1.

The overall objective of financial reporting is to provide information

a. That is useful for decision making.
b. About assets, liabilities and equity of an entity.
c. About financial performance during a period
d. That allows owners to assess management performance.
2. Which is an objective of financial reporting?
a. To provide information that is useful in making investing and credit decisions.
b. To provide information that is useful to management.
c. To provide information about the potential users investing in the entity
d. To provide information about ways to solve internal and external conflicts about the
entity.
3. What is a major objective of financial reporting?
a. To provide information that is useful to management in making decisions
b. To provide information that clearly portrays nonfinancial transactions
c. To provide information that is useful to assess the amounts, timing, and uncertainty of
prospective cash receipts.
d. To provide information that excludes claims against the resources.
4. One objective of financial reporting is to provide
A. Information about the investors in the entity.
B. Information about the liquidation value of the resources held by the entity.
C. Information that is useful in assessing cash flow prospects.
D. Information that will attract new investors.
5. An objective of financial reporting is “assessing cash flow prospects” which is interpreted to
mean
a. Cash basis accounting is preferred over accrual basis accounting
b. Information about the financial effects of cash receipts and cash payments is generally
considered the best indicator of ability to generate favorable cash flows.
c. Over the long run, trends in revenue and expenses are generally more meaningful than
trends in cash receipts and disbursements.
d. All of the choices are correct regarding “assessing cash flow prospects”.
6. Which of the following best describes “financial performance”?
a. The revenue, expenses and net income or loss for a period
b. The assets, liabilities and equity
c. The total assets minus total liabilities.
d. The total cash inflows minus total cash outflows
7. In measuring financial performance, accrual accounting is used because
a. Cash flows are considered less important
b. It provides a better indication of ability to generate cash flows than cash basis
c. It recognizes revenue when cash is received and expenses when cash is paid
d. It is one of the implicit assumptions.
8. The most useful information to existing and potential investors, lenders and other creditors
in predicting future cash flow is
 a. Information about current cash flows
b. Current earning based on accrual accounting
c. Information regarding the accounting policies used by management.
d. Information regarding the results obtained by using a wide variety of accounting policies
9. The accrual basis of accounting is most useful for
a. Determining the amount of income tax liability
b. Predicting the short term financial performance
c. Predicting the long term financial performance
d. Determining the amount of dividends to be declared

PROBLEM 2-8 MULTIPLE CHOICE (AICPA ADAPTED)

1. The objectives of financial reporting are based on
a. The needs for conservation
b. Reporting on management stewardship
c. Generally accepted accounting principles
d. The needs of the users of the information
2. Which of the following is not a major objective of financial reporting?
a. Financial reporting shall provide information about entity resources, claims against those
resources and changes in them.
b. Financial reporting shall provide information useful in evaluating management
stewardship
c. Financial reporting shall provide information useful in investment, credit and similar
decision.
d. Financial reporting shall provide information useful in assessing cash flow prospects.
3. Which of the following is not an objective of financial reporting?
a. To provide information about an entity’s assets and claims against those assets
b. To provide information that is useful in assessing an entity’s resources and uses of cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about the liquidation value of an entity
4. The information provided by financial reporting pertains to
a. Individual business entities, rather than to industries or an economy as a whole or to
members of society as consumers.
b. Business industries, rather than to individual entities or an economy as a whole or to
members of society as consumers.
c. Individual business entities, industries and an economy as a whole, rather than to
members of society as consumers
d. An economy as a whole and to members of society as consumers, rather than to
individual entities or industries.
5. During a period when an entity is under the direction of a particular management, financial
reporting will directly provide information about
a. Both entity performance and management performance
 b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance

PROBLEM 2-9 (IAA)

For each situation, identify the underlying assumption involved.
1. The operations of a saving bank are being evaluated by the Bangko Sentral ng PIlipinas.
During the investigation, the BSP has determines that numerous loans made by the top
management were unwise and have seriously endangered the future of the saving bank.
2. The parent entity in Manila has a subsidiary in Japan. The financial statements of the
subsidiary are translated to pesos for consolidation with the financial statements of the
parent entity at year end.
3. A machinery was imported from USA at a certain cost five years ago. Because of inflation, the
machinery has now a current replacement cost which is very much higher than the historical
cost. Management would like to report the machinery at current replacement cost.
4. An entity has experiences in drastic reduction in revenue by reason a long dry spell in the
area where the entity grows its tobacco. The management decided to wait until next year
and present financial statements for a two year period rather than prepare now the
traditional twelve month financial statements.
5. A subsidiary was exhibiting poor financial performance for the current year. In an effort to
increase the subsidiary’s reported income, the parent entity purchased goods from the
subsidiary at twice the normal mark-up.