decision.
B. Is capable of making a difference in a decision. D. To be useful, information must be relevant to the
C. Is understandable by reasonably informed users of decision-making needs of users.
accounting information.
D. Can be depended on to represent the economic 71. Which of the following statements about materiality is true?
conditions and events that it is intended to represent. A. Materiality is a matter of relative size or importance.
FA © 2014 B. An item must make a difference or it need not be
disclosed.
66. What is the quality of information that enables users to C. An item is material if the inclusion or omission would
better forecast future operations? influence or change the judgment of a reasonable
A. Comparability C. Materiality person.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
D. All of these statements are true about materiality. FA © B. Freedom from material error
2014 C. Inclusion of a degree of caution
D. Influence on the economic decisions of users FA © 2014
72. Which of the following statements is true in relation to
"materiality"? 76. Which of the following is not a characteristic of faithful
I. Materiality provides that the specific requirements of representation?
PFRS need not be met if the resulting information is not A. The financial information must have predictive value and
material. confirmatory value.
II. Materiality depends on the relative size and nature of the B. The financial information must be complete within the
item judged in the particular circumstances of the bounds of materiality and cost.
omission. C. The financial information contained in the financial
A. I only C. Both I and II statements must be free from bias.
B. II only D. Neither I nor II TOA © D. The phenomena described in the financial statements
2013 and the process used to produce the reported
information must be free from error. TOA © 2013
73. Which of the following statements is incorrect concerning
materiality? 77. Which of the following situations violates the concept of
A. Materiality is dependent on professional judgment faithful representation?
because no threshold limit is defined in the Conceptual A. Financial statements were issued nine months late.
Framework. B. Data on segments having the same expected risks and
B. Materiality is not a fundamental qualitative growth rates are reported to analysts estimating future
characteristic but rather a threshold or cut off point in profits.
determining useful information. C. Management reports to shareholders regularly refer to
C. Materiality depends on the absolute size of the item or new projects undertaken, but the financial statements
error judged in the particular circumstances of the never report project results.
omission or misstatement. TOA © 2013 D. Financial statements included an item of property, plant
D. Information is material if the omission or misstatement and equipment with carrying amount increased to
could influence the economic decisions that users make management estimate of market value. TOA © 2013
on the basis of the financial information about entities.
78. The ingredients of faithful representation are
74. What is the quality of information that gives assurance that A. Completeness and neutrality
it is reasonably free of error and bias? B. Completeness and free from error
A. Faithful representation C. Relevance C. Completeness, neutrality and free from error
B. Neutrality D. Verifiability FA © D. Completeness, neutrality, free from error and
2014 conservatism FA © 2014

75. Which of the following is the best description of "faithful 79. To be a faithful representation, information must be all of
representation" in relation to information in financial the following, except
statements? A. Complete C. Free from error
A. Comprehensibility to users B. Confirmatory D. Neutral FA © 2014
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
2013
80. An ingredient of the fundamental qualitative characteristic
of faithful representation is Enhancing (comparability, verifiability, timeliness,
A. Neutrality C. Understandability understandability, prudence)
B. Timeliness D. Verifiability TOA © 86. The enhancing qualitative characteristics of financial
2013 information are
A. Verifiability and timeliness
81. Which of the following terms best describes information in B. Comparability and understandability
financial statements that is "neutral"? C. Comparability, understandability and verifiability
A. Relevant C. Unbiased D. Comparability, understandability, verifiability and
B. Reliable D. Understandable FA © timeliness FA © 2014
2014
87. To be most useful, the financial information shall be
82. The financial accounting information is directed toward the compared with similar information of previous periods or
common needs of users and is independent of presumptions with information produced by other entities.
about particular needs and desires of specific users. A. Comparability C. Reliability
A. Completeness C. Relevance B. Relevance D. Understandability
B. Neutrality D. Verifiability. TOA © TOA © 2013
2013
88. An important implication of this qualitative characteristic is
83. Which of the following qualitative characteristics of financial that users are informed of the accounting policies employed,
information requires that information shall not be biased in changes in those policies and the effects of such changes.
favor of one group of users to the detriment of others? A. Comparability C. Full disclosure
A. Free from error C. Neutrality B. Consistency D. Understandability
B. Completeness D. Relevance FA © 2014 TOA © 2013

84. Which of the following concepts means that there should be 89. When information about two different entities engaged in
no attempt on the part of the preparers of financial reports the same industry has been prepared and presented in
to induce a predetermined outcome or a particular mode of similar manner, the information exhibits the enhancing
behavior? qualitative characteristic of
A. Consistency C. Neutrality A. Comparability C. Faithful
B. Faithful representation D. Verifiability TOA © representation
2013 B. Consistency D. Relevance FA © 2014

85. Under the Conceptual Framework, neutrality is an 90. Changing the method of inventory valuation should be
ingredient of reported in the financial statements under what enhancing
A. Relevance quality of accounting information?
B. Faithful representation A. Comparability C. Understandability
C. Both relevance and faithful representation B. Timeliness D. Verifiability TOA ©
D. Neither relevance nor faithful representation TOA © 2013
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
which of the following qualities?
91. What is meant by comparability when discussing financial A. Consistency C. Verifiability
accounting information? B. Predictive value D. All of the choices are
A. Information is timely. correct TOA © 2013
B. Information is reasonably free from error.
C. Information has predictive and confirmatory value. 96. Financial information exhibits consistency when
D. Information is measured and reported in a similar A. Gains and losses are shown separately on the income
fashion across entities. FA © 2014 statement.
B. Accounting entities give similar events the same
92. Which of the following relates to both relevance and faithful accounting treatment each period.
representation? C. Expenditures are reported as expenses and netted
A. Consistency C. Timeliness against revenue in the period in which they are paid.
B. Feedback value D. Verifiability TOA © D. Accounting procedures are adopted which smooth net
2013 income and make results consistent between years. FA
© 2014
93. Consistency is an important factor in comparability within
a single entity which requires that 97. Financial information does not demonstrate consistency
A. Changes in circumstances or in the nature of the when
underlying transactions should be disclosed. A. An entity changes the estimate of residual value of an
B. Historical cost should be the primary basis in measuring equipment.
intangible assets and property, plant and equipment. B. An entity fails to adjust the financial statements for
C. Some costs should be recognized as expenses on the change in the value of the measuring unit.
basis of a presumed direct association with specific C. Entities in the same industry use different accounting
revenue. method to account for the same type of transaction.
D. Assets whose prices are increased by external events D. None of these TOA © 2013
other than transfers should be retained in the
accounting records at their recorded amounts until they 98. The consistency standard requires that
are exchanged. TOA © 2013 A. Gains and losses should not appear in the income
statement.
94. What is meant by consistency when discussing financial B. Expenses should be reported as charges against the
accounting information? period when incurred.
A. Information is timely. C. The effect of changes in accounting upon income should
B. Information is verifiable. be property disclosed. TOA © 2013
C. Information is measured similarly across the industry. D. Accounting procedures should be adopted when the
FA © 2014 result is a consistent rate of return.
D. Information is measured and reported in a similar
fashion across points in time. 99. Which of the following accounting concepts states that an
accounting transaction shall be supported by sufficient
95. When an entity applies the same accounting treatment to evidence to allow two or more qualified individuals to arrive
similar events from period to period, the entity is exhibiting at essentially similar conclusions?
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
A. Conservatism C. Periodicity 105. Which concept of accounting holds that, to the maximum
B. Objectivity D. Stable monetary unit extent possible, financial statements shall be based on
TOA © 2013 arm's length transactions?
A. Matching C. Revenue realization
100. Objectivity is assumed to be achieved when an B. Monetary unit D. Verifiability FA ©
accounting transaction 2014
A. Is recorded in a fixed amount of pesos
B. Involves the payment or receipt of cash 106. Historical cost has been the valuation basis most
C. Allocates revenue or expenses in a rational and commonly used in financial accounting because of
systematic manner A. Accuracy C. Timeliness
D. Involves an arm's length transaction between two B. Conservatism D. Verifiability TOA ©
independent parties TOA © 2013 2013

101. The principle of objectivity includes the concept of 107. An enhancing quality of accounting information is
A. Classification C. Summarization A. Confirmatory value C. Predictive value
B. Conservatism D. Verifiability TOA © B. Free from error D. Timeliness TOA ©
2013 2013

102. Proponents of historical cost ordinarily maintain that in 108. An entity issuing the annual financial reports within one
comparison with all other valuation alternatives for financial month after the end of reporting period is an example of
reporting, statements prepared using historical cost are which enhancing quality of accounting information?
A. Verifiable A. Neutrality C. Representational
B. Relevant faithfulness
C. Conservative B. Predictive value D. Timeliness FA © 2014
D. Indicative of the entity's purchasing power FA © 2014
190. Allowing entities to estimate rather than physically count
103. The ability through consensus among measurers to inventory at interim periods is an example of a tradeoff
ensure that information represents what it purports to between
represent is an example of A. Neutrality and consistency C. Timeliness and
A. Comparability C. Relevance verifiability
B. Confirmatory value D. Verifiability FA © B. Timeliness and comparability D. Verifiability and
2014 comparability FA © 2014

104. The characteristic that is demonstrated when a high 110. An implicit assumption of the qualitative characteristic of
degree of consensus can be secured among independent understandability is that
measurers using the same measurement method is A. Information must be decision-useful to all potential
A. Neutrality C. Understandability users of financial reporting.
B. Relevance D. Verifiability FA © B. General-purpose financial reporting is the primary
2014 source of information for statement users.
C. Users need reasonable knowledge of business and
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
financial accounting matters to understand the to the enhancing qualitative characteristics?
information contained in financial statements. A. Verifiable financial information implies consensus.
D. All of the choices are correct. FA © 2014 B. Financial information shall be made available to users in
time to influence their decisions.
111. For information to be useful, the linkage between the C. Financial information must exclude complex matters in
users and the decisions made is order to achieve understandability.
A. Faithful representation C. Understandability D. To be most useful, the financial information shall be
B. Relevance D. Verifiability FA © compared with similar information of previous periods,
2014 or with information produced by other entities. TOA ©
2013
112. Classifying, characterizing and presenting information
clearly and concisely makes the information The Cost Constraint of Useful Financial Reporting
A. Comparable C. Understandable 118. Which of the following relates to both relevance and
B. Timely D. Verifiable TOA © faithful representation?
2013 A. Conservatism C. Materiality
B. Cost-benefit constraint D. Substance over form
113. Which of the following statements is true in relation to the TOA © 2013
enhancing qualitative characteristic of understandability of
financial information? 119. The usefulness of providing information in financial
A. Financial statements shall exclude complex matters. statements is subject to the constraint of
B. Financial statements shall be free from material error. A. Consistency C. Reliability
C. Users are expected to have significant business B. Cost-benefit D. Representational
knowledge. faithfulness
D. Users have a reasonable knowledge of business and
economic activities and review the information with 120. The Conceptual Framework includes which of the
reasonable diligence. FA © 2014 following constraints?
A. Conservatism C. Prudence FA © 2014
B. Cost D. All of the choices are
115. Enhancing qualities include all of the following, except constraints
A. Comparability C. Understandability
B. Neutrality D. Verifiability FA © 121. According to the Conceptual Framework, the usefulness
2014 of providing information in financial statements is subject
to the constraint of
116. Which of the following is not an enhancing qualitative A. Consistency C. Materiality
characteristic? B. Cost-benefit D. Timeliness FA © 2014
A. Comparability C. Timeliness
B. Profit-oriented D. Understandability 122. Which of the following best describes the cost-benefit
TOA © 2013 constraint?
A. Financial information should be free from cost to users
117. Which of the following statements is incorrect in relation of the information.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
B. The benefit of the information must be greater than the B. Depreciation and amortization policies are justifiable
cost of providing it. and appropriate.
C. Cost of providing financial information is not always C. The current and noncurrent classification of assets and
evident or measurable but must be considered. liabilities is justifiable and significant.
D. All of the choices are correct. FA © 2014 D. Amortizing research and development costs over several
periods is justifiable and appropriate. TOA © 2013
Underlying Assumptions
123. What is the only underlying assumption mentioned in the 128. Which basic assumption may not be followed when an
Conceptual Framework for Financial Reporting? entity in bankruptcy reports financial results?
A. Accounting entity C. Monetary unit A. Economic entity assumption C. Monetary unit
B. Going concern D. Time period TOA © assumption
2013 B. Going concern assumption D. Periodicity
assumption FA © 2014
124. Which of the following statements best describes the term
"going concern"? 129. The valuation of a promise to receive cash in the future at
A. The expenses of an entity exceed its income present value is valid because of the accounting concept of
B. When current liabilities of an entity exceed current A. Entity C. Monetary unit
assets B. Going concern D. Time period FA ©
C. The ability of the entity to continue in operation for the 2014
foreseeable future FA © 2014
D. The potential to contribute to the flow of cash and cash 130. What is the accounting concept that justifies the usage of
equivalents to the entity accruals and deferrals?
A. Consistency C. Materiality
125. The relatively stable economic, political and social B. Going concern D. Stable monetary unit
environment supports FA © 2014
A. Conservatism C. Materiality
B. Going concern D. Timeliness FA © 2014 Elements of Financial Statements
131. Financial statements portray the financial effects of
126. Which of the following is an implication of the going transactions and other events by grouping them into broad
concern assumption? classes, according to their economic characteristics. These
A. The historical cost principle is credible. broad classes are termed as
B. Depreciation and amortization policies are justifiable A. Accounts C. Features of financial
and appropriate. statements
C. The current and noncurrent classification of assets and B. Elements of financial statements D. Quantitative
liabilities is justifiable and significant. characteristics FA © 2014
D. All of these. FA © 2014
132. Financial statements portray the financial effects of
127. Which of the following is not an implication of the going transactions and other events by grouping them into broad
concern assumption? classes according to their economic characteristics. These
A. The historical cost principle is credible. broad classes are termed as FA © 2014
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
A. Audit reports C. Financial reports asset?
B. Elements of financial statements D. Notes to A. An asset is tangible
financial statements B. An asset is obtained at a cost
C. An asset provides future benefits
133. The elements directly related to the measurement of D. The claims to an asset's benefits are legally enforceable
financial position are FA © 2014
A. Asset and liability
B. Income and expense 139. The essential characteristics of an asset include all of the
C. Asset, liability and equity following, except
D. Asset, liability, equity, income and expense FA © 2014 A. The asset is tangible.
B. The asset is the result of past event.
134. The elements directly related to the measurement of C. The asset provides future economic benefit.
financial performance are D. The cost of the asset can be measured reliably. FA ©
A. Asset and liability C. Asset, liability and 2014
equity
B. Income and expense D. Income, expense and 140. The essential characteristics of an asset include all of the
equity FA © 2014 following, except
A. The asset is tangible.
135. The elements directly related to the measurement of B. The asset provides future economic benefit.
financial performance are C. The cost of the asset can be measured reliably.
A. Income and expense D. The asset is the result of past transaction or event. TOA
B. Sales and cost of sales © 2013
C. Asset, liability and equity
D. Asset, liability, equity, income and expense FA © 2014 141. Which of the following statements is not true regarding
assets?
136. The elements of financial position describe amounts of A. An asset represents a probable future economic benefit.
resources and claims against resources B. Assets include costs that have not yet been matched with
A. At a moment in time revenue.
B. During a period of time C. An asset is obtained or controlled as a result of past or
C. During a period of time and at a moment in time probable future event. TOA © 2013
D. Neither during a period of time nor at a moment in time D. Assets reported in the statement of financial position
FA © 2014 include current and noncurrent assets.

137. It is a resource controlled by the entity as a result of 142. Which of the following statements is incorrect concerning
past events and from which future economic benefits are assets?
expected to flow to the entity. A. An asset results from past event.
A. Asset C. Income B. Physical form is not essential to the existence of an asset.
B. Equity D. Liability FA © 2014 C. In determining existence of an asset, the right of
ownership is essential.
138. Which of the following is an essential characteristic of an D. There is a close association between incurring an
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
expenditure and generating asset but the two do not
necessarily coincide. TOA © 2013 148. Which of the following represents a liability?
A. The obligation to pay for goods that an entity expects to
143. Which of the following statements is incorrect regarding order from suppliers next year.
assets? B. The obligation to provide goods that customers have
A. An asset represents a probable future economic benefit. ordered and paid for during the current' year.
B. Assets include costs that have not yet been matched with C. The obligation to pay interest on a five-year note payable
revenue. that was issued the last day of the current year.
C. An asset is obtained or controlled as a result of probable D. The obligation to distribute an entity's own shares next
future event. year as a result of a stock dividend declared near the end
D. Assets reported in the statement of financial position of the current year. TOA © 2013
include current and noncurrent assets. FA © 2014
149. Which is not within the definition of a liability?
144. Conceptually, asset valuation accounts are A. A note payable with no specified maturity date
A. Assets C. Neither assets nor B. A present obligation that is estimated in amount
liabilities C. An obligation to provide goods or services in the future
B. Liabilities D. Part of shareholders' D. The signing of a three-year employment contract at a
equity FA © 2014 fixed annual salary FA © 2014

145. It is a present obligation of an entity arising from past 150. It is the residual interest in the assets of the entity after
events the settlement of which is expected to result in an deducting all of the liabilities.
outflow from the entity of resources embodying economic A. Equity C. Retained earnings FA
benefits. © 2014
A. Asset C. Expense B. Income D. All of the choices
B. Equity D. Liability FA © 2014 match the definition

146. Which of the following best describes the term "liability"? 151. It is the residual interest in the assets of the entity after
A. An excess of equity over current assets deducting all of the liabilities.
B. A present obligation arising from past event A. Equity C. Income
C. Resources to meet financial commitments when due FA B. Expense D. Net income FA ©
© 2014 2014
D. The residual interest in the assets of the entity after
deducting all of the liabilities 152. It is an increase in economic benefit during the
accounting period related to an increase in asset or a
147. For a liability to exist decrease in liability that results in increase in equity other
A. The exact amount must be known. than contribution from owners.
B. There must, be a past transaction or event. A. Asset C. Income
C. There must be an obligation to pay cash in the future. B. Expenses D. Liability FA © 2014
D. The identity of the party to whom the liability is owed
must be known. FA 2014 153. Under the Conceptual Framework, the term "income"
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
A. Is the same as comprehensive income. 158. It is a decrease in economic benefit during the
B. Includes foreign currency translation adjustment. accounting period related to a decrease in asset or an
C. Includes change in fair value of financial assets at fair increase in liability that results in decrease in equity other
value through other comprehensive income. than distribution to owners.
D. Includes gain resulting from the sale of an asset to A. Asset C. Income
another party in an arm's length transaction. TOA © B. Expense D. Liability FA © 2014
2013
159. An outflow of assets from an entity based on an activity
154. Which of the following statements in relation to income is that represents the entity's major operations is called
true? A. Equity C. Liability
A. Income encompasses revenue only. B. Expense D. Loss FA © 2014
B. Income encompasses both revenue and gain.
C. Revenue encompasses both income and gain. 160. Which of the following statements in relation to the term
D. Gain encompasses both income and revenue. FA © "expense" is incorrect?
2014 A. Expense is synonymous with expenditure.
B. Entities do not incur expenses per se but they initially
155. This arises in the course of ordinary regular activities of acquire assets. TOA © 2013
the entity and is referred to by a variety of different names C. All expenses and losses are expired costs but not all
including sales, fees, interest, dividends, royalties and expired costs are expenses or losses.
rent. D. All expenses decrease owners' equity but not all
A. Gain C. Profit decreases in owners' equity are expenses.
B. Income D. Revenue FA © 2014
161. A decrease in assets arising from peripheral or
156. According to the Conceptual Framework, an entity's incidental transactions is called
revenue may result from A. Capital expenditure C. Expense
A. A decrease in a liability from primary operations. B. Cost D. Loss FA © 2014
B. A decrease in an asset from primary operations.
C. An increase in a liability from incidental transactions. Recognition of the Elements of Financial Statements
D. An increase in an asset from incidental transactions. 162. It is the process of incorporating or reporting in the
FA © 2014 statement of financial position or statement of
comprehensive income an item that meets the definition of
157. The primary distinction between revenue and gain is an element of financial statements.
A. The materiality of the amount. A. Allocation C. Recognition
B. The likelihood that the transaction will recur in the B. Realization D. Summarization FA ©
future. 2014
C. The nature of the activity that gives rise to the
transaction. 163. It is the process of incorporating in the statement of
D. The cost versus the benefit of the alternative method of financial position or statement of comprehensive income an
disclosing the transaction. TOA © 2013 item that meets the definition of an element of financial
statements.
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
A. Allocation C. Realization will be required to settle an obligation and the amount
B. Measurement D. Recognition FA © of the obligation can be measured reliably. FA © 2014
2014
169. An income is recognized when
164. The term "recognized" is synonymous with the term A. The future economic benefit can be measured reliably.
A. Allocated C. Realized B. The entity obtains control of the future economic
B. Matched D. Recorded FA © 2014 benefit.
C. It is possible that future economic benefit will flow to
165. An item that meets the definition of an element shall be the entity and the economic benefit can be measured
recognized when reliably.
I. It is probable that future economic benefits associated D. It is probable that future economic benefit will flow to
with the item will flow to or from the entity. the entity and the economic benefit can be measured
II. The item has a cost or value that can be measured with reliably. FA © 2014
reliability.
A. I only C. Either I or II 170. An expense is recognized when
B. II only D. Both I and II TOA © A. The decrease in future economic benefit can be
2013 measured reliably.
B. It is probable that a decrease in future economic benefit
166. An asset is recognized when has occurred.
A. The cost or value of the asset can be measured reliably. C. It is probable that an increase in future economic
B. It is probable that future economic benefit will flow to the benefit has occurred and the increase in future
entity. economic benefit can be measured reliably.
C. The entity obtains control of the rights associated with D. It is probable that a decrease in future economic benefit
the asset. has occurred and the decrease in the future economic
D. It is probable that future economic benefit will flow to benefit can be measured reliably. FA © 2014
the entity and the; cost or value of the asset can be
measured reliably. FA © 2014 171. Which of the following is not a theoretical basis for the
allocation of expense?
167. When should an expenditure be recorded as an asset A. Cause and effect association C. Profit maximization
rather than an expense? FA © 2014
A. Always C. Never B. Immediate recognition D. Systematic and
B. If the amount is material D. When future benefit rational allocation
exists FA © 2014
172. Which accounting principle is being observed when an
168. A liability is recognized when accountant charges to expense a cost that contributed to
A. When the entity obtains control of the obligation. revenue during a period?
B. The amount of the obligation can measured reliably. A. Conservatism C. Monetary unit
C. It is probable that an outflow of future economic benefit B. Matching D. Revenue realization
will be required to settle the obligation. FA © 2014
D. It is probable that an outflow of future economic benefit
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
173. The accounting principle of matching is best 178. When costs can be reasonably associated with specific
demonstrated by revenue but not with specific product, the costs should be
A. Associating effort with accomplishment a. Expensed in the period incurred
B. Establishing an appropriation for contingency d. Capitalized and then amortized over a reasonable period
C. Recognizing prepaid rent received as revenue c. Expensed in the period in which the related revenue is
D. Not recognizing any expense unless some revenue is recognized
realized FA © 2014 b. Allocated to the specific product based on the best
estimate of the product processing time FA © 2014
174. An example of direct matching of an expense with revenue
would be 179. Which of the following is an example of the cause and
A. Advertising expense effect association principle?
B. Depreciation expense A. Officers' salaries
C. Office salaries expense B. Sales commission
D. Direct labor costs incurred to produce inventory sold C. Allocation of insurance cost
during a period FA © 2014 D. Depreciation of property, plant and equipment FA ©
2014
175. It is the process that involves the simultaneous or
combined recognition of revenue and expenses that result 180. Which of the following would be matched with current
directly from the same transactions and other events. revenue on a basis other than association of cause and
A. Immediate recognition C. Matching of revenue effect?
with cost TOA © 2013 A. Cost of goods sold C. Sales commission
B. Matching of cost with revenue D. Systematic and B. Goodwill D. Warranty cost FA ©
rational allocation 2014

176. Expenses are recognized on the basis of a direct 182. Bad debt expense is recognized according to which
association between the cost incurred and the earning of expense recognition principle?
specific items of income. A. Critical event recognition C. Immediate
A. Cost allocation C. Matching of revenue recognition FA © 2014
with costs B. Direct matching D. Systematic and
B. Matching of costs with revenue D. Revenue rational allocation
recognition FA © 2014
183. The recognition of an allowance for doubtful accounts is
177. What is the general approach as to when product costs an application of
are recognized as expenses? A. Going concern assumption C. Materiality constraint
A. In the period when the expenses are paid. B. Matching principle D. Revenue recognition
B. In the period when the expenses are incurred. principle FA © 2014
C. In the period when the vendor invoice is received.
D. In the period when the related revenue is recognized. 183. The allowance for doubtful accounts which appears as a
FA © 2014 deduction from accounts receivable is an application of
A. Going concern assumption C. Materiality constraint
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
B. Matching principle D. Revenue recognition 2014
principle FA © 2014
189. An expense is recognized immediately
184. When economic benefits are expected to arise over several A. When cost incurred ceases to qualify as an asset.
accounting periods and the association with income can B. When an expenditure produce's future economic benefit.
only be broadly or indirectly determined, expenses are C. When an expenditure produces no future economic
recognized on the basis of benefit.
A. Cause and effect association C. Profit maximization D. When an expenditure produces no future economic
FA © 2014 benefit and when cost incurred ceases to quality as an
B. Immediate recognition D. Systematic and asset. FA © 2014
rational allocation
190. An expense is recognized immediately
185. Which of the following principles best describes the I. When an expenditure produces no future economic
conceptual rationale for the method of matching benefits.
depreciation with revenue? II. When cost incurred ceases to qualify for recognition as
A. Associating cause and effect C. Partial recognition an asset in the statement of financial position.
B. Immediate recognition D. Systematic and A. I only C. Either I or II
rational allocation B. II only D. Neither I nor II TOA ©
2013
186. Why are certain costs of doing business capitalized when
incurred and then depreciated or amortized over 191. Which of the following principles best describes the
subsequent accounting periods? rationale for matching distribution costs and administrative
A. To reduce the income tax liability expenses with revenue of the current period?
B. To aid management in the decision-making process A. Direct matching C. Partial recognition FA
C. To adhere to the accounting concept of conservatism © 2014
D. To match the costs of production with revenue as earned B. Immediate recognition D. Systematic and
FA © 2014 rational allocation

187. Which of the following should be expensed under the 192. The writeoff of a worthless patent is an example of which
principle of systematic and rational allocation? of the following principles?
A. Electricity to light office building C. Salesmen's A. Associating cause and effect C. Objectivity FA © 2014
monthly salaries B. Immediate recognition D. Systematic and
B. Insurance premiums D. Transportation to rational allocation
customers FA © 2014
193. Which category of expenses is subject to immediate
188. Which of the following is an application of the systematic recognition in the income statement?
and rational allocation principle? A. The salary of the entity president
A. Amortization of intangible asset C. Research and B. The salary of the production foreman
development costs C. Utilities expense for the production line of a
B. Doubtful accounts D. Warranty costs FA © manufacturer FA © 2014
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
D. Repairs and maintenance expense incurred on A. money.
production equipment of a manufacturer B. money and sociological impact.
C. money and psychological impact.
194. Some costs cannot be directly related to particular D. money and sociological and psychological impact. FA ©
revenue but are incurred to obtain benefits that are 2014
exhausted in the period in which costs are incurred. An
example of such cost is 199. The elements of financial statements are measured in
A. Freight in C. Sales commissions terms of
B. Prepaid insurance D. Sales salaries FA © A. Constant pesos C. Flexible pesos
2014 B. Fixed pesos D. Nominal pesos FA ©
2014
195. Which of the following is not an acceptable basis for the
recognition of expense? 200. Which of the following measurement bases is currently
A. Cash disbursement C. Immediate used in financial statements?
recognition FA © 2014 A. Present value
B. Direct matching D. Systematic and B. Settlement value and fair value
rational allocation C. Present value and settlement value
D. Present value, settlement value and fair value FA ©
Measurement of the Elements of Financial Statements 2014
196. It is the process of determining the monetary amounts
at which the elements of the financial statements are 201. The measurement bases used in financial accounting
recognized and carried in the financial statements. include
A. Measurement C. Recognition A. Historical cost and current cost only
B. Presentation D. Recording FA © 2014 B. Historical cost, current cost and present value only
C. Historical cost, current cost and realizable value only
197. Under generally accepted accounting principles D. Historical cost, current cost, realizable value and present
A. Assets and liabilities are measured on the basis of their value FA © 2014
liquidation value.
B. Financial position and financial performance are 202. The most common financial attribute used in measuring
measured on the basis of cash received and cash paid. financial information is
C. Income and expenses, assets and liabilities are A. Current cost C. Present value
measured based on the occurrence of changes in the B. Historical cost D. Realizable value FA1
economic resources and obligations. © 2014
D. Income and expenses are recognized on the basis of cash
receipts and payments, including depreciation of 203. The measurement basis most commonly adopted by
property, plant and equipment. TOA © 2013 entities in preparing financial statements is
A. Current cost C. Present value
198. One of the basic features of financial accounting is the B. Historical cost D. Realizable value FA ©
direct measurement of economic resources and obligations 2014
and changes in them in terms of
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
204. Historical cost is the 2014
A. Amount of cash paid or fair value of the consideration
given at the time of acquisition. 209. It is the amount of cash or cash equivalent that would
B. Amount of cash that could currently be obtained by have to be paid if the same or an equivalent asset was
selling the asset in an orderly disposal. acquired currently.
C. Amount of cash that would have to be paid if the same A. Current cost C. Present value
or an equivalent asset is acquired currently. B. Historical cost D. Realizable value FA ©
D. Discounted value of the future net cash inflows that the 2014
item is expected to generate in the normal course of
business. FA © 2014 210. It is the amount of cash that could currently be obtained
by selling the asset in an orderly disposal.
205. Proponents of historical costs maintain that in A. Fair value C. Present value
comparison with all other valuation alternatives for general B. Market value D. Realizable value FA ©
purpose financial reporting, statements prepared using 2014
historical costs are more
A. Objective C. Conservative TOA © 211. Which of the following terms best describes the amount
2013 of cash or cash equivalents that could currently be obtained
B. Relevant D. Indicative of the by selling an asset in an orderly disposal?
entity's purchasing power A. Fair value C. Residual value
B. Realizable value D. Value in use FA ©
206. Which of the following is an argument against historical 2014
cost?
A. Fair value is subjective. 212. It is the amount of cash that could currently be obtained
B. Fair value is more relevant. by selling the asset in an orderly disposal.
C. Historical cost is verifiable and reliable. A. Fair value C. Present value
D. Historical cost is based on exchange transaction. FA © B. Market value D. Realizable value FA ©
2014 2014

207. It is the amount of cash or cash equivalent that would 213. Which of the following terms best describes the
have to be paid if the same or an equivalent asset was discounted value of the future net cash inflows that an item
acquired currently. is expected to generate in the normal course of business?
A. Current cost C. Present value A. Fair value C. Present value
B. Historical cost D. Realizable value FA © B. Historical cost D. Residual value FA ©
2014 2014

208. Which of the following terms best describes assets 214. Which of the following measurement attributes is not
recorded at the amount that represents the immediate currently used in practice?
purchase cost of an equivalent asset? A. Current replacement cost C. Net realizable value
A. Current cost C. Present value B. Inflation-adjusted cost D. Present value FA ©
B. Historical cost D. Realizable value FA © 2014
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
the current market value of an entity.
215. Asset measurements in financial statements C. Accountants base asset valuation upon objective and
A. Do not reflect output value verifiable evidence rather than on personal opinion.
B. Are confined to historical cost D. Accountants assume that assets such as supplies,
C. Reflect several financial attributes building and equipment will be used in the business
D. Are confined to historical cost and current cost FA © operations rather than sold. FA © 2014
2014
220. The most conceptually appropriate method of measuring
216. Which of the following financial attributes of assets is a liability is to
generally considered to be the most relevant? A. Record as a liability the amount of cash that would be
A. Current cost C. Historical cost required to pay the liability.
B. Current exit value D. Present value FA © B. Record as a liability the amount of cash actually received
2014 when a liability was incurred.
C. Discount the amount of expected cash outflows that are
217. The primary measurement basis currently used to value necessary to liquidate the liability using the market rate
assets in external financial statements is of interest at the date financial statements.
A. The market price of the assets at the date the assets were D. Discount the amount of expected cash outflows that are
acquired. necessary to liquidate the liability using the market rate
B. The present value of the cash flows that the assets are of interest at the date the liability was initially incurred.
expected to generate. TOA © 2013
C. The current market price if the assets held were
purchased on the open market. FA © 2014 Concepts of Capital & Capital Maintenance
D. The current market price if the assets currently held 221. Which of the following statements in relation to the
were sold on the open market. concepts of capital is true?
I. Under a financial capital concept, such as invested
218. When discussing asset valuation, valuation bases such money or invested purchasing power, capital is
as replacement cost, exit value and discounted cash flow are synonymous with the net assets or equity of the entity.
mentioned. Which of these bases should be considered a II. Under a physical capital concept, such as operating
current value measure? capability, capital is regarded as the productive capacity
A. Replacement cost and exit value of the entity.
B. Exit value and discounted cash flow A. I only C. Both I and II
C. Replacement cost and discounted cash flow B. II only D. Neither I nor II TOA ©
D. Replacement cost, exit value and discounted cash flow 2013
FA © 2014
222. Which of the following statements is true concerning the
219. Which of the following statements is not consistent with concepts of capital?
generally accepted accounting principles in relation to asset I. Under the financial capital concept, a profit is earned
measurement? only if the monetary amount of net assets at the end of
A. Assets are originally recorded at cost. the period exceeds the monetary amount of net assets at
B. Subtracting total liabilities from total assets results in the beginning of the period, after excluding any
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
distributions to and contributions from owners. to currently reported net income and comprehensive
II. Under the physical capital concept, a profit is earned income? FA © 2014
only if the physical productive capacity at the end of the A. Financial capital and financial capital C. Physical
period exceeds the physical productive capacity at the capital and financial capital
beginning of the period, after excluding any distributions B. Financial capital and physical capital
to and contributions from owners. D. Physical capital and
A. I only C. Both I and II physical capital
B. II only D. Neither I nor II TOA ©
2013 Comprehensive
227. Which of the following statements is true concerning the
223. The financial capital concept requires that net assets Conceptual Framework?
shall be measured at I. The Conceptual Framework is concerned with general
A. Current cost purpose financial statements including consolidated
B. Historical cost financial statements.
C. Current cost adjusted for changes in purchasing power II. Special purpose financial reports, for example,
D. Historical cost adjusted for changes in purchasing power prospectuses and computations prepared for taxation
FA © 2014 purposes, are within the scope of the Conceptual
Framework.
224. Under the financial capital maintenance concept, a profit A. I only C. Both I and II
is earned B. II only D. Neither I nor II TOA ©
A. If the monetary amount of net assets at the beginning 2013
exceeds the monetary amount of net assets at the end.
B. If the monetary amount of net assets at the end exceeds 228. Which of the following is not true concerning the
the monetary amount of net assets at the beginning. Conceptual Framework?
C. If the monetary amount of net assets at the beginning I. The Conceptual Framework should be a basis for
exceeds the monetary amount of net assets at the end, standard setting.
after excluding distributions to and contributions from II. The Conceptual Framework should allow practical
owners. problems to be solved more quickly.
D. If the monetary amount of net assets at the end exceeds III. The Conceptual Framework should be based on
the monetary amount of net assets at the beginning, fundamental truths that are derived from the laws of
after excluding any distributions to and contributions nature.
from owners. A. II only C. I and II only
B. Ill only D. II and III only FA ©
225. The physical capital maintenance concept requires the 2014
adoption of which measurement basis?
A. Current cost C. Present value 229. Which of the following statements is true concerning the
B. Historical cost D. Realizable value FA © Conceptual Framework for Financial Reporting?
2014 A. Nothing in the Conceptual Framework overrides any
specific Philippine Financial Reporting Standard.
226. Which capital maintenance concept is applied respectively B. The Conceptual Framework is concerned with general
Theory of Accounts: Conceptual Framework for Financial Accounting Fritz Amiel L. Desabille, CPA
purpose financial statements including consolidated
financial statements.
C. The Conceptual Framework is not a reporting standard
and does not define standard for any particular
measurement or disclosure issue.
D. All of these statements are true about the Conceptual
Framework. FA © 2014