CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

2nd Semester, A.Y. 2022-2023

Midterm Examination

Instructions: Choose the letter of the correct/best answer.

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 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. It is the branch of accounting that focuses on the general purpose reports of financial position and
operating results known as financial statements.
a. Financial accounting
b. Auditing
c. Managerial accounting
d. Taxation

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

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

5. 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

6. 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

7. The most common form of business organization is a

a. corporation
b. sole proprietorship
c. partnership
d. cell phone stand

8. 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 known as identification.

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

9. 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.

10. All of the following statements incorrectly refer to the Conceptual Framework except
a. The framework is concerned with all-purpose financial statements including consolidated
financial statements.
b. Financial statements are prepared and presented at least annually and are directed toward the
common and specific information needs of a wide range of users.
c. Prospectuses and computations prepared for taxation purposes are outside the scope of the
framework.
d. Financial statements include such items as reports by directors, statements by the chairman,
discussion and analysis by management and similar items that may be included in an annual
report.
e. The framework applies to the financial statements of all commercial, industrial and business
reporting entities, but only for the private sector.

11. What is the objective of financial statements according to the Conceptual Framework?
a. To provide information about the financial position, performance, and changes in financial
position of an entity that is useful to a 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.

12. The primary users of financial statements under the Conceptual Framework include
I. Existing and potential investors
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

13. Under the Conceptual Framework, qualitative characteristics are sub-classified into
a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental and enhancing qualitative characteristics
d. not sub-classified

14. 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

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

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

16. Which of the following are related to 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

17. Under this qualitative characteristic, 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. However, information about complex matters that should be included in the
financial statements because of its relevance to the economic decision-making needs of users
should not be excluded merely on the grounds that it may be too difficult for certain users to
understand.
a. Relevance
b. Reliability
c. Understandability
d. Comparability

18. 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.

19. The elements of faithful representation do not include

a. Comparability
b. Neutrality
c. Completeness
d. Free from error

20. 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

21. The elements directly related to the measurement of performance

a. income
b. expenses
c. a and b
d. neither a nor b

22. Assets and liabilities are recognized if

a. they meet the definition of an element.
b. have probable future economic benefits and have cost or value that are measured reliably.
c. a and b
d. neither a nor b

23. 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

24. 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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25. Which of the following concepts is violated when measuring inventories at the lower of cost and
net realizable value?
a. The concept that assets shall not be carried at an amount in excess of its recoverable amount.
b. Historical cost concept
c. Prudence or conservatism concept
d. Offsetting concept

26. 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. Exchange differences from translating foreign currency denominated cash flows.
c. Acquisition of equipment through issuance of note payable.
d. Bank overdrafts that can be offset.

27. 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

28. 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

29. 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. level of rounding-off of amounts in the financial statements.

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

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

31. 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

32. 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

33. Financial reporting standards continuously change primarily in response to

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

34. The cost of purchases 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

35. 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
d. deciding on whether to extend loan to the reporting entity

36. Entity A is making a materiality judgment. Entity A considers an item to be material, and therefore
needs to be disclosed in the notes to the financial statements, if the item pertains to a related
party transaction. What type of materiality assessment is Entity A using?

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 a. quantitative
b. qualitative
c. faithful representation
d. relevance

37. Which of the following financial statements would not be dated as covering a certain reporting
period?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity

38. 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 entities, rather than to industries of the economy as a whole or to 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

39. 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.

40. 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

41. 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 or Interpretation, the Conceptual Framework overrides the Standard or
Interpretation.
b. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the
Conceptual Framework. In the absence of a Standard or an Interpretation that specifically
applies, the Conceptual Framework should be followed.
c. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the
Conceptual Framework. In the absence of a Standard or an Interpretation that specifically
applies to a transaction, management should consider the applicability of the Conceptual
Framework in developing and applying an accounting policy that will result in information that
is relevant and reliable.
d. The Conceptual Framework applies only when IASB develops new or revised Standards. An
entity is never required to consider the Conceptual Framework.

42. According to PAS 8, these are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
a. Accounting policies c. Accounting standards
b. Accounting estimates d. Accounting assumptions

43. A change in the pattern of consumption of economic benefits from an asset is most likely a
a. change in accounting policy. c. error.
b. change in accounting estimate. d. any of these

44. PAS 8 permits a change in accounting policy only if the change

a. is required by a PFRS
b. results in reliable and more relevant information
c. a or b
d. PAS 8 does not permit a change in accounting policy

45. These arise from misapplication of accounting policies, mathematical mistakes, oversights or
misinterpretations of facts, or fraud.
a. Error
b. Change in accounting estimate
c. Change in accounting policy
d. Impracticable application

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46. How should the following changes be treated, according to PAS 8?
I. A change is to be made in the method of calculating the provision for uncollectible receivables.
II. Investment properties are now measured at fair value, having previously been measured at
cost.
Change (1) Change (2)
a. Change of accounting policy Change of accounting policy
b. Change of accounting policy Change of accounting estimate
c. Change of accounting estimate Change of accounting policy
d. Change of accounting estimate Change of accounting estimate

47. 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.
d. Currently maturing obligations are presented as noncurrent liabilities if a refinancing
agreement is completed after the financial statements are authorized for issue.

48. Which of the following is not a required disclosure under PAS 1?

a. The financial effect of a departure from a PFRS 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.

49. All of the following statements incorrectly refer to the Conceptual Framework except
a. The framework is concerned with all-purpose financial statements including consolidated
financial statements.
b. Financial statements are prepared and presented at least annually and are directed toward the
common and specific information needs of a wide range of users.
c. Prospectuses and computations prepared for taxation purposes are outside the scope of the
framework.
d. Financial statements include such items as reports by directors, statements by the chairman,
discussion and analysis by management and similar items that may be included in an annual
report.
e. The framework applies to the financial statements of all commercial, industrial and business
reporting entities, but only for the private sector.

50. 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

51. 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

52. 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 overall 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.

53. 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

54. 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).

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 c. Philippine Institute of Certified Public Accountants (PICPA).
d. Democratic People's Republic of Korea Accounting Standards Committee (DPKRASC).

55. 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)

56. 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.

57. The Conceptual Framework sets out general recognition principles of financial statement elements
which include all of the following except
a. asset recognition
b. equity recognition
c. liability recognition
d. expense recognition

58. Which of the following is most likely expensed under the ‘immediate recognition’ principle?
a. cost of inventories
b. impairment loss
c. cost of equipment
d. rentals paid

59. A secondary objective of financial statements

a. is to show information regarding assets and liabilities of an entity
b. is to show information regarding an entity’s financial position, performance, and changes in
financial position
c. is to show the results of the stewardship of management.
d. b and c

60. 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.