CFAS IV-CONCEPTUAL FRAMEWORK

Question 1

1. A conceptual framework is:
   (a) statements of financial accounting standard.
   (b) an underlying accounting assumption.
   (c) a theoretical foundation which guides the ASC, preparers and users of financial
   accounting information.
   (d) a financial statement.

Answer 1

(c) a theoretical foundation which guides the ASC, preparers and users of financial
accounting information.

Question 2

2. Which is not a basic purpose of a conceptual framework?
   (a) to assist ASC in developing accounting standards
   (b) to assist preparers of financial statements in applying ASC accounting standards.
   (c) to assist ASC in reviewing and adopting International Accounting Standards.
   (d) to assist the Board of Accountancy in promulgating rules and regulations affecting the
   practice of accountancy in the Philippines

Answer 2

(d) to assist the Board of Accountancy in promulgating rules and regulations affecting the
practice of accountancy in the Philippines

Question 3

3. The ASC conceptual framework is intended to establish:
   (a) generally accepted accounting principles in financial reporting by business enterprises.
   (b) the meaning of present fairly in accordance with generally accepted accounting
   principles
   (c) the objectives and concepts for use in developing standards of financial accounting and
   Reporting.
   (d) the hierarchy of sources of generally accepted accounting principles.

Answer 3

(c) the objectives and concepts for use in developing standards of financial accounting and
Reporting.

Question 4

1. Which is not included in the scope of the ACS conceptual framework?
   (a) qualitative characteristics that determine usefulness of financial accounting information
   (b) definition, recognition and measurement of the elements af financial statements
   (c) objective of financial statements
   (d) generally accepted accounting principles

Answer 4

(d) generally accepted accounting principles

Question 5

2. What is the objective of financial statements? the firm’s assets and liabilities
   (a) to disclose the market value of the firm’s assets and liabilities
   (b) to determine compliance with tax laws
   (c) to make forecasts about the economy
   (d) to help users makes decisions

Answer 5

(d) to help users makes decisions

Question 6

3. It is the financial flexibility of an enterprise
   (a) liquidity (c) financial structure
   (b) solvency (d) capacity for adaptation

Answer 6

(d) capacity for adaptation

Question 7

4. It is the level of income earned by an enterprise through the efficient and effective
   utilization of resources.
   (a) financial position (c) positive cash flows
   (b) performance (d) negative cash flows

Answer 7

(b) performance

Question 8

5. Liquidity is defined as the:
   (a) ability of the enterprise to pay currently maturing obligations.
   (b) ability of the enterprise to meet obligations over a longer term.
   (c) invested capital of the enterprise.
   (d) borrowed capital of the enterprise

Answer 8

(a) ability of the enterprise to pay currently maturing obligations.

Question 9

6. The theory of accounting which best describes the accounting equation expressed “assets
   Liabilities + proprietorship” is the
   (a) entity theory (c)proprietary theory
   (b) fund theory (d) residual equity theory

Answer 9

(a) entity theory

Question 10

7. What theory of ownership equity is enumerated by the following equation: assets
   liabilities minus preferred stock equity equals common stock equity?
   (a) fund (c) proprietary
   (b) enterprise (d) residual equity

Answer 10

(d) residual equity

Question 11

8. Classifying preferred dividends as expense is an application of what concept
   (a) entity (c) residual equity
   (b) proprietary (d) fund

Answer 11

(c) residual equity

Question 12

9. The primary accounting is a fair presentation of the performance of the enterprise.
   (a) entity (c) fund
   (b) proprietary (d)residual equity

Answer 12

(a) entity

Question 13

10. Government or fiduciary accounting is an application of:
    (a) entity (c)residual equity
    (b) proprietary (d) fund

Answer 13

(d) fund

Question 14

11. Which of the following statements is incorrect?
    (a) the accounting theory which explains well the accounting equation “assets minus
    liabilities equals capital” is the proprietary theory
    (b) under the entity theory, the major accounting effort is directed toward proper valuation
    af assets rather than income determination
    (c) strict adherence to the entity concept would not allow a parent company to take up in
    its books its proportionate share in the profits and losses of its subsidiaries
    (d) under the fund theory, assets represent prospective services to the fund, liabilities
    represent restriction against asses of the funds, and invested capital represents either
    legal or financial restrictions on the use of assets

Answer 14

(b) under the entity theory, the major accounting effort is directed toward proper valuation of assets rather than income determination

Question 15

12. The type of money prices which uses such concepts as present value, discounted cash
    flow and value in use is known as:
    (a) price in a current purchase exchange (c)price based on future exchange
    (b) price in a past exchange (d) price in a current sale exchange

Answer 15

(c)price based on future exchange

Question 16

13. All accounts in the financial statements are affected to a certain extent by inflationary
    conditions, but the effect is more explicit in some accounts than in others. Which account is
    the more seriously affected by inflation?
    (a)property, plant and equipment (c) receivables
    (b) merchandise inventory (d) cash

Answer 16

(a)property, plant and equipment

Question 17

14. The recognition of the deficiencies of historical cost accounting has led to the advocacy
    of the recognition of the effects of inflation in the accounts. The following statements
    characterize the recognition af the effects of inflation except:
    (a) all accounts in the financial statements are affected to a certain extent by inflationaryY
    conditions, and the effect is more explicit in some accounts than in others
    (b) restating the entire financial statements in terms of current prices is a very complicated
    process and requires considerable additional work
    (c) users of financial statements advocate the recognition of the effects of inflation in the
    accounts because historical cost creates the impression that the business entity is more
    profitable than what it really is
    (d) inflation affects more drastically those items in the accounts where the rate of turnover
    is quite high

Answer 17

(d) inflation affects more drastically those items in the accounts where the rate of turnover
is quite high

Question 18

1. It is the capacity of information to make a difference in a decision by helping users from
   predictions about the outcome of past, present and future events, or confirm and correct
   prior expectations.
   (a) relevance (c) comparability
   (b) reliability (d) understandability

Answer 18

(a) relevance

Question 19

2. The attributes of relevance include ( choose the incorrect one):
   (a) predictive value (c)timeliness
   (b) feedback value (d) neutrality

Answer 19

(d) neutrality

Question 20

3. It is the quality of information that assures readers that the information is free from bias
   or error and faithfully represents what it purports to show.
   (a) understandability (c)reliability
   (b) relevance (d) comparability

Answer 20

(c)reliability

Question 21

4 Which of the following has the primary responsibility for the preparation, presentation
and reliability of information in the financial statements?

Answer 21

(a) management

Question 22

6. In the event of conflict between the economic substance of a transaction and its legal
   farm,the economic substance shall prevail. This concept is known as:
   (a) form over substance (c) faithful representation
   (b) substance over form (d) completeness

Answer 22

(b) substance over form

Question 23

5. verifiability of financial accounting information is synonymous with:
   (a) faithful representation (c) Prudence
   (b) substance over form (d) completeness

Answer 23

(a) faithful representation

Question 24

7. The financial accounting information is directed toward the common needs of users and
   is independent of presumptions about particular needs and desires of specific users.
   (a) relevance (c) neutrality
   (b) verifiability (d) completeness

Answer 24

(c) neutrality

Question 25

8. John Company does not know exactly how long its equipment will last. It decides to use shorter rather than longer useful life for depreciating the equipment. What accounting concept is being applied in this decision? (a) reliability (c)materiality (b) relevance (d) conservatism

Answer 25

(d) conservatism

Question 26

9. Tt is the exercise of care and caution in dealing with uncertainties in measurement so s not to overstate assets and income and not understated liabilities and expenses (a) completeness (c) faithful representation (b) prudence

Answer 26

(b) prudence

Question 27

10. It is the result of the standard of adequate disclosure (a )faithful representation (c) neutrality (b) substance over form (d) completeness

Answer 27

(d) completeness

Question 28

12. The conceptual framework of accounting sets out certain essential characteristics o accounting information Which of the following is not an essential characteristic? (a) understandability (c) reliability (b) profit-oriented (d) comparability

Answer 28

(b) profit-oriented

Question 29

11. Which of the following **improves the reliability** of accounting information? (a) accounting entity (c) verifiability (b) going concern (d) time period

Answer 29

(c) verifiability

Question 30

13. The financial information must be **comprehensible or intelligible** if it is to be useful. (a) relevance (c)understandability (b) reliability (d) comparability

Answer 30

(c)understandability

Question 31

14. Which qualitative characteristics relate to the **content** of the financial statements? (a) relevance and reliability (c) relevance and understandability (b) understandability (d) reliability and comparability

Answer 31

(a) relevance and reliability

Question 32

15. Which qualitative characteristics relate to the **presentation** of financial statements? (a) relevance and reliability (c) relevance and understandability (b) understandability and comparability (d) reliability and comparability

Answer 32

(b) understandability and comparability

Question 33

16. It is the **ability to bring together** for the purpose of **noting similarities and dissimilarities**. (a) relevance (c)understandability (b) reliability (d) comparability

Answer 33

(d) comparability

Question 34

17. Which is incorrect concerning the conditions for comparability within a single enterprise? (a) The presentations are in the same form. (b) The contents of the statements are identical. (c) Accounting principles are not changed or if they are changed, the financial effects of the changes are not disclosed. (d) Changes in circumstances or in the nature of underlying transactions are disclose

Answer 34

(c) Accounting principles are not changed or if they are changed, the financial effects of the changes are not disclosed.

Question 35

20. The ability through consensus among measures to ensure that information represents what it purports to represents is an example of the concept of: (a) relevance (c) comparability (b) verifiability (d) feedback value

Answer 35

(b) verifiability

Question 36

18. The ASC conceptual framework of accounting sets out **two constraints when implementing accounting procedures**. What are they? (a) cost-benefit and cost principle (c) cost principle and revenue principle (b) timeliness and revenue principle (d) cost-benefit and timeliness

Answer 36

(d) cost-benefit and timeliness

Question 37

19. According to the ASC conceptual framework, the usefulness of providing information in financial statements is subject to the constraints of: (a) consistency (c)reliability (b) cost-benefit (d) representational faithfulness

Answer 37

(b) cost-benefit

Question 38

21. Which of the following accounting concepts states that an accounting transaction should be **supported by sufficient evidence** to allow two or more qualified individuals to arrive at essentially similar conclusions? (a) conservatism (c) periodicity (b) objectivity (d) stable monetary unit

Answer 38

(b) objectivity

Question 39

22. Objectivity is assumed to be achieved when an accounting transaction: (a) is recorded in a fixed amount of peso. (b) involves the payment or receipt of cash. (c)involves an arm's length transaction between two independent parties. (d) Allocates revenue or expenses in a rational and systematic manner.

Answer 39

(c)involves an arm's length transaction between two independent parties.

Question 40

23. The principle of objectivity includes the concept of: (a) summarization (c) conservatism (b) classification (d) verifiability

Answer 40

(d) verifiability

Question 41

24. The consistency standard of reporting requires that: (a) expenses be reported as charges against the period in which they are incurred. (b) the effect of changes in accounting upon income be properly disclosed. (c) extraordinary gains and losses should not appear on the income statement. (d) accounting procedures are adapted which give a consistent rate of return.

Answer 41

(b) the effect of changes in accounting upon income be properly disclosed.

Question 42

25. Accounting changes are often made are the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of: (a) materiality (c) conservatism (b) consistency (d) objectivity

Answer 42

(b) consistency

Question 43

26. Timeliness is an ingredient of: (a) reliability (c) verifiability (b) relevance (d) adequate financial statements

Answer 43

(b) relevance

Question 44

27. Which of the following situations violates the concept of reliability? (a) Financial statements were issued nine months late. (b) Report data an segments having the same expected risks and growth rates to analysts estimating future profits. (c) Financial statements included property with a carrying amount increases management's estimate of market value. (d) Management reports to stockholders regularly refer to new projects undertaken, The financial statements never report project results.

Answer 44

(c) Financial statements included property with a carrying amount increases management's estimate of market value.

Question 45

28. What is the underlying concept that supports the immediate recognition of a contingent loss? (a) substance over form (c) matching (b) consistency (d) conservatism

Answer 45

(d) conservatism

Question 46

29. What is the underlying concept governing the GAAP pertaining to recording gain contingencies? (a) conservatism (c) consistency (b) relevance (d) reliability

Answer 46

(a) conservatism

Question 47

30. Uncertainty and risks inherent in business situations should be adequately considered in Financial reporting. This statement is an example of the concept of: (a) conservatism (c) neutrality (b) completeness (d) representational faithfulness

Answer 47

(a) conservatism

Question 48

31. An estimated loss from a loss contingency should be accrued when: (a) It is probable at the date of the financial statements that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated (b) The loss has been incurred on the date of the financial statements and of the loss may be material. (c) It is probable that a loss will be incurred in a future period and the amount of the loss can be reasonably estimated. (d) It is probable at the date of the financial statements thata loss has been incurred and the amount of the loss may be material.

Answer 48

(a) It is probable at the date of the financial statements that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated

Question 49

32. How should a loss contingency that is reasonably possible and for which the amount can be reasonably estimated? (a) accrues and disclosed (c) disclosed only (b) accrued only (d) neither accrued nor disclosed

Answer 49

(c) disclosed only

Question 50

33. Reserves for general contingencies should: (a) be accrued in the financial statements and disclosed in the notes thereto. (b) not be accrued in the financial statements but should be disclosed in the notes thereto. (c) not be accrued in the financial statements and need not be disclosed in the notes thereto. (d) be accrued in the financial statements but need not be disclosed in the notes thereto.

Answer 50

(c) not be accrued in the financial statements and need not be disclosed in the notes thereto.

Question 51

34. An estimated loss from a loss contingency that is probable and for which the amount of the loss can be reasonably estimated should: (a) not be accrued but should be disclosed in the notes to the financial statements. (b) be accrued by debiting an appropriated retained earnings account and crediting a liability account or an asset account (c) be accrued by debiting an expense account and crediting an appropriated retained earnings account (d) be accrued by debiting an expense account

Answer 51

(d) be accrued by debiting an expense account and crediting a liability account or an asset account.

Question 52

35. On December 20,2001, an uninsured property damage loss was caused by a company car being driven on company business by a company salesman. The company did not become aware of the loss until January 25, 2002. The amount of the loss was reasonably estimable before the company's 2001 financial statements were issued. The company's December 31, 2001 financial statements should report an estimated loss as: (a) a disclosure, but not an accrual (c) neither an accrual nor a disclosure. (b) an accrual. (d) an appropriation of retained earnings

Answer 52

(b) an accrual.

Question 53

36. A company did not record an accrual for a contingent loss but disclose the nature of the contingency and the range of the koss. How likely is the loss? (a) remote (c) probable (b) reasonably possible (d) certain

Answer 53

(b) reasonably possible

Question 54

37. A lawsuit in connection with a safety hazard exists for a manufactured product. Occurrence of a loss is probable and reasonably estimable. The loss contingency should: (a) be accrued and disclosed. (c) be disclosed. (b) be accrued only. (d) neither be accrued nor disclosed

Answer 54

(a) be accrued and disclosed.

Question 55

38. An expropriation of assets which is imminent and for which the amount of loss can be reasonably estimated should be: (a) accrued only. (c) accrued and disclosed. (b) disclosed only .(d) neither accrued and disclosed.

Answer 55

(c) accrued and disclosed.

Question 56

39. Management can estimate the amount of loss that will occur if a foreign government exçropriates some company assets. If the appropriation is reasonably possible, what is the treatment of the loss contingency? (a) disclosed but not accrued as a liability (c) accrued as a liability but not disclosed (b) disclosed and accrued as a liability (d) nether accrued as a liability not disclosed

Answer 56

(a) disclosed but not accrued as a liability

Question 57

40. A company has a probable loss that can only be reasonably estimated within a range of outcomes However, no single amount within the range is a better estimate than any other amount. The amount of the loss accrual should be: (a) zero. (c) minimum of the range. (b) maximum of the range (d) mean of the range.

Answer 57

(c) minimum of the range.

Question 58

41. Ax Company is being used for illness caused to local residents as a result of negligence on the company's part in permitting local residents to be exposed to highly toxic chemicals fram its plant. Ex's lawyer states that it is probable that Ax will loss the sit and be found liable for a judgment costing anywhere from P500,000 to P2,500,000. However, the lawyer states that the most probable cost is P1,000,000. As a result of the above facts, Ax should accrue: (a) a loss contingency of P500,000 and disclose a additional cortingency of up to P2,000,000. (b) a loss contingency of P1,000,000 and disciose as additional contingency of up to P1,500,000 (c) a loss contingency of P1,000,000 but not disclose any additional contingency. (d) no loss contingency but disclose a contingency of PS00,000 to P2,000,000.

Answer 58

(b) a loss contingency of P1,000,000 and disciose as additional contingency of up to P1,500,000

Question 59

42. Ever Company has consigned that mortgage ncte on the home of its president, guaranteeing the indebtedness in the event that the president should default. Ever considers the likelihood of default to be remote. How should the guarantee be treated Ever's financial statements? (a) disclosed only (c) accrued and disclosed (b) accrued anly (d) neither accrued and disclosed

Answer 59

(a) disclosed only

Question 60

43. The likelihood that the future event will or will nor occur can be expressed by a range of outcomes. Which range means that the future event occurring is very slight? (a) probable (c) certain (b) reasonably possible (d) remote

Answer 60

(d) remote

Question 61

44.Gain contingency is USually recognized when: (a) realized. (b) occurrence is reasonably possible and the amount is reasonably estimable. (c) occurrence is probable and the amount is reasonably estimable. (d) the amount is reasonably estimable.

Answer 61

(a) realized.

Question 62

45. Which of the following is the proper accounting treatment of a gain contingency? (a) an accrued account. (b) deferred earning (c)an account receivable with an additional disclosure explaining the nature of the transaction. (d) a disclosure only.

Answer 62

(d) a disclosure only.

Question 63

46. When the occurrence of a gain contingency is probable and its amount can be reasonably estimated, the gain contingency should be: (a) recognized in the income statement and disclosed, (b) classified as an appropriation of retained earnings. (c) disclosed, but not recognized in the income statement (d) neither recognized in the income statement nor disclosed.

Answer 63

(c) disclosed, but not recognized in the income statement

Question 64

47. The Great Company operated a plant in a foreign country. It is probable that the plant will be expropriated. However, the foregn governi has indicated that Great will receive a definite amour or cope aino amount of the plant. The contingency sauce provides a definite amount of compensation for the plant. The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant. The contingency should be reported: (a) as a valuation allowance as a part of stockholders equity. (b) as a fixed asset valuation allowance account. (c) in the notes to the financial statements. (d) in the income statement.

Answer 64

(c) in the notes to the financial statements.

Question 65

48. On December 31, 2002, Cream Company was suing a competitor for patent infringement. The award from the probable favorable outcome could be reasonably estimated. Crearm's 2002 financial statements should report the expected award as a (a) receivable and revenue. (c)receivable and deferred revenue (b) receivable and reduction of patent (d) disclosure only

Answer 65

(d) disclosure only

Question 66

49. Neutrality is an ingredient of: (a) relevance (c)understandability (b) reliability (d) comparability

Answer 66

(b) reliability

Question 67

50. Which of the following relates to both relevance and reliability? (a) comparability (c)verifiability (b) feedback value (d) timeliness

Answer 67

(a) comparability

Question 68

51. Under the ASC framework, the qualitative characteristics are: (a) understandability, relevance, reliability and comparability (b) accrual and going concern (c) timelines, cost and benefit and materiality (d) entity, proprietary, residual equity and fund theory

Answer 68

(a) understandability, relevance, reliability and comparability

Question 69

52. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers the same measurement methods is (a) relevance (c)verifiability (b) reliability (d) neutrality

Answer 69

(c)verifiability

Question 70

53. Which of the following are considered pervasive constraints? (a) materiality and conservatism (c) conservatism and timeliness (b) timeliness and predictive value (d) cost-benefit and maternity

Answer 70

(d) cost-benefit and maternity