Theory of Accounts

Preweek Discussion

Introduction and Preface to PFRS and Conceptual Framework

1. What is the IASB?
a. Institutional Accounting Statement Board
b. International Accounting Standards Board
c. Institutional Audit Standards Board
d. International Audit Statement Board

2. What is the mission of the International Financial Reporting

Interpretations Committee (IFRIC)?
a. To reach a consensus when interpretations conflict with the IFRS
framework
b. To assist the IASB in establishing and improving standards of financial
accounting and reporting and provide timely guidance on financial reporting
issues by issuing interpretations
c. To develop and write IFRS standards
d. To oversee the submission of listed company financial statements and
review them for compliance with IFRS

3. What is the mission of the IASB?

a. To develop a single set of high-quality, understandable, and enforceable
global accounting standards that require high-quality, transparent, and
comparable information in financial statements and other financial reporting
b. To develop the audit profession throughout the world by working with
universities in the publishing of textbooks and exams
c. To bring together the key players and laws that determine how
accounting is done in all parts of the world
d. To serve as a sounding board for audit disputes that occur within
multinational corporations and to provide comparable information in financial
statements and other financial reporting

4. Which of the following statements is true?

a. The IFRS will be adopted by January 2006 by European Union listed
companies.
b. The IFRS will be adopted by January 2005 by European Union listed
companies.
c. The IFRS will be adopted by January 2007 by European Union listed
companies
d. The IFRS will be adopted by January 2004 by European Union listed
companies

5. How many people serve on the International Accounting Standards Board?

a. 10 b. 12 c. 14 d. 15

6. What are the qualitative characteristics of the IFRS financial statements?

a. Uniqueness, relevance, responsibility, and comparability
b. Understandability, relevance, responsibility, and cooperation
c. Democratic principles, relevance, reliability, and cooperation
d. Understandability, relevance, reliability, and comparability

7. Which of the following statements is/are true about Equity?

I. Equity is defined as the difference between assets and liabilities
II. Increases and decreases in equity (other than from transactions with
owners of the enterprise) represent income and expenses.
a. I only b. II only c. Both I and II d. Neither I nor II

8. Which of the following measurement approaches are required by the IASB

framework in the preparation of the financial statements?
I. Historical cost
II. Current cost
III. Realizable (settlement) value
IV. Present value
a. I and IV only b. I, II, III and IVc. I, II and III d. None of the
above

9. An increase in economic benefits during the accounting period in the form

of inflows or enhancements of assets, or decreases of liabilities, that result in
increases in equity
a. Income b. Expense c. Assets d. Equity

10. A decrease in economic benefits during the accounting period in the form
of outflows or depletions of assets, or the incurring of liabilities that result in
decreases in equity, other than those relating to distributions to equity
participants
a. Income b. Expense c. Assets d. Equity

11. The reliability of accounting information depends on the following

except:
a. The information must be complete within the bounds of materiality and
cost.
b. The financial statements must be free from bias, meaning the financial
information should not favor one party to the detriment of another party.
c. The information should reflect the legal form of the transactions rather
than their economic substance.
d. Prudence is the inclusion of a degree of caution in the exercise of
judgment needed in making an estimate required under conditions of
uncertainty, such that assets or income are not overstated and liabilities or
expenses are not understated.

12. The ASC framework (Choose the incorrect one)

a. Sets out the concepts that underlie the preparation and presentation of
financial statements for external users.
b. Is not a Statement of Financial Accounting Standards and hence does not
define standards for any particular measurement or disclosure issue.
c. Is concerned with special purpose reports, for example, prospectuses and
computations prepared for taxation purposes.
d. Applies to the financial statements of all commercial, industrial and
business reporting enterprises, whether in the public or private sector.

13. The IASC Framework for the Preparation and Presentation of Financial
Statements, now reaffirmed by the IASB and renamed the IASB Framework,
serves to guide the IASB in:
I. developing accounting standards
II. resolving accounting issues not addressed in IAS
III. preparing auditing standards
a. II and III b. I and II c. I and III d. I only

14. As part of the restructuring of the IASC into the IASB in 2001, the
Standing Interpretations Committee (SIC) was replaced with the:
a. Urgent Issues Group (UIG);
b. Sarbanes-Oxley Committee (SOC);
c. International Financial Reporting Interpretations Committee (IFRIC);
d. Standards Advisory Council.

15. The international accounting standards are:

a. rules based rather than principles based; c. based on regulations not
concepts;
b. principles based rather than rules based; d. focussed on quantitative
rules

16. The name that is now used for standards issued by the International
Accounting Standards Board is:
a. International Accounting Standards (IAS);
b. International Generally Accepted Accounting Principles (IGAAP);
c. International Financial Accounting Interpretations (IFAI);
d. International Financial Reporting Standards (IFRS).

17. The responsibilities of the International Financial Reporting

Interpretations Committee include:
I. Report to the IASB and obtain its approval for final interpretations.
II. Interpret the application of IFRS.
III. Provide timely guidance on financial reporting issues not addressed in
IFRS or IAS.
IV. Publish draft interpretations for public comment.
V. Consider comments made on interpretations before finalising an
interpretation.
a. I, II, III, IV and V; c. II, III, and IV only;
b. I, II and III only; d. III, IV and V only.

18. A document that contains disclosures including financial statements, that

is issued to potential investors, by companies seeking capital, is known as a:
a. securities statement;b. company constitution; c. trust deed; d.
prospectus.

19. Foreign registered companies in the United States can submit to the
Securities and Exchange Commission, financial statements prepared using
their national GAAP provided they also submit:
a. a reconciliation to US GAAP;
b. a reconciliation to IFRS;
c. a full set of financial statements conforming to US GAAP;
d. a full set of financial statements conforming the US Stock Exchange listing
requirements.

20. The Public Company Accounting Oversight Board has as its mission the
protection of investors in US securities markets and the furtherance of the
public interest by ensuring that public company financial statements are
audited according to the highest standards of quality, independence and
ethics. This Board was created under the:
a. Income Tax Assessment Act; b. Sarbanes-Oxley Act; c. Corporations
Act 2001; d. IASB Framework.

21. Under IFRS 2 Share-based Payment, the method that must be used to
measure employee stock options and other payments given to employees in
the form of equity securities, is:
a. initial cost; b. discounted cash flows; c. fair value; d. selling
price.
22. A company is regarded as a first-time adopter of International Financial
Reporting Standards if, for the first time, it makes an explicit and unreserved
statement that:
a. its general purpose financial statements comply with IFRS;
b. it has prepared its financial statements using national GAAP;
c. it has selected accounting policies that are based on IFRS in force prior to
31 December 2005;
d. it will prospectively adjust its comparative financial statements by
applying IFRS in force at 1 January 2006.

23. International Financial Reporting Standards are applicable to the

following entities:
a. not-for-profit entities; c. government business enterprises;
b. government activities; d. public sector non-profit organisations.

24. The standards of the International Auditing and Assurance Standards

Board include international standards on:
I. Quality control. II. Auditing. III. Review Engagements. IV.
Assurance Engagements.
a. I, II and III only; b. II, II and IV only; c. I, III and IV only; d. II,
II, III and IV.

25. The measurement basis most commonly adopted by enterprises in

recording its assets is
a. The amount of cash or cash equivalents that would have to be paid if the
same or an equivalent asset was acquired currently.
b. The amount of cash and cash equivalents that could currently be obtained
by selling the asset in an orderly disposal.
c. The amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of their acquisition.
d. The present discounted value of the future net cash inflows that the item
is expected to generate in the normal course of business.

26. Which statement is incorrect concerning the ASC framework?

a. Nothing in the framework overrides any specific Statement of Financial
Accounting Standards.
b. The framework deals with the objectives of the financial statements, the
qualitative characteristics that determine the usefulness of the information in
financial statements, the definition, recognition and measurement of the
elements of the financial statements and concepts of capital maintenance.
c. The framework sets out the concepts that underlie the preparation and
presentation of financial statements for internal and external users.
d. The framework is concerned with general purpose financial statements
including consolidated financial statements.

27. Solvency is defined as;

a. Ability of the enterprise to meet obligations over a longer term
b. Invested capital of an enterprise
c. Ability of the enterprise to pay currently maturing obligations
d. Barrowed capital of the enterprise

28. It is a decrease in economic benefit during the accounting period in the

form of outflow or decrease of assets or increase of liability that results in
decrease in equity other than distribution to equity participants.
a. Income b. Expense c. Net income d. Gain
29. Accounting constraints are factors that affect the balance between the
qualitative characteristics of
a. Understandability and comparability c. Reliability and
understandability
b. Relevance and comparability d. Reliability and relevance

30. An application of the matching principle where there is no direct or clear

association of the expense with the revenue earning process and therefore
costs are simply allocated over the periods benefited.
a. Cause an effect association c. Immediate recognition
b. Systematic and rational allocation d. Depreciation and
amortization

31. The following refer to the accounting assumptions. Which is false

regarding the postulates?
a. Financial statements are normally prepared on the assumption that the
enterprise will continue in operation for the foreseeable future.
b. Income should be recognized when earned regardless of when received
and expense is recognized when incurred regardless of when paid.
c. The business enterprise is an accounting entity, separate from owners,
managers and employees.
d. The purchasing power of the peso is a vital tool in measuring enterprise
performance and therefore elements of the financial statements must be
adjusted for such changes.

32. An essential quality of the information provided in the financial

statements is that it is readily understandable by users. For this purpose
I.The information should be presented in a form and expressed in
terminology that users understand.
II.Users are assumed to have a reasonable knowledge of business and
economic activities and accounting and a willingness to study the
information with reasonable diligence.
a. I only b. II only c. Both I and II d. Neither I nor II

33. What is the authoritative status of the Framework?

a. The framework has the highest level of authority.
b. In the absence of Standard or an Interpretation that specifically applies to
a transaction, the framework should be followed.
c. In the absence of Standard or an Interpretation that specifically applies to
a transaction, management should consider the applicability of the
Framework in developing and applying an accounting policy that results in
information that is relevant and reliable.
d. The Framework applies only when the FRSC develops new or revised
standards
34. When should an item that meets the definition of an element be
recognized, according to the Framework?
a. When it is probable that any future economic benefit associated with the
item will flow to or from the entity.
b. When the element has a cost or value that can be measured with
reliability.
c. When the entity obtains control of the rights or obligations associated with
the item.
d. When it is probable that any future economic benefit associated with the
item will flow to or from the entity and the item has a cost or value that can
be measured with reliability.
35. The following statements relates to materiality, which of the following
statements is incorrect?
a. The relevance of information is affected by its nature and materiality.
b. In some cases, the nature of information alone is sufficient to determine
its relevance
c. Materiality provides a threshold or cut-off point that is why it is considered
as a primary qualitative characteristic
d. Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements.

36. Under this concept of capital maintenance profit is earned only if the
financial (or money) amount of the net assets at the end of the period
exceeds the financial (or money) amount of net assets at the beginning of
the period, after excluding any distribution to, and contributions from,
owners during the period
a. Financial capital b. Money capital c. Physical capital d. Operating
capital

37. Under this concept of capital maintenance profit is earned only if the
physical productive capacity (operating capability) of the entity (or the
resources or funds needed to achieve that capacity) at the end of the period
exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to and contributions from, owners during the
period.
a. Financial capital b. Money capital c. Physical capital d. Operating
capital

38. The physical capital maintenance concept requires the adoption of what
measurement basis
a. historical cost b. current cost c. discounted value d.
replacement cost

39. What is the primary difference in the treatment between the two
concepts of capital maintenance?
a. the treatment of the effects of changes in the prices of assets and
liabilities of the entity
b. the treatment of the effects of changes in the prices of expense and
revenue of the entity
c. the treatment of the effects of changes in foreign exchange rates
d. the treatment of the effect of changes in foreign subsidiary

40. The financial capital maintenance concept requires the adoption of what
measurement basis
a. historical cost b. current cost c. discounted value d.
none

41. The measurement basis most commonly adopted by entities in preparing

their financial statements is
a. historical cost b. current cost c. discounted value d.
replacement cost

42. Is the process of determining the monetary amounts at which the

elements of financial statements are to be recognized and carried in the
balance sheet and income statement
a. Recognition b. Measurement c. Classifying d. Valuation
43. According the Framework which of the following types of expense is not
recognized in the income statement on systematic and rational allocation
procedures?
a. Property plant and equipment b. Goodwill c. Patents d. Product
Warranty

44. It is the process of incorporating in the balance sheet or income

statement an item that meets the definition of an element of financial
statements
a. Recognition b. Measurement c. Classifying d. Valuation

45. An asset is recognized in the balance sheet when

I. It is probable that future economic benefits will flow to the entity
II. The asset has a cost or value that can be measured reliably
a. I only b. II only c. Either I or II d. Both I and II

46. A liability is recognized in the balance sheet when

I. it is probable that an outflow of resources embodying economic benefits
will result from the settlement of a present obligation
II. the amount at which the settlement will take place can be measured
reliably
a. I only b. II only c. Neither I or II d. Both I and II

47. Which statement is correct concerning the recognition of income and

expense?
I. Income is recognized when an increase in future economic benefit related
to an increase in an asset or a decrease in liability has arisen that can be
measured reliably
II. Expense is recognized when a decrease in future economic benefit related
to a decrease in an asset or an increase in liability has arisen that can be
measured reliably
a. I only b. II only c. Neither I or II d. Both I and II

48. Expense are recognized in the income statement on the basis of a direct
association between the costs incurred and the earning of specific items of
income. This process is commonly referred to as
a. Associating effect and cause c. matching of costs with revenues
b. Systematic and rational allocation d. immediate recognition

49. An expense is recognized immediately in the income statement

I. When an expenditure produces no future economic benefits
II. When future economic benefits do not qualify, or cease to qualify, for
recognition in the balance sheet as an asset
a. I only b. II only c. Neither I or II d. Both I and II

50. Which of the following statements is incorrect about capital maintenance

adjustments
a. The revaluation or restatement of assets and liabilities gives rise to
increases or decreases equity
b. While increases or decreases meet the definition of income and expenses,
they are included in the income statement under certain concepts of capital
maintenance
c. Instead these items are included in the equity as capital maintenance
adjustments or revaluation reserves
d. This concept of capital maintenance are financial and physical capital
51. Which of the following statements is/are incorrect about income?
I. The definition of income encompasses both revenue and gains
II. Revenue arises in the course of the ordinary activities of an entity and
referred to by a variety of different names including sales, fees, interest,
dividends, royalties and rent
III. Gains represent other items that meet the definition of income and arise
only in the course of the ordinary activities of an entity
IV. Gains represent increases in economic benefits and as such are different
in nature from revenue.
a. I and II only b. I, II and III only c. I, II, III and IV d. II, III
and IV

52. The following statements refer to equity which is incorrect?

a. Although equity is defined as a residual, it may be sub-classified in the
balance sheet
b. The creation of reserves is sometimes required by statute or other laws in
order to give the entity and its creditors an added measure of protection
from the effects of losses
c. The existence and size of legal, statutory and tax reserves is information
that can be relevant to the decision-making needs of users, transfer from
reserves are expense rather than appropriation of retained earnings
d. The amount at which equity is shown in the balance sheet is dependent
on the measurement of assets and liabilities

53. It is the duty or responsibility to act or perform in a certain way

a. Liability b. Obligations c. Settlement d. Economic
consequence

54. The following statements refer to liabilities which is incorrect?

a. An essential characteristic of a liability is that the entity has a present
obligation
b. If an entity decides as a matter of policy to rectify faults in its products
even when these become apparent after the warranty period has expired,
the amounts that are expected to be expended in respect of goods already
sold are not liabilities.
c. A distinction needs to be drawn between a present obligation and a future
commitment
d. A decision by the management of an entity to acquire assets in the future
does not, of itself, give rise to a present obligation.

55. An obligation normally arises only when

a. the asset is delivered or the entity enters into an irrevocable agreement
to acquire the asset.
b. the asset is delivered or the entity enters into a revocable agreement to
acquire the asset
c. the asset is ready for delivery and the entity enters into an irrevocable
agreement to acquire the asset
d. the asset is delivered and the entity enters into an irrevocable agreement
to acquire the asset

56. The settlement of a present obligation usually involves the entity giving
up resources embodying economic benefits in order to satisfy the claim of
the other party. Settlement of a present obligation may occur in which of
the following ways
I. Payment of cash
II. Transfer of other assets
III. Provision of services
IV. Replacement of that obligation with another obligation
V. conversion of the obligation to equity
VI. creditor waiving or forfeiting its rights
a. I, II, IV, V and VI b. I, II, III, IV, V and VI c. I, II, V and VI
d. I, II, III and IV

57. The following statements refer to Asset which is incorrect?

a. The future economic benefit embodied in an asset is the potential to
contribute directly or indirectly, to the flow of cash and cash equivalents to
the entity
b. An entity usually employs its assets to produce goods or services capable
of satisfying the wants and needs of customers; because these goods or
services can satisfy these wants or needs, customers are prepared to pay for
them and hence contribute to the cash flow of the entity.
c. Cash itself cannot render a service to the entity because it cannot
command over the other resources
d. In determining the existence of an asset, the right of ownership is not
essential; thus, for example, property held on a lease is an asset if the entity
controls the benefits which are expected to flow from the property
58. The future economic benefits embodied in an asset may flow to the
entity in a number of ways, this includes which of the following
I. Used singly or in combination with other assets in the production of goods
or services to be sold by the entity
II. exchanged for other assets
III. used to settle a liability
IV. distributed to the owners of the entity
a. I only b. I and II only c. I, II, and IV only d. I, II, III and IV

59. Which of the following statements about Financial position is incorrect?

a. The definition of an asset and a liability identify their essential features
but do not attempt to specify the criteria that need to be met before they
are recognized in the balance sheet
b. The expectation that future economic benefits will flow to or from an
entity must be sufficiently certain to meet the probability criterion before an
asset or liability is recognized
c. In assessing whether an item meets the definition of an asset, liability or
equity, attention needs to be given to its underlying substance and economic
reality and not merely its legal form
d. Balance sheets drawn up in accordance with current International
Accounting Standards should not include items that do not satisfy the
definition of an asset or liability and are not shown as part of equity.

60. It is a resources controlled by the entity as a result of past events and

from which future economic benefits are expected to flow to the entity
a. assets b. liability c. Equity d. Revenue

61. Information about the sources and uses of an enterprise’s cash and cash
equivalents is provided in the:
a. income statement; c. cash flow statement;
b. statement of changes in equity; d. balance sheet.

62. The IASB Framework outlines two underlying assumptions of financial

statements. These are:
Assumption 1 Assumption 2
a. Accrual basis of accounting Going concern assumption;
b. Cash basis of accounting Insolvency assumption;
c. Historical cost accounting Limited life concept;
d. Fair value basis of measurement Perpetual life concept.

63. If financial information that is presented in a balance sheet or income

statement is misstated, and it influences the economic decisions of users,
that information is described as:
a. reliable; b. material;c. prudent; d. faithful.

64. The IASB Framework identifies four principal qualitative characteristics

that make the information in financial statements useful to investors,
creditors and others. These characteristics are:
I. Comparability.
II.Relevance.
III. Subjectivity.
IV. Confidentiality.
V. Understandability.
VI. Reliability.
a. I, II, III and IV; b. II, IV, V and IV. c. I, III, IV and VI; d. I,
II, V, and VI.

65. In respect to information included in financial statements, the accounting

concept of ‘prudence’ ensures that:
a. the financial statements report what they purport to report;
b. a degree of caution in the exercise of judgements about estimates is
made:
c. an appropriate balance is achieved between the relevance and the
reliability of information that has been included;
d. information is provided to users within the time period in which it is most
likely to bear on their decisions.

66. An item cannot be recognised in the balance sheet or the income

statement unless it meets the two criteria of:
Criterion 1 Criterion 2
a. Materiality Relevance to the users;
b. Completeness Measurement reliability;
c. Neutrality Representational faithfulness;
d. Probable economic benefits Measurement reliability.

67. The following statement: ‘decreases in economic benefits during the

accounting period in the form of outflows or depletions of assets, or the
incurrence of liabilities that result in decreases in equity other than those
relating to distributions to equity participants’ provides a definition of:
a. expenses; b. liabilities; c. assets; d. income.

68. The following definition ‘increases in economic benefits during the

accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants’ is a formal statement of
the meaning of:
a. assets; b. liabilities; c. income; d. expense.

69. This qualitative characteristics users are assumed to have a reasonable

knowledge of business and economic activities
and accounting and a willingness to study the information with reasonable
diligence
a. Relevance b. Understandability c. Reliability d. Comparability

70. “An omission can cause information to be false or misleading and thus
unreliable and deficient in terms of its
relevance” this statement relates to what qualitative characteristic?
a. Relevance b. Prudencec. Reliability d. Completeness

71. Which statement is correct concerning the two concepts of capital?

I. Under a financial capital concept, such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity
of the enterprise.
II. Under a physical capital concept, such as operating capability, capital
is regarded as the productive capacity of the enterprise.
a. Both I and II b. Neither I nor II c. I only d. II
only

72. A decrease in net assets arising from peripheral or incidental

transactions is called a (n)
a. Capital expenditure b. Cost c. Loss d. Expense

73. What accounting concept justifies the usage of accruals and deferrals?
a. Going concern assumption c. Consistency characteristics
b. Materiality constraint d. Monetary unit assumption

74. Proponents of historical cost ordinarily maintain that in comparison with

all other valuation alternatives for general purpose financial reporting,
statements prepared using historical costs are more
a. Reliable b. Relevant c. Indicative of the entity’s purchasing power d.
Conservative

75. Which of the following best illustrates the accounting concept of

conservatism?
a. Use of the allowance to recognize bad debt losses from credit sales
b. Use of the LCNRV approach in valuing inventories
c. Use of the same accounting method from one period to the next in
computing depreciation expense
d. Utilization of a policy of deliberate understatement of asset values in
order to present a conservative net income figure.

76. The amortization of intangible assets over their useful lives is justified by
the
a. Economic entity assumption c. Monetary unit assumption
b. Going concern assumption d. Historical cost assumption

77. Which one of the following is not an element of the financial

information’s reliability characteristic?
a. Substance over form b. Faitful representation c.
Comparability d. Prudence

78. Which of the following is an internal user of a company’s financial

information?
a. Board of Directors
b. Shareholders in the company
c. Holders of the company’s bonds
d. Creditors with long-term contracts with the company

79. The International Accounting Standards Board was formed to

a. Enforce international accounting standards in foreign countries
b. Develop worldwide accounting standards
c. Establish accounting standards for multinational companies
d. Develop accounting standards for countries that do not their own
standard-setting bodies

80. Which of the following is not an implication of the going-concern

assumption?
a. The historical cost principle is credible
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current/noncurrent classification of assets and liabilities is justifiable
and significant.
d. Amortizing research and development costs over multiple periods is
justifiable and appropriate.

81. The primary measurement basis currently used to value assets in

external financial statements of an entity is
a. The current market price if the assets currently held by an entity were
sold on the open market.
b. The current market price if the assets held by an entity were purchased
on the open market
c. The present value of the cash flows the assets are expected to generate
over their remaining useful lives.
d. The market price of the assets held by an entity at the date the assets
were acquired.

82. Which of the following is an item that is reportable in the financial record
s of an entity?
a. The value of goodwill earned through business operations
b. The value of human resources
c. Changes in personnel
d. Change in inventory costing method.

83. Total net income over the life of an entity is

a. Higher under the cash basis than under the accrual basis
b. Lower under the cash basis than under the accrual basis
c. The same under the cash basis as under the accrual basis
d. Not susceptible to measurement

84. What is the authoritative status of the Framework?

a. It has the highest level of authority. In case of conflict between the
Framework and a
Standard or Interpretation, the Framework overrides the Standard or
Interpretation
b. If there is a Standard or Interpretation that specifically applies to a
transaction, it overrides the Framework. In the absence of a standard or an
Interpretation that specifically applies, the Framework should be followed
c. If there is a Standard or Interpretation that specifically applies to a
transaction, it overrides the framework. In the absence of a Standard or an
Interpretation that specifically applies to a transaction, management should
consider the applicability of the Framework in developing and applying an
accounting policy that results in information that is relevant and reliable
d. The Framework applies only when IASB develops new or revised
Standards. An entity is never required to consider the Framework

85. What is the objective of financial statements according to the

Framework?
a. To provide information about the financial position, performance and
changes in financial position of an entity that is useful to wide range of users
in making economic decisions
b. To prepare and present a balance sheet, an income statement, a cash
flow statement, and a statement of changes in equity
c. To prepare and present comparable, relevant, reliable, and
understandable information to investors and creditors.
d. To prepare financial statements in accordance with all applicable
Standards and Interpretations.

86. Which of the following are underlying assumptions of financial

statements
a. Relevance and reliability
b. Financial capital maintenance and physical capital maintenance
c. Accrual and going concern
d. Prudence and conservatism

87. Which of the following is not a qualitative characteristics of financial

statements according to the framework?
a. Materiality b. Understandability c. Comparability d.
Relevance

88. What are qualitative characteristics of financial statements according to

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

89. When should an item that meets the definition of an element be

recognized, according to the framework?
a. When it is probable that any future economic benefits associated with the
item will flow to or from the entity
b. When the element has a cost of value that can be measured with
reliability
c. When the entity obtains control of the rights or obligations associated with
the item
d. When it is probable that any future economic benefits associated with the
item will flow to or from the entity and the item has a cost or value that can
be measured with reliability.

90. Recording the purchase price of a chalkboard eraser (with an estimated

useful life of 10 years) as an expense of the current period is justified by the
a. Going-concern assumption c. Materiality constraint
b. Matching principle d. Comparability principle

91. The physical capital maintenance concept is consistent with

a. Historical cost/nominal peso and historical cost/constant peso
b. Historical cost/nominal peso and current cost/constant peso
c. Current cost/nominal peso and historical cost/constant peso
d. Current cost/nominal peso and current cost/constant peso

92. Critical thinking is most important for decision-makers in which of the

following problem-solving steps?
a. Recognizing the problem c. evaluating the alternatives
b. Identifying the alternative solutions d. selecting a solution from
among the alternatives

93. Republic Act 9298 is otherwise known as

a. Revised Accountancy Law c. Revised Accountancy Act
b. Philippine Accountancy Act of 2004 d. Code of Professional Ethics for
CPAs

94. A company issues financial statements in which there is an assumed

conversion of warrants and options into commons stock. Morever, there is
an assumed repayment of debt relating to the assumed conversion. This
scenario is most closely associated with which of the following
a. Computation of contingent liability disclosure
b. Computation of diluted earnings per share
c. Extraordinary items and cumulative effect changes
d. Retroactive-effect changes and common stock

95. The Financial Reporting Standards Council (FRSC) has

a. 14 members b. 15 members c. 16 members d. 8
members

96. The FRSC issues its Standards in a series of pronouncement called PFRS.
These consists of
a. PFRS b. PASs c. Philippine Interpretation d. all of
these

97. The FRSC member from SEC is nominated by the Commissioner of SEC
and should be an Associate Commissioner, the FRSC member from the
Central bank is nominated by the Governor of the Central Bank and should
be a deputy governor

Each of the council members shall serve without compensation for a term of
three years, which can be renewed
a. True; True b. True; False c. False; True d. False; False

98. Which of the following government agency represented in FRSC but not
in ASC?
a. Bangko Sentral ng Pilipinas c. Bureau of Internal
Revenue
b. Securities and Exchange Commission d. Board of Accountancy

99. The period of exposing the draft of a proposed PFRS will be at least sixty
(60days), unless a shorter period is considered appropriate: by the FRSC.
The shorter period should be
a. not less than 30 days c. less than 30 days
b. 30 days no more less d. more than 30 days but not
exceed 59 days
100. Once the FRSC has established/adopted an accounting standard
a. the standard is continually reviewed to see if modification on is necessary
b. the standard is not reviewed unless the SEC makes a complaint
c. the task of reviewing the standard to see if modification is necessary is
given to the PICPA
d. the principle of consistency requires that no revisions ever be made to the
standards

101. Generally accepted accounting principles

a. Are accounting adaptations based on the laws of economic science
b. Derive their credibility and authority from legal rulings and court
precedents
c. Derive their credibility and authority from the national government
through the financial reporting section of the SEC
d. Derive their credibility and authority from general recognition and
acceptance by the accounting profession

102. Which of the following is not regarded as constituting a separate

element in the FRSC Framework?
a. Income b. Expense c. Gain d. Equity

103. In classifying the elements of financial statements the primary

distinction between revenues and gains is
a. the materiality of the amounts involved
b. The likelihood that the transactions involved will recur in the future
c. The nature of the activities that gave rise to the transactions involved
d. The costs versus the benefits of the alternative methods of disclosing the
transactions involved.

104. A decrease in net assets arising from peripheral or incidental

transactions is called a (n)
a. Capital expenditure b. Cost c. Loss d. Expense

END

ANSWER KEY:
FRAMEWORK
1. B
2. B. IFRIC assists the IASB in establishing and improving standards of
financial accounting and reporting and providing timely guidance on
newly identified financial reporting issues not specifically addressed in
the IFRSs
3. A. By developing a single set of high-quality, understandable, and
enforceable global accounting standards that require high-quality,
transparent, and comparable information in financial statements and
other financial reporting, the IASB intends to help participants in the
world’s capital markets and other users make sound economic
decisions
4. B. The European Union requires that all European Union listed
companies prepare their consolidated financial statements for financial
years starting on or after 1 January 2005, in accordance with IFRS.
5. C. The IASB has 14 board members, each with one vote. The IASB is
selected, overseen, and funded by the International Accounting
Standards Committee (IASC) Foundation.
6. D. Information provided in financial statements should be readily
understandable by users, as well as relevant to the decision-making
needs of users. Users must find the information reliable and be able to
compare the financial statements of an enterprise through time in
order to identify trends in its financial position and performance.
7. D. Both statements are true. In the whole approach to accounting that
has been adopted by the IFRS, these elements of financial statements
are interrelated. Thus, equity is defined as the difference between
assets and liabilities, and increases and decreases in equity (other
than from transactions with owners of the entity) represent income
and expenses. The significance of this is that all the definitions rely
on the definitions of assets and liabilities, which means that the
conceptual foundation of accounts under IFRS is the balance sheet.
The income statement is left to explain and analyze the difference
between the opening and closing balance sheet, because the key
requirement is an accurate statement of assets and liabilities. See
Framework paragraphs 49(c) and 70.
8. D. The IASB Framework gives these examples of measurement bases
and briefly discusses their relative merits, but it does not require any
particular approach. It merely notes that “the measurement basis
most commonly adopted by entities in preparing their financial
statements is historical cost. This is usually combined with other
measurement bases
9. A
10. B
11. C Information has the quality of reliability when it is free from
material error and bias and can be depended upon by users to
represent faithfully that which it either purports to represent or could
reasonably be expected to represent. (Framework P. 31) B.
Information may be relevant but so unreliable in nature or
representation that its recognition may be potentially misleading.
Example, if the validity and amount of a claim for damages under a
legal action are disputed, it may be inappropriate for the entity to
recognize the full amount of the claim in the balance sheet, although it
may be appropriate to disclose the amount and circumstances of the
claim (Framework P.32)
To be reliable, information must represent faithfully the transactions
and other events if either purports to represent or could reasonably be
expected to represent. Thus, for example, a balance sheet should
represent faithfully the transactions and other events that result in
assets, liabilities and equity of the entity at the reporting date which
meet the recognition criteria. (Framework P.33)
If information is to represent faithfully the transactions and other
events that it purports to represent, it is necessary that they are
accounted for and presented in accordance with their substance and
economic reality and not merely their legal form. (Framework P. 35) C
Prudence is the inclusion of a degree of caution in the exercise of the
judgment needed in making the estimates required under conditions of
uncertainty, such that assets or income are not overstated and
liabilities or expense are not understated, However, the exercise of
prudence does not allow, for example, the creation of hidden reserves
or excessive provision, the deliberate understatement of assets or
income, or the deliberate overstatement of liabilities or expense,
 because the financial statements would not be neutral and therefore
not have the quality of reliability (Framework p.37) D
To be reliable, the information in financial statements must be
complete within the bounds of materiality and cost, (Framework p. 38)
A
To be reliable the information must have the quality of Faithful
representation, Neutral, Prudence and Completeness, to represent
faithfully the transactions it is necessary that they are accounted for
and presented in accordance with there substance and economic
reality and not merely their legal form.

12. C Framework p.1 states that framework sets out the concepts
that underlie the preparation and presentation of financial statements
for external users. The purpose of the framework is to:
a. assist the Board of IASC in the development of future International
Accounting Standards and in its review of existing International
Accounting Standards;
b. assist the Board of IASC in promoting harmonization of regulations,
accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by International
Accounting Standards;
c. assist national standard-setting bodies in developing national
standards
d. assist preparers of financial statements in applying International
Accounting Standards and in dealing with topics that have yet to form
the subject of an International Accounting Standards
e. assist auditors in forming an opinion as to whether financial
statements conform with International accounting standards
f. assist users of financial statements in interpreting the information
contained in financial statements prepared in conformity with
International Accounting Standards board.
Statement A is correct
Framework p.2 This Framework is not an International Accounting
Standard and hence does not define standards for any particular
measurement or disclosure issue. Nothing in this Framework overrides
any specific International Accounting Standard. Statement B is correct
Framework p. 6 The Framework is concerned with general purpose
financial statements (hereafter referred to as “financial statements”)
including consolidated financial statements. Statement C is incorrect
Framework p. 8 Framework applies to the financial statements of all
commercial, industrial and business reporting entities, whether in the
public or the private sectors. A reporting entity is an entity for which
there are users who rely on the financial statements as their major
source of financial information about the entity. Statement D is correct

13. B Framework P. 1 a
a. assist the Board of IASC in the development of future International
Accounting Standards and in its review of existing International
Accounting Standards;
PAS 8 p.10 In the absence of a Standard or an Interpretation that
specifically applies to a transaction other events

14. C

15. B
16. D

17. A

18. D

19. A

20. B

21. C

22. A

23. C

24. D

25. C IAS 1 p101. The measurement basis most commonly adopted

by entities in preparing their financial statements is historical cost.
P.100a. Historical cost. Assets are recorded at the amount of cash and
cash equivalents paid or the fair value of the consideration given to
acquire them at the time of their acquisition.

26. C choice A is Framework p2 When is said This framework is not

an International Accounting Standard and hence does not define
standards for any particular measurement or disclosure issue. Nothing
in this framework overrides any specific International Accounting
Standards. Choice B is Framework p.5 Scope Choice D is Framework
p.6 Framework p.1 for external users adding the word internal made
the statement false

27. A: Framework p.16 The financial position of an entity is affected

by the economic resources it controls, its financial structure, its
liquidity and solvency, and its capacity to adapt to changes in the
environment in which it operates. Information about the economic
resources controlled by the entity and its capacity in the past to modify
these resources is useful in predicting the ability of the entity to
generate cash and cash equivalents in the future. Information about
financial structure is useful in predicting future borrowing needs and
how future profits and cash flows will be distributed among those with
an interest in the entity; it is also useful in predicting how successful
the entity is likely to be in raising further finance. Information about
liquidity and solvency is useful in predicting the ability of the entity to
meet its financial commitments as they fall due. Liquidity refers to the
availability of cash in the near future after taking account of financial
commitments over this period. Solvency refers to the availability of
cash over a longer term to meet financial commitments as they fall
due.
28. B
29. D framework p. 43 to 46
30. B
31. D
32. B
33. C
34. D
35. C
36. A
37. C
38. B
39. A
40. D
41. A
42. B
43. D
44. A
45. D
46. D
47. D
48. C
49. D
50. B
51. A
52. C
53. B
54. B
55. A
56. B
57. C
58. D
59. D
60. A
61. C
62. A
63. B
64. D
65. B
66. D
67. A
68. C
69. B
70. D
71. A
72. C
73. A
74. A
75. B
76. B
77. C
78. A
79. B
80. D
81. D
82. D
83. C
84. C
85. A
86. C
87. A
88. A
89. D
90. C
91. D
92. C
93. B
94. B
95. B
96. D
97. A
98. C
99. A
100. A
101. D
102. C
103. C
104. C
end