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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

FIRST GRADING EXAMINATION

1. Accounting has been given various definitions, which of the following is not one of those
definitions?
a. Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities that is intended to be useful in making economic
decisions.
b. Accounting is the art of recording, classifying, and summarizing in a significant manner and
in terms of money, transactions and events which are, in part of at least, of a financial
character and interpreting the results thereof.
c. Accounting is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating the
results to interested users.
d. Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.

2. Which of the following statements is true?

a. The basic purpose of accounting is to provide information about economic activities
intended to be useful in making economic decisions.
b. All events and transactions of an entity are recognized in the books of accounts.
c. General purpose financial statements are those statements that cater to the common and
specific needs of a wide range of external users.
d. The accounting process of assigning numbers, commonly in monetary terms, to the
economic transactions and events is referred to as classifying.

3. The accounting standards used in the Philippines are adapted from the standards issued by the
a. Federal Accounting Standards Board (FASB).
b. International Accounting Standards Board (IASB).
c. Philippine Institute of Certified Public Accountants (PICPA).
d. Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC).

4. Which of the following statements is incorrect regarding the basic accounting concepts?
a. One of ABC Co.’s delivery trucks was involved in an accident. Although no lawsuits have
yet been filed against ABC, ABC recognized a liability for the probable loss on the event.
This is an application of the prudence or conservatism concept.
b. Under the consistency concept, the financial statements should be prepared on the basis of
accounting principles which are followed consistently.
c. Under the entity theory, the business is viewed as a separate entity. Therefore, the personal
transactions of the business owners are not recorded in the business’ accounting records.
d. The time period concept means that financial statements are prepared only at the end of the
life of a business.
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5. Entity A appropriates ₱1M to fund employee benefits for the last quarter of the following year.
Entity A deposits the ₱1M fund in a payroll account. This economic activity is most
appropriately referred to as
a. production.
b. savings.
c. exchange.
d. investment.

6. It is the branch of accounting that focuses on the preparation of general purpose financial
statements.
a. Financial accounting
b. General Accounting
c. All-purpose Accounting
d. All-around accounting

7. These are events that do not involve an external party.

a. external events
b. nonreciprocal
c. internal events
d. special event

8. Entity A computes for its profit or loss periodically instead of waiting until the end of the life of
the business before doing so. This is an application of which of the following accounting
concepts?
a. historical cost
b. stable monetary unit
c. accrual basis
d. time period or reporting period

9. This refers to the use of caution in the exercise of judgments needed in making estimates
required under conditions of uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated.
a. faithful representation
b. prudence
c. consistency
d. relevance

10. The bottom part of each of Entity A’s financial statements states the following “This statement
should be read in conjunction with the accompanying notes.” This is most likely an application of
which of the following accounting concepts?
a. articulation
b. consistency
c. accrual basis
d. time period

11. Which of the following events is considered as an internal event?

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a. sale of inventory on account

b. provision of capital by owners
c. borrowing of money
d. conversion of raw materials into finished goods
e. payment of liabilities

12. Which of the following events is considered as an external event?

a. production
b. payment of taxes
c. gifts and charitable contributions
d. provision of capital by owners
e. b, c and d

13. Financial statements are said to be a mixture of fact and opinion. Which of the following items is
factual?
a. cost of goods sold
b. discount on capital stock
c. retained earnings
d. patent amortization expense

14. This concept defines the area of interest of the accountant. It determines which transactions are
recognized in the books of accounts and which are not.
a. Articulation
b. Matching
c. Separate entity
d. Full disclosure

15. A CPA employed as an accountant in a government agency is considered to be in

a. private practice.
b. public practice.
c. academe.
d. service.

16. Which of the following statements is correct?

I. Accounting provides qualitative information, financial information, and quantitative
information.
II. Qualitative information is found in the notes to the financial statements only.
III. Accounting is considered an art because it is supported by an organized body of knowledge
IV. Accounting is considered a science because it involves the exercise of skill and judgment.
V. Measurement is the process of assigning numbers to objects such inventories or plant assets
and to events such as purchases or sales.
VI. All quantitative information is also financial in nature.
VII. The accounting process of assigning peso amounts or numbers to relevant objects and events
is called identification.
a. I and V
b. I, II, VI and V
c. I, II, III, IV and V
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d. II, VI and V

17. Which of the following statements about the Norwalk Agreement is correct?
a. The Norwalk Agreement requires all domestic companies in the U.S. to prepare financial
statements in accordance with the IFRSs.
b. The Norwalk Agreement is a short-term convergence between the FASB and the IASB which
has long-time been abolished.
c. The Norwalk Agreement is a convergence between the FASB and the IASB to make their
existing financial reporting standards compatible and coordinate their future work programs
to ensure that once achieved, compatibility is maintained.
d. The Norwalk Agreement does not affect the financial reporting standards in the Philippines.

18. The process of identifying, measuring, analyzing, and communicating financial information
needed by management to plan, evaluate, and control an organization’s operations is called
a. financial accounting.
b. tax accounting.
c. managerial accounting.
d. auditing.

19. The PFRSs consist of all of the following except

a. PFRSs.
b. PASs.
c. Interpretations.
d. Conceptual Framework.

20. It is the official accounting standard setting body in the Philippines. It is composed of a
chairperson and 14 members.
a. Financial Reporting Standards Committee (FRSC)
b. Financial Reporting Standards Council (FRSC)
c. Accounting Standards Committee (ASC)
d. Accounting Standards Council (ASC)

21. Financial reporting standards continuously change primarily in response to

a. users’ needs.
b. political influence.
c. government regulations.
d. changes in social environments.

22. Accounting is often called the "language of business" because

a. it is easy to understand.
b. it is fundamental to the communication of financial information.
c. all business owners have a good understanding of accounting principles.
d. accountants in many companies share financial information.

23. You are the accountant of ABC Co. During the period, your company purchased staplers worth
₱1,500. Although the staplers have an estimated useful life of 10 years, you have charged their
cost as expense. Which of the following is most likely to be true?
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a. You are applying the concept of matching.

b. You are applying the concepts of materiality and cost-benefit consideration.
c. You are applying the concept of verifiability.
d. You are just lazy to compute for the periodic depreciation. ✌☺

24. All of the following statements incorrectly refer to the concepts in the Conceptual Framework
except
a. The Conceptual Framework is concerned with all-purpose financial statements.
b. Financial statements are prepared and presented at least annually and are directed toward
both the common and specific information needs of a wide range of users.
c. The objective of general purpose financial statements is similar to the objective of general
purpose financial reporting.
d. The financial statements prepared by a reporting entity comprising a parent and its
subsidiaries are referred to as ‘combined financial statements’.

25. What is the authoritative status of the Conceptual Framework?

a. It has the highest level of authority. In case of a conflict between the Conceptual Framework
and a Standard, the Conceptual Framework overrides that Standard.
b. If there is a Standard that specifically applies to a transaction, that Standard overrides the
Conceptual Framework. In the absence of such a Standard, the requirement of the Conceptual
Framework should be followed.
c. If there is a Standard that applies to a transaction, that Standard overrides the Conceptual
Framework. In the absence of such a Standard, the entity’s management should consider the
applicability of the Conceptual Framework in developing and applying an accounting policy
that will result in useful information.
d. The Conceptual Framework applies only to the IASB when developing or amending Standards.
A reporting entity should never use the Conceptual Framework.

26. The foundation of the Conceptual Framework is formed from

a. the qualitative characteristics that makes information useful to users.
b. the objective of general purpose financial reporting.
c. the concept of reporting entity.
d. the principles and objectives of presentation and disclosure of financial information.

27. What is the objective of general purpose financial statements according to the Conceptual
Framework?
a. To provide information about the financial position, financial performance, and changes in
financial position of an entity that is useful to primary 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 for
investors and creditors.
d. To prepare financial statements in accordance with all applicable Standards and
Interpretations.

28. The primary users of financial statements under the Conceptual Framework include
I. Existing and potential investors
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II. Employees
III. Lenders and other creditors
IV. Suppliers and other trade creditors
V. Customers
VI. Governments and their agencies
VII. Public
VIII. Professional accountants, including auditors

a. I and III
b. I, II, III, IV, V, VI, VII
c. I, II, III, IV, V, VI
d. all of these

29. The Conceptual Framework broadly classifies the qualitative characteristics into
a. primary and secondary qualitative characteristics.
b. major and minor qualitative characteristics.
c. fundamental and enhancing qualitative characteristics.
d. cold and hot qualitative characteristics.

30. Identify the fundamental qualitative characteristics under the Conceptual Framework.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability

a. I and II
b. I and III
c. I, II, III, IV, V and VI
d. IV, V, VI and VII

31. Identify the qualitative characteristics that enhance the usefulness of financial information.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability

a. I and II
b. I and III
c. II, III, IV, V and VII
d. IV, V, VI and VII
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32. Which of the following are considered aspects of the qualitative characteristic of relevance under
the Conceptual Framework?
I. Predictive value
II. Confirmatory value
III. Timeliness
IV. Materiality

a. I and II
b. I, II and III
c. I, II and IV
d. I, II, III and IV

33. Under this qualitative characteristic, users are assumed to have a reasonable knowledge of
business activities and willingness to study the information with reasonable diligence.
a. Relevance
b. Faithful representation
c. Understandability
d. Comparability

34. Which of the following statements is incorrect concerning materiality?

a. Materiality can be assessed quantitatively or qualitatively
b. There are no specific materiality thresholds provided under the PFRSs
c. Materiality is a matter of judgment
d. Materiality is a quantitative matter. It should never be assessed qualitatively.

35. The elements of faithful representation do not include

a. comparability.
b. neutrality.
c. completeness.
d. free from error.

36. The ability through consensus among measurers to ensure that information represents what it
purports to represent is an example of the concept of
a. relevance.
b. comparability.
c. verifiability.
d. feedback value.

37. According to the Conceptual Framework, the pervasive constraint on the information that can be
provided by financial reporting is
a. materiality.
b. historical.
c. cost-benefit.
d. going concern.

38. The element that is related to the measurement of an entity’s financial performance is
a. income.
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b. expenses.
c. a and b
d. neither a nor b

39. According to the revised Conceptual Framework, an item is recognized if

a. it meets the definition of an asset, liability, equity, income or expense.
b. recognizing it would provide useful information.
c. it is probable that the item will result to an inflow or outflow of economic benefits and its
cost can be measured reliably.
d. a and b

40. Which of the following may result to an expense?

a. Increase in asset
b. Decrease in liability
c. Increase in liability
d. Distribution to holders of equity claims

41. The Conceptual Framework uses the term “economic resources” to refer to
a. assets.
b. equity.
c. liabilities.
d. income.

42. Which of the following is incorrect regarding the use of the term ‘reporting entity’ under the
Conceptual Framework?
a. A reporting entity one that is required, or chooses, to prepare financial statements.
b. A reporting entity must be a legal entity.
c. A reporting entity can be a parent and its subsidiaries viewed as a single entity.
d. All of these are correct.

43. The cost of inventory is recognized as expense

a. immediately.
b. using the matching concept.
c. by systematic allocation.
d. any of these as a matter of accounting policy choice

44. “I say red; you say green.” The information lacks which of the following qualitative
characteristics?
a. Relevance
b. Verifiability
c. Timeliness
d. Colorfulness

45. Which of the following is not one of the decisions that primary users make?
a. deciding on how to run the day-to-day operations of the entity
b. deciding on whether to hold or sell investment in stocks
c. deciding on whether to buy investment in stocks
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d. deciding on whether to extend loan to the reporting entity

46. Entity A is making a materiality judgment. Entity A considers an item to be material, and
therefore included in the financial statements, if it pertains to a related party transaction. What
type of materiality assessment is Entity A using?
a. Quantitative
b. Qualitative
c. Faithful representation
d. Relevance

47. According to the Conceptual Framework, the needs of the primary users that are met by financial
statements are
a. all of their needs.
b. all of their common needs only.
c. majority of their common needs only.
d. substantially a majority of their common and specific needs only.

48. The term ‘liquidity’, as used in relation to the assessment of an entity’s financial position, refers
to
a. the entity’s ability to pay its short-term obligations.
b. the entity’s ability to pay its long-term obligations.
c. the entity’s ability to collect its current receivables.
d. the entity’s ability to flow like water.

49. The measurement bases described under the Conceptual Framework are least applicable to the
measurement of
a. assets.
b. liabilities.
c. equity.
d. income.

50. Information on the utilization of economic resources is most useful when assessing an entity’s
a. management stewardship.
b. liquidity and solvency.
c. financial position and financial performance.
d. financial strengths and weaknesses, including the entity’s needs for additional financing.

51. This refers to the comparability of financial statements of the same entity but in different
periods.
a. Inter-comparability
b. Extra-comparability
c. Intra-comparability
d. Intro-comparability

52. Which of the following financial statements would not be dated as covering a certain reporting
period?
a. Statement of financial position
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b. Statement of profit or loss and other comprehensive income

c. Statement of cash flows
d. Statement of changes in equity

53. Comprehensive income (or total comprehensive income) includes

a. Profit or loss
b. Other comprehensive income
c. Transactions with owners
d. a and b
e. All of these

54. What is the purpose of reporting comprehensive income?

a. To report changes in equity due to transactions with owners.
b. To report a measure of the overall financial performance of an entity.
c. To replace profit with a better measure.
d. To combine income from continuing operations with income from discontinued operations
and extraordinary items.

55. The information provided by financial reporting pertains to

a. individual business entities and the economy as a whole, rather than to industries or to
members of society as consumers
b. individual business entities, industries and the economy as a whole, rather than to members
of society as consumers
c. individual reporting entities, rather than to industries, the economy as a whole or members
of society as consumers
d. individual business entities and industries, rather than to the economy as a whole or to
members of society as consumers

56. Which of the following statements is correct when an entity departs from a provision of a PFRS?
a. The entity’s financial statements would be grossly incorrect; therefore, PAS 1 does not allow
such a departure.
b. PAS 1 permits such a departure if the relevant regulatory framework requires, or otherwise
does not prohibit, such a departure.
c. PAS 1 requires certain disclosures when an entity departs from a provision of a PFRS.
d. b and c

57. Which of the following statements is correct regarding the classification of financial liabilities as
current or noncurrent in accordance with PAS 1?
a. Currently maturing obligations are presented as current liabilities even if their original term
is longer than one year and even if a refinancing agreement is completed after the end of the
reporting period but before the financial statements are authorized for issue.
b. Currently maturing obligations are presented as noncurrent liabilities only if their original
term is longer than one year.
c. Currently maturing obligations are presented as noncurrent liabilities only if a refinancing
agreement is completed after the end of the reporting period but before the financial
statements are authorized for issue.
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d. Currently maturing obligations are presented as noncurrent liabilities if a refinancing

agreement is completed after the financial statements are authorized for issue.

58. According to PAS 1, the judgments and estimates embodied in the financial statements, for
example, materiality judgments, assessments of uncertainty and risk, and the like, are the
responsibility of the entity’s
a. management.
b. accountant.
c. auditor.
d. janitor.

59. Which of the following is not a disclosure requirement of PAS 1?

a. The financial effect of a departure when an entity departs from a PFRS requirement.
b. Any material uncertainties on the entity’s ability to continue as a going concern.
c. The recognition, measurement and disclosure of specific transactions and other events.
d. The reason for using a longer or shorter period when an entity changes the frequency of its
reporting.

60. An entity’s financial position or condition refers to which of the following?

a. The status of the entity’s assets, liabilities and equity.
b. The amount of return that the entity has generated from its economic resources during the
period.
c. The level of change in the entity’s economic resources and claims to those resources, also
referred to as the economic phenomena.
d. All of these.

61. Comprehensive income excludes which of the following

a. Revaluation surplus
b. Gains and losses from investments measured at fair value through profit or loss
c. Income tax expense
d. Distributions to owners

62. Entity A needs guidance in accounting for its inventories. Entity A should refer to which of the
following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8

63. Entity A needs guidance in preparing its statement of changes in equity. Entity A should refer to
which of the following?
a. PAS 1
b. PAS 2
c. PAS 7
d. PAS 8
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64. Entity A buys and sells artifacts. Each artifact is unique and not ordinarily interchangeable.
According to PAS 2, the cost formula that Entity A should use is
a. Specific identification.
b. Weighted Average.
c. FIFO.
d. Any of these.

65. Entity A acquires inventories and incurs the following costs:

Purchase price, gross of trade discount 100,000
Trade discount 20,000
Non-refundable purchase tax, not included
in the purchase price above 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Advertisement costs 10,000

How much is the cost of the inventories purchased?

a. 102,000
b. 122,000
c. 97,000
d. 100,000

66. Which of the following is presented in the activities section of the statement of cash flows?
a. Purchase of a treasury bill three months before its maturity date.
b. Dividends paid this year although declared in a prior year.
c. Acquisition of equipment through issuance of note payable.
d. Bank overdrafts that can be offset.

67. In the statement of cash flows of a non-financial institution, interest income received is presented
under
a. operating activities.
b. financing activities.
c. investing activities.
d. a or c

68. An entity makes a change in accounting estimate. How does the entity recognize the effects of
the change in profit or loss?
a. Prospectively in the current period
b. Prospectively in the current and future periods
c. Retrospectively starting from the earliest period presented
d. a or b

69. Materiality does not make any difference with regard to

a. the separate presentation of items in the financial statements.
b. the disclosure of additional information in the notes.
c. intentional errors.
d. the level of rounding-off of amounts in the financial statements.
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70. According to PAS 10, dividends declared after the reporting period, but before the financial
statements are authorized for issue, are
a. recognized as liability at the end of reporting period.
b. not recognized as liability at the end of reporting period.
c. disclosed only as an adjusting event.
d. any of these.

71. At the end of the period, Entity A has deductible temporary difference of ₱100,000. Entity A’s
income tax rate is 30%. Entity A’s statement of financial position would report which of the
following?
a. 30,000 deferred tax asset
b. 30,000 deferred tax liability
c. 30,000 deferred tax expense
d. 30,000 income tax expense

72. You are a business manager. During the period, you have authorized the acquisition of a
machine that will be used in your company’s manufacturing activities in the next 5 years. In
your selection of an appropriate accounting policy for the recognition and measurement of the
machine, which of the following reporting standards is most relevant?
a. PAS 1
b. PAS 2
c. PAS 16
d. PAS 32

73. Which of the following is not one of the principal issues in the accounting for PPE?
a. Recognition.
b. Initial measurement as asset.
c. Allocation of carrying amount over the period of use.
d. Recognition of carrying amount as expense when the related revenue is recognized.

74. You are the General Manager of Entity A. You have received the actuarial report for your
company’s defined benefit plan. The report shows the following information:
PV of DBO – Jan. 1, 20x1 1,500,000
FVPA – Jan. 1, 20x1 1,200,000
PV of DBO – Dec. 31, 20x1 1,800,000
FVPA, end. – Dec. 31, 20x1 1,310,000
Actuarial gain 100,000
Return on plan assets 110,000
Discount rate 5%

When reporting on your company’s year-end highlights of financial summary, which of the
following will you report to the Board of Directors (the ‘big bosses’)?
a. Your company’s net liability for retirement benefits has increased by ₱490,000.
b. Your company’s net liability for retirement benefits has decreased by ₱300,000.
c. Your company’s net liability for retirement benefits has increased by ₱190,000.
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d. I will tell them nothing.

75. Entity A has 20 employees who are each entitled to one day paid vacation leave for each month
of service rendered. Unused vacation leaves are carried forward and can be used in future
periods if the current period’s entitlement is not used in full. However, unutilized entitlements
are forfeited when employees leave the entity. All the employees have rendered service
throughout the current year and have taken a total of 150 days of vacation leaves. The average
daily rate of the employees in the current period is ₱1,000. However, a 5% increase in the rate is
expected to take into effect in the following year. Based on Entity A’s past experience, the
average annual employee turnover rate is 20%. How much will Entity A accrue at the end of the
current year for unused entitlements?
a. 0
b. 90,000
c. 75,600
d. 94,500

76. Under a profit-sharing plan, Entity A agrees to pay its employees 5% of its annual profit. The
bonus shall be divided among the employees currently employed as at year-end. Relevant
information follows:

Profit for the year ₱8,000,000

Employees at the beginning of the year 8
Average employees during the year 7
Employees at the end of the year 6

If you are an alumnus of Entity A, how much bonus do you expect to receive?
a. 66,667
b. 50,000
c. 57,143
d. 0

77. The transfer of resources from the government to an entity in exchange for past or future
compliance with certain conditions is called
a. Government grant.
b. Government assistance.
c. Government financial assistance.
d. Government asset transfer.

78. Entity A receives land from the government conditioned that the land will only be used in Entity
A’s primary business activities and should never be sold. If in case, Entity A decides not to use
the land in its primary business activities, it shall return the land to the government. Which of
the following standards is least likely to be relevant in accounting for the land?
a. PAS 2
b. PAS 16
c. PAS 20
d. All of these are relevant
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79. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for
settlement on January 6, 20x2. Your functional currency is the Philippine peso. The relevant
exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1

The cost of the machine that will be disclosed in your December 31, 20x1 financial statements is
a. $100,000.
b. ₱5,000,000.
c. ₱5,200,000.
d. ₱4,700,000.

80. On January 1, 20x1, Entity A started the construction of a qualifying asset. The qualifying asset is
financed through general borrowings. The average expenditures during the year amounted to
₱9,500,000. The capitalization rate is 11%. The actual borrowing costs incurred during the period
were ₱1,990,000. How much are the borrowing costs eligible for capitalization?
a. 1,990,000
b. 1,045,000
c. 1,090,000
d. 990,000

“Go ahead and be lazy; sleep on, but you will go hungry.” (Proverbs 19:15)

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