826 R. Papa St.

Sampaloc, Manila
Philippine School of Business
Administration
CPA REVIEW

THEORY OF ACCOUNTS
HAND OUT NO. 05-31 MAY 2006

Conceptual Framework

TRUE/FALSE
1. The two groups identified as the principal users of external financial information are
investors and creditors.

2. External financial information is generally more highly summarized than the information
reported internally.
3. The purpose of the International Accounting Standards Board is to develop a uniform
currency in which the financial transactions of companies throughout the world
would be measured.
F
4. All significant post-balance sheet events are reported is an example of completeness.
F
5. All payments less than P25 are expensed as incurred is an example of prudence.
F
6. A switch from accelerated depreciation to straight-line depreciation is a violation of
consistency.

7. A machine, that cost P140,000, is reported at its current market value of P165,000 is a
violation of relevance.
F
8. Yearly financial reports is a sample of periodicity assumption.

9. _Business enterprise assumed to have a long life is a violation of conservatism.

F
10. Information that helps users confirm or correct prior expectations has feedback value

MULTIPLE CHOICE:

1. Users of financial reports include all of the following except

a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
D
2. The financial statements most frequently provided include all of the following
except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
D
3. The information provided by financial reporting pertains to
a. individual business enterprises, rather than to industries or an economy as a
whole or to members of society as consumers.

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 b. business industries, rather than to individual enterprises or an economy as a
whole or to members of society as consumers.
c. individual business enterprises, 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 enterprises or industries.
A
4. Whether a business is successful and thrives is determined by
a. markets.
b. free enterprise.
c. competition.
d. all of these.
D
5. An effective capital allocation process
a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. all of these.
D
6. Financial statements in the early 2000s provide information related to
a. non-financial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. none of these.
C
7. Which of the following statements is not an objective of financial reporting?
a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and
changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.
C
8. A common set of accounting standards and procedures are called
a. financial accounting standards.
b. generally accepted accounting principles.
c. objectives of financial reporting.
d. statements of financial accounting concepts.
B
9. The role of the Securities and Exchange Commission in the formulation of
accounting principles can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
C
10. The body that has the power to prescribe the accounting practices and standards to
be employed by companies that fall under its jurisdiction is the
a. ASC.
b. PICPA.
c. SEC.
d. BSP.

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11. The overall objective of financial reporting is to provide information
a. that is useful for decision making.
b. about an enterprise's assets, liabilities, and owners' equity.
c. about an enterprise's financial performance during a period.
d. that allows owners to assess management's performance.
A

12. Which of the following statements is not normally 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 sources and uses of
cash.
c. To provide information that is useful in lending and investing decisions.
d. To provide information about an entity's liquidation value.
D
13. Financial accounting is the area of accounting that emphasizes reporting to
a. management.
b. regulatory bodies.
c. internal auditors.
d. Creditors and investors.
D
14. Management accounting is the area of accounting that emphasizes
a. Reporting financial information to external users.
b. Reporting to the SEC.
c. combining accounting knowledge with an expertise in data processing.
d. developing accounting information for use within a company.
D
15. The responsibility to review the work of the accountants and issue opinions as to
the fairness of the financial statements rests with
a. the external auditor.
b. the board of directors.
c. the internal auditors.
d. management.
A
16. As independent (or external) auditors, CPAs are primarily responsible for
a. Preparing financial statements in conformity with GAAP.
b. certifying the accuracy of financial statements.
c. expressing an opinion as to the fairness of financial statements.
d. filing financial statements with the SEC.
C
17. Which of the following is an internal user of a company's financial information?
a. Board of directors.
b. Stockholders in the company.
c. Holders of the company's bonds.
d. Creditors with long-term contracts with the company.
A
18. Prior to 1973, generally accepted accounting principles were established
a. by the Accounting Standard Council.
b. by the Securities and Exchange Commission.
c. under the direction of the Philippine Institute of Certified Public Accountants.
d. by the individual practitioner.

19. The normal order followed by the ASC in publishing its standards is
a. statement, discussion memorandum, opinion.
b. discussion memorandum, interpretation, exposure draft, statement.
c. Exposure draft, discussion memorandum, statement.
d. discussion memorandum, exposure draft, statement.

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 D
20. Proper application of accounting principles is most dependent upon the
a. existence of specific guidelines.
b. oversight of regulatory bodies.
c. external audit function.
d. professional judgment of the accountant.
D
Accounting concepts—matching.
Listed below are several information characteristics and accounting principles and
assumptions. Match the letter of each with the appropriate phrase that states its
application. (Items a through k may be used more than once or not at all.)
a. Economic entity assumption g. Matching principle
b. Going concern assumption h. Full disclosure principle
c. Monetary unit assumption i. Relevance characteristic
d. Periodicity assumption j. Reliability characteristic
e. Historical cost principle k. Consistency characteristic
f. Revenue recognition principle
_____ 1. Stable-peso assumption (do not use historical cost principle).
_____ 2. Earning process completed and realized or realizable.
_____ 3. Presentation of error-free information with representational faithfulness.
_____ 4. Yearly financial reports.
5. Accruals and deferrals in adjusting and closing process. (Do not use
going concern.)
_____ 6. Useful standard measuring unit for business transactions.
_____ 7. Notes as part of necessary information to a fair presentation.
_____ 8. Affairs of the business distinguished from those of its owners.
_____ 9. Business enterprise assumed to have a long life.
_____ 10. Valuing assets at amounts originally paid for them.

ANSWER
1. c 4. d 7. h 10. e
2. f 5. g 8. a
3. j 6. c 9. b

MULTIPLE CHOICE - 2
1. Conservatism is best described as selecting an accounting alternative that
a. understates assets and/or net income.
b. has the least favorable impact on owners' equity.
c. overstates, as opposed to understates, liabilities.
d. is least likely to mislead users of financial information.

D 2. The financial statements that are prepared for the business are separate and
distinct from the owners according to the
a. going-concern principle.
b. Matching principle.
c. economic entity assumption.
d. full disclosure principle.
C
3 According to Conceptual Framework, neutrality is an ingredient of

Relevance Reliability
a. Yes Yes
b. Yes No
c. No No
d. No Yes

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 D
4. Under the Conceptual Framework 2, representational faithfulness is an ingredient
of
Relevance Reliability
a. Yes Yes
b. Yes No
c. No No
d. No Yes
D
5. According to the ASC's conceptual framework, predictive and feedback values are
ingredients of

Relevance Reliability
a. Yes No
b. Yes Yes
c. No Yes
d. No No
A
6. According to the ASC's conceptual framework, which of the following relates to
both relevance and reliability?

Consistency Verifiability
a. Yes Yes
b. Yes No
c. No Yes
d. No No
B
7. Which of the following statements concerning the objectives of financial
reporting is correct?
a. The objectives are intended to be specific in nature.
b. The objectives are directed primarily toward the needs of internal users of
accounting information.
c. The objectives were the end result of the ASC's conceptual framework project.
d. The objectives encompass not only financial statement disclosures, but other
information as well.
D
8. 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.
b. materiality constraint.
c. Matching principle.
d. comparability principle.
B
9. Which of the following is not one of the fundamental criteria for recognition?
a. Timeliness.
b. Measurability.
c. Relevance.
d. Reliability.
A
10. According to the ASC's conceptual framework, the process of reporting an item in
the financial statements of an entity is
a. realization.
b. recognition.
c. Matching.
d. allocation.

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11. Prudence is best described as selecting an accounting alternative that
a. understates assets and/or net income.
b. has the least favorable impact on owners' equity.
c. overstates, as opposed to understates, liabilities.
d. is least likely to mislead users of financial information.
B
12. The financial statements that are prepared for the business are separate and
distinct from the owners according to the
a. going-concern principle.
b. matching principle.
c. economic entity assumption.
d. full disclosure principle.
C
13. Which of the following elements of financial statements is not a component of
profit or loss?
a. Revenues.
b. Expenses.
c. Losses.
d. Distributions to owners.
D
14. An item would be considered material and therefore would be disclosed in the
financial statements if
a. the expected benefits of disclosure exceed the additional costs.
b. the impact on earnings is greater than 3 percent.
c. the IASB definition of materiality is met.
d. the amount is deemed large enough to make a difference to the users.
D
15. What accounting concept justifies the use of accruals and deferrals?
a. Going concern assumption.
b. Corporate form of organization.
c. Consistency characteristic.
d. Arm's-length transactions.
A
16. Which of the following is not a purpose of the conceptual framework of
accounting?
a. To provide definitions of key terms and fundamental concepts.
b. To provide specific guidelines for resolving situations not covered by existing
accounting standards.
c. To assist accountants and others in selecting among alternative accounting and
reporting methods.
d. To assist the ASC in the standard-setting process.
B
17. 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.
D
18. The overriding qualitative characteristic of accounting information is
a. relevance.
b. understandability.
c. reliability.
d. Decision usefulness.
D

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19. When financial reports from two different companies have been prepared and
presented in a similar manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. comparability.
d. consistency.
C
20. Accounting for inventories by applying the lower-of-cost-or- NRV is an example
of the application of
a. conservatism.(prudence)
b. comparability.
c. consistency.
d. materiality.
A
21-40 Modified True or False
a. Only statement 1 is True
b. Only statement 2 is True
c. Both statements are True
d. Both statements are False

21. 1. In establishing financial accounting standards the ASC should be responsive to

the needs and viewpoints of the entire economic community, not just the accounting
profession.
2. ASC should operate in full view of the public through a "due process" system that
gives interested persons ample opportunity to make their views known.

221. Qualitative objectives are the attributes that make the information provided in
financial statements useful to users.
2. The information contained in the financial statements is neutral when the
information is free from bias or error.

23. 1. Comparability state that it is appropriate for an enterprise to leave its accounting
policies unchanged when more relevant and reliable alternative exist.
2. Information has the quality of relevance when it influence the economic decision
of users by serving them evaluate past, present, and future events.

24. 1. The elements of financial position are assets, liabilities and equity.
2. Income and expenses are elements of financial performance.

25. 1. Accountants generally prepare a single set of general-purpose financial

statements, rather than a number of different types of financial statements.
2. In general, the accounting profession has relied on general purpose financial
statements prepared in conformance with generally accepted accounting
principles.

26. 1. Information about economic resources controlled by the enterprise and its
capacity to modify these resources is useful in predicting the ability of the
enterprise to generate cash in the future.
2. Financial statements are prepared and presented at least annually and are
directed toward the specific information needs of a wide range of users.

27. 1. Relevance and reliability are qualitative characteristics pertain to the content
rather than the presentation of the financial information.
2. If there is undue delay in the reporting of information, it may lose its relevance
and reliability.

28. 1. The basic purpose of accounting is to provide information that the managers of
an economic entity need to control its operation.
2. Accounting assumptions embrace the conventions, rules, and procedures
necessary to define what is accepted accounting practice.

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29. 1. Going concern serves as the basis for preparing financial statements at regular
intervals.
2. Matching is not an underlying assumption of financial accounting.

30. 1. Generally accepted accounting principle is not included in the scope of the ASC
framework.
2. Revenue (Income) recognition is one of the basic accounting principle.

31. 1. An item is material if its inclusion or omission would influence or change the
judgment of a reasonable person.
2. Relevance is the capacity of information to make a difference in a decision by
helpingusers form predictions about the outcome of past, present, and future

events.

32. 1. Accounting information must be both relevant and reliable to be useful to

decision makers.
2. The going-concern assumption justifies the valuation of assets on a
liquidation basis.

33. 1. The economic entity assumption states that economic activity can be identified
with a particular unit of accountability.
2. The periodicity assumption implies that the economic activities of an enterprise
can be divided into segment.

34. 1. Revenue is generally recognized at point of collection.

2. Installment sales and cost recovery method are examples of revenue recognition
at point of sales.
35. 1. Financial statements prepared on a cost basis provide business enterprise
information having a common, accepted basis from which each reader can make
inferences, comparisons, and analyses.
2. All payments less than P250 are expensed as incurred, is a sample of
conservatism.
36. 1. The company employs the same inventory valuation method from period to
period, is a sample of periodicity assumption.
2. A patent is capitalized and amortized over the periods benefited, is a sample of
going concern assumption.

37. 1. An officer of SEIKO Corp. purchased a new home computer for personal use with
company money, charging miscellaneous expense, is a violation of materiality
concept.
2. A machine, that cost P40,000, is reported at its current market value of P45,000,
is a violation of revenue recognition principle.

38. 1. Notes as part of necessary information to a fair presentation applies the principle
of full disclosure.
2. Accruals and deferrals in adjusting and closing process applies the matching
principle.

39. 1. Information that helps users confirm or correct prior expectations has feedback
value.

2. Some costs which give rise to future benefits cannot be directly associated with the
revenues they generate. Such costs are allocated in a rational and systematic
manner to the periods expected to benefit from the cost.

40. 1. Expenses are recognized when the goods or services (efforts) make their
contribution to revenue.

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2. When no association with revenue is evident and no future benefits are
expected, expenses are recognized immediately.

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