CHAPTER 1-Framework Accounting

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CHAPTER 1

CHAPTER 1 FRAMEWORK OF ACCOUNTING

FRAMEWORK OF ACCOUNTING

QUESTION 1-1 QUESTION 1-1 Define accounting. Define accounting. ANSWER 1-1 ANSWER 1-1

The Accounting Standards Council defines accounting as

The Accounting Standards Council defines accounting as follows:follows: Accounting is a service activity. Its function is to

Accounting is a service activity. Its function is to provide quantitatiprovide quantitative information, primarily financial inve information, primarily financial in nature, about economic entities, that is intended to be useful

nature, about economic entities, that is intended to be useful in making economic decision.in making economic decision.

The Committee on Accounting Terminology of the American Institute of Certified Public Accountants The Committee on Accounting Terminology of the American Institute of Certified Public Accountants defines accounting as

defines accounting as follows:follows: Accounting is the art of

Accounting is the art of recording, classifying and summarizrecording, classifying and summarizing in a ing in a significant manner and in terms of significant manner and in terms of money, transactions and events which are in part

money, transactions and events which are in part at least of at least of a financial character and interpreting thea financial character and interpreting the results thereof.

results thereof.

The American Accounting Association in its statement of Basic Accounting Theory defines accounting as The American Accounting Association in its statement of Basic Accounting Theory defines accounting as follows:

follows:

Accounting is the process of

Accounting is the process of identifying, measurinidentifying, measuring and g and communicacommunicating economic information to permitting economic information to permit informed judgment and decision by users of

informed judgment and decision by users of the information.the information.

QUESTION 1-2 QUESTION 1-2

What are the three important activities in the accounting process as embodied in the accounting What are the three important activities in the accounting process as embodied in the accounting definition?

definition?

ANSWER 1-2 ANSWER 1-2

The accounting definition provides three important activities in the accounting process, namely: The accounting definition provides three important activities in the accounting process, namely:

a. a. IdentifyingIdentifying b. b. MeasuringMeasuring c. c. CommunicatingCommunicating QUESTION 1-3 QUESTION 1-3

Explain fully the

Explain fully theidentifyingidentifyingprocess of process of accountingaccounting..

ANSWER 1-3 ANSWER 1-3 Identifying

Identifyingmeansmeansthe recognition or nonrecognition of “accountable” events. Not the recognition or nonrecognition of “accountable” events. Not all business activitiesall business activities

are accountable. are accountable.

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An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject matter of accounting is

words, the subject matter of accounting is economic activity economic activity or the measurement of economic resourcesor the measurement of economic resources and economic obligations. Only economic activities are

and economic obligations. Only economic activities are emphasized and recognized in financialemphasized and recognized in financial accounting. Sociological and psychological matters are beyond the

accounting. Sociological and psychological matters are beyond the province of accounting.province of accounting.

Explain the two

Explain the two classificaticlassifications of ons of economic transactieconomic transactions or ons or events.events.

Economic activities of an entity are referred to as transactions which may be classified as

Economic activities of an entity are referred to as transactions which may be classified as external andexternal and internal.

internal.

External transactions

External transactionsor exchange transactions are those economic events involving one entity andor exchange transactions are those economic events involving one entity and another entity. Purchase of merchandise from a supplier, borrowing money from a bank, sale another entity. Purchase of merchandise from a supplier, borrowing money from a bank, sale of of merchandise to customer and payment of salaries to employees are examples of

merchandise to customer and payment of salaries to employees are examples of external transactiexternal transactions.ons.

Internal transactions

Internal transactionsare economic events involving the entity only. These are economic activities thatare economic events involving the entity only. These are economic activities that take place entirely within the entity. Production and casualty loss are

take place entirely within the entity. Production and casualty loss are examples of internal transactions.examples of internal transactions.

Explain briefly the

Explain briefly themeasuringmeasuringprocess of accounting.process of accounting.

Measuring or measurement is the process of determining the monetary amounts at which the elements Measuring or measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. of the financial statements are to be recognized and carried in the balance sheet and income statement. If accounting information is to be useful, it must be expressed in terms of a common financial

If accounting information is to be useful, it must be expressed in terms of a common financial denominator. Financial stateme

denominator. Financial statements without monetary amounts would be nts without monetary amounts would be largely unintelligiblargely unintelligible orle or incomprehensi

incomprehensible. The Philippine peso ble. The Philippine peso is the unit is the unit of measuring accountable economic transactions.of measuring accountable economic transactions. The measurement bases are

The measurement bases arehistorical cost, current cost, realizable valuehistorical cost, current cost, realizable value andandpresent value.present value.HistoricalHistorical cost is the most common.

cost is the most common.

Explain fully the

Explain fully thecommunicatingcommunicatingprocess of accounting.process of accounting.

Communicating

Communicatingis the process of is the process of preparing and preparing and distributingdistributingaccounting reports to potential users of accounting reports to potential users of accounting information.

accounting information.

Identifying and measuring are pointless if the information contained in the accounting records cannot Identifying and measuring are pointless if the information contained in the accounting records cannot be communicated in some form to potential users, like the investors, owners, managers, creditors and be communicated in some form to potential users, like the investors, owners, managers, creditors and

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An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject matter of accounting is

words, the subject matter of accounting is economic activity economic activity or the measurement of economic resourcesor the measurement of economic resources and economic obligations. Only economic activities are

and economic obligations. Only economic activities are emphasized and recognized in financialemphasized and recognized in financial accounting. Sociological and psychological matters are beyond the

accounting. Sociological and psychological matters are beyond the province of accounting.province of accounting.

Explain the two

Explain the two classificaticlassifications of ons of economic transactieconomic transactions or ons or events.events.

Economic activities of an entity are referred to as transactions which may be classified as

Economic activities of an entity are referred to as transactions which may be classified as external andexternal and internal.

internal.

External transactions

External transactionsor exchange transactions are those economic events involving one entity andor exchange transactions are those economic events involving one entity and another entity. Purchase of merchandise from a supplier, borrowing money from a bank, sale another entity. Purchase of merchandise from a supplier, borrowing money from a bank, sale of of merchandise to customer and payment of salaries to employees are examples of

merchandise to customer and payment of salaries to employees are examples of external transactiexternal transactions.ons.

Internal transactions

Internal transactionsare economic events involving the entity only. These are economic activities thatare economic events involving the entity only. These are economic activities that take place entirely within the entity. Production and casualty loss are

take place entirely within the entity. Production and casualty loss are examples of internal transactions.examples of internal transactions.

Explain briefly the

Explain briefly themeasuringmeasuringprocess of accounting.process of accounting.

Measuring or measurement is the process of determining the monetary amounts at which the elements Measuring or measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement. of the financial statements are to be recognized and carried in the balance sheet and income statement. If accounting information is to be useful, it must be expressed in terms of a common financial

If accounting information is to be useful, it must be expressed in terms of a common financial denominator. Financial stateme

denominator. Financial statements without monetary amounts would be nts without monetary amounts would be largely unintelligiblargely unintelligible orle or incomprehensi

incomprehensible. The Philippine peso ble. The Philippine peso is the unit is the unit of measuring accountable economic transactions.of measuring accountable economic transactions. The measurement bases are

The measurement bases arehistorical cost, current cost, realizable valuehistorical cost, current cost, realizable value andandpresent value.present value.HistoricalHistorical cost is the most common.

cost is the most common.

Explain fully the

Explain fully thecommunicatingcommunicatingprocess of accounting.process of accounting.

Communicating

Identifying and measuring are pointless if the information contained in the accounting records cannot Identifying and measuring are pointless if the information contained in the accounting records cannot be communicated in some form to potential users, like the investors, owners, managers, creditors and be communicated in some form to potential users, like the investors, owners, managers, creditors and

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Communicating

Identifying and measuring are pointless if the information contained in the accounting records cannot Identifying and measuring are pointless if the information contained in the accounting records cannot be communicated in some form to potential users, like the investors, owners, managers, creditors and be communicated in some form to potential users, like the investors, owners, managers, creditors and other interested parties.

other interested parties.

Actually, it is for

Actually, it is for this reason that accounting has been called the this reason that accounting has been called the “language of business”.“language of business”.

Implicit in the

Implicit in the communicacommunication process are tion process are thetherecording, classifyingrecording, classifyingandandsummarizingsummarizingaspects of aspects of accounting.

accounting.

Recording

Recordingor journalizing is the process of systematically maintaining a record of all or journalizing is the process of systematically maintaining a record of all economic businesseconomic business transactions after they have been identified and measured.

transactions after they have been identified and measured.

Classifying

Classifyingis the sorting or grouping of is the sorting or grouping of similar and interrelated economic transacsimilar and interrelated economic transactions into theirtions into their respective class. Actually, classifying is accomplished by

respective class. Actually, classifying is accomplished by posting to posting to the ledger.the ledger. Summarizing

Summarizingis the preparation of financial statements which include the statement of financialis the preparation of financial statements which include the statement of financial position, income statement, stateme

position, income statement, statement of nt of comprehencomprehensive income, statement of cash sive income, statement of cash flows andflows and statement of changes in equity.

statement of changes in equity.

What is the

What is the basic purpose of accounting?basic purpose of accounting?

The basic purpose of

The basic purpose of accounting is to “provide quantitatiaccounting is to “provide quantitative financial information about a business that isve financial information about a business that is

useful to statement users particularly owners and creditors, in making economic decisions. “ useful to statement users particularly owners and creditors, in making economic decisions. “ An accountant’s primary task therefore is to

An accountant’s primary task therefore is to supply informationsupply informationto help users, such as shareholderto help users, such as shareholders,s, bankers and managers make informed judgment and better decision.

bankers and managers make informed judgment and better decision.

What do you

What do you understand by the accountancy profession?understand by the accountancy profession?

Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines. This law is Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines. This law is

known as the “Philippine Accountancy Act of 2004”. known as the “Philippine Accountancy Act of 2004”.

Accountancy has developed as a

Accountancy has developed as a profession attaining a status equivalent to that of profession attaining a status equivalent to that of law and medicine.law and medicine. In the Philippines, in order to

In the Philippines, in order to qualify to practice the accountancy profession, a person must finish qualify to practice the accountancy profession, a person must finish aa degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by degree in Bachelor of Science in Accountancy and pass a very difficult government examination given by the Board of

the Board of AccountancAccountancy.y.

Incidentally, theBoard of Accountancyis the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines.

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Incidentally, theBoard of Accountancyis the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines.

QUESTION 1-9

Explain theaccreditation to practice public accountancy.

ANSWER 1-9

Certified Public Accountants, firms and partnership of certified public accountants, including partners and staff members thereof, are required to register with the Board of Accountancy and Professional Regulation Commission for the practice of public accountancy.

The PRC upon favorable recommendation of the Board of Accountancy shall issue the Certificate of Registration to practice public accountancy which shall be valid for 3 years and renewable every 3 years upon payment of required fees.

Certified Public Accountants generally practice their profession in three main areas, namely public accounting, private accountingandgovernment accounting.

QUESTION 1-10

Explain thelimitationof the practice of public accountancy.

ANSWER 1-10

Single practitioners and partnershipsfor the practice of public accountancy shall be registered certified public accountants in the Philippines.

A certificate of accreditation shall be issued to certified public accountants in public practice only upon showing in accordance with rules and regulations promulgated by the Board of Accountancy and

approved by the Professional Regulation Commission that such registrant has acquired a minimum of three years of meaningful experience in any of the areas of public practice including taxation.

The Securities and Exchange Commissionshall not registerany corporationorganized for the practice of public accountancy.

QUESTION 1-11

What is public accounting?

ANSWER 1-11

Public accounting,in essence, is the practice of the accountancy profession. Individual practitioners, small accounting firms and large multinational organizations render independent and expert financial services to the public such asauditing, taxationandmanagement advisory services.

QUESTION 1-12

Explain briefly the three kinds of services rendered by apublic accountant. ANSWER 1-12

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Explain briefly the three kinds of services rendered by apublic accountant. ANSWER 1-12

1. Auditinghas traditionally been the primary service offered by most public accounting practitioners.

Auditing or specifically external auditing is the “examination of financial statements by

independent certified public accountant for the purpose of expressing opinion as to the fairness

with which the financial statements are prepared”.

2. Taxation serviceincludes the preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors. The CPA not infrequently represents the client in tax investigations.

3. Management advisory servicehas become increasingly important in recent years, although audit and tax services are undoubtedly the mainstay of public accountants.

The term “management advisory service” has no precise coverage but is used generally to refer to services to clients on matters of accounting, finance, business policies, organization

procedures, product costs, distribution and many other phases of business conduct and operations.

QUESTION 1-13

Explain briefly private accounting.

ANSWER 1-13

Private accountingmeans that Certified Public Accountants are employed in business entities in various capacity as accounting staff, chief accountant, internal auditor and controller. The highest accounting officer in a business entity is the controller.

The major objective of the private accountant is to assist management in planning and controlling the

entity’s operations. This will include maintaining the records, producing the financial reports, preparing

the budgets and controlling and allocating the cost of the business.

The private accountant has also the responsibility for the determination of the various taxes the business is obliged to pay.

QUESTION 1-14

Explain briefly government accounting.

ANSWER 1-14

Government accounting “encompass the process of analyzing, classifying, summarizing and

communicating all transactions involving the receipt and disposition of government funds and property

and interpreting the results thereof”.

The focus of government accounting is the custody and administration of public funds.

Many Certified Public Accountants are employed in many branches of the government, more particularly the Bureau of Internal Revenue, Commission on Audit, Department of Budget and

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The focus of government accounting is the custody and administration of public funds.

Many Certified Public Accountants are employed in many branches of the government, more particularly the Bureau of Internal Revenue, Commission on Audit, Department of Budget and

Management, Securities and Exchange Commission and even in a police agency like the National Bureau of Investigation.

QUESTION 1-15

Distinguish financial accounting and managerial accounting.

ANSWER 1-15

Financial accountingis primarily concerned with the recording of business transactions and the eventual preparation of financial statements. Financial accounting focuses ongeneral purpose reportsknown as

financial statements. These financial statements are intended for internal andexternal users.

Financial accounting is the area of accounting that emphasizes reporting to creditors and investors. Managerial Accountingis the accumulation and preparation of financial reports forinternal users only. In other words, managerial accounting is the area of accounting that emphasizes developing accounting information for use within an entity.

QUESTION 1-16

What is the meaning of generally accepted accounting principles?

ANSWER 1-16

Generally accepted accounting principles (GAAP) encompass the conventions, rules and procedures necessary to define what accepted accounting practice is.

Generally accepted accounting principles are conventional - that is, they become generally accepted by

agreement often tacit agreement rather than by formal derivation from a set of postulates and basic concepts. The principles have developed on the basis of experience, reason, custom, usage,and

practically necessity.

Simply stated,generally accepted accounting principlesrepresentthe “rules, procedures, practice and standards followed in the preparation and presentation of financial statements.”

Generally accepted accounting principles arelike lawsthat must be followed in financial reporting. In the Philippines, the development of generally accepted accounting principles is formalized initially

through the creation of the Accounting Standards Council. The accounting standards promulgated by the Accounting Standards Council constitute the generally accepted principles in the Philippines.

The approved statementsof the ASC are called previously as “Statement of Financial Accounting Standards” or SFAS.

These ASC statements of Financial Accounting Standards are now known as Philippine Accounting StandardsorPASandPhilippine Financial Reporting Standards or PFRS.

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The approved statementsof the ASC are called previously as “Statement of Financial Accounting Standards” or SFAS.

These ASC statements of Financial Accounting Standards are now known as Philippine Accounting StandardsorPASandPhilippine Financial Reporting Standards or PFRS.

QUESTION 1-17

What is the purpose of accounting standards?

ANSWER 1-17

The overall purpose of accounting standards is to identify proper accounting practicesfor the preparation and presentation of financial statements.

Accounting standards create acommon understandingbetween preparers and users of financial statements particularly on how items, for example the valuation of assets, are treated.

Financial statements shall therefore comply with all applicable accounting standards.

QUESTION 1-18

What do you understand by the Financial Reporting Standards Council or FRSC?

ANSWER 1-18

The FRSCnow replacesthe ASC.

The FRSC is the accounting standard setting body created by the Professional Regulation Commission upon recommendation of the Board of Accountancy to assist the Board of accountancy in carrying out its powers and functions provided under R.A. Act No. 9298.

The main function is to establish and improve accounting standards that will be generally accepted in the Philippines.

The FRSC is composed of 15 members with a chairman who had been or is presently a senior accounting practitioner and 14 representatives from the following:

Board of Accountancy 1 Securities and exchange Commission 1 Bangko Sentral ng Pilipinas 1 Bureau of Internal Revenue 1 Commission on Audit 1 Major organization of preparers and users

of financial statements 1 Accredited national professional organization of CPAs:

Public Practice 2

Commerce and Industry 2 Academe or Education 2 Government 2

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Commerce and Industry 2 Academe or Education 2 Government 2

Total 14

The Chairman and members of the FRSC shall have a term of 3 years renewable for another term. Any member of the ASC shall not be disqualified from being appointed to the FRSC.

QUESTION 1-19

What do you understand by the Philippine Interpretations Committee?

ANSWER 1-19

The Philippine Interpretations Committee or PIC has replaced the Interpretations Committee or IC formed by the Accounting Standards Council in May 2000.

The role of the PIC is to prepare interpretations of PFRS for approval by the FRSC and in the context of the framework,to provide timely guidance on financial reporting issues not specifically addressed in current PFRS.

In other words, interpretations are intended to give “authoritative guidance” on issues that are likely to

receive divergent or unacceptable treatment because the standards do not provide specific and clear cut rules and guidelines.

The counterpart of the PIC in the United Kingdom is the International Financial Reporting Interpretations committee or IFRSC which has already replaced the Standing Interpretations Committee or SIC.

QUESTION 1-20

What do you understand by the International Accounting Standards Committee?

ANSWER 1-20

TheIASCis an independent private sector body, with the objective of achieving uniformity in the

accounting principles which are used by business and other organizations for financial reportingaround the world.

It was formed I June 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States of America.

The IASC subsequently expanded to include representatives from over 100 countries and by year 2000 the membership included 143 bodies in 104 countries representing over two million accountants. The IASC is headquartered in London, United Kingdom.

QUESTION 1-21

What are the objectives of the International Accounting Standards committee?

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QUESTION 1-21

What are the objectives of the International Accounting Standards committee?

ANSWER 1-21

a. To formulateand publishin the public interestaccounting standardsto be observed in the presentation of financial statements and to promote their worldwide acceptance and observance.

b. To work generally for the improvement andharmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.

The approved statements of the IASC are known asInternational Accounting Standards or IAS. QUESTION 1-22

What are the factors considered by the Philippines in deciding to move totally to international accounting standards?

ANSWER 1-22

a. Support of international accounting standards by Philippine organizations, such as the Philippine SEC, Board of Accountancy and PICPA.

b. Increasing internalization of business which has heightened interest in a common language for financial reporting.

c. Improvement of international accounting standards- Removal of free choices of accounting treatments.

d. Increasing recognition of international accounting standards by the Word Bank, Asian Development Bank and World Trade Organization.

QUESTION 1-23

What do you understand by the International Accounting Standards Board?

ANSWER 1-23

The International Accounting Standards Board or IASBnowreplaces the International Accounting Standards Committee or IASC. The IASB publishes its standards in a series of pronouncements called

“International Financial Reporting Standards” or IFRS.

However, the IASB has adopted the body of standards issued by the IASC. The pronouncements of the IASCcontinue to be designated as “International Accounting Standards” or IAS.

The IASB’s objective is to raise the quality and consistency of financial reporting and to have a platform of high quality and improved standards.

The IFRS is aglobal phenomenonintended to bring about greater transparency and a higher degree of comparability in financial reporting, both of which will benefit the investors and are essential to achieve the goal of one uniform and globally accepted financial reporting standards.

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The IFRS is aglobal phenomenonintended to bring about greater transparency and a higher degree of comparability in financial reporting, both of which will benefit the investors and are essential to achieve the goal of one uniform and globally accepted financial reporting standards.

QUESTION 1-24

What are accounting assumptions?

ANSWER 1-24

Accounting assumptionsare the basic notions or fundamental premises on which the accounting process is based. Accounting assumptions are the “givens” and they exist without saying.

Like a building structure that requires a solid foundation to avoid or prevent future collapse and provide room for expansion, and so with accounting.

Accounting assumptions serve as the foundation or bedrock of accounting in order to avoid

misunderstanding but rather enhance the understanding and usefulness of the financial statements. Accounting assumptions are also known aspostulates.

QUESTION 1-25

What are the underlying accounting assumptions?

ANSWER 1-25 1. Accrual 2. Going concern 3. Accounting entity 4. Time period 5. Monetary unit

The Framework for the Preparation and Presentation of Financial Statements mentions two underlying assumptions, namelyaccrualandgoing concern.

However, implicit in accounting are the basic assumptions of accounting entity, time period and monetary unit.

QUESTION 1-26

Explain fully theaccrual assumption.

ANSWER 1-26

The preparation of financial statements every accounting period is usually based on accrual accounting.

Accrual accountingmeans thatincomeisrecognized when earned regardless of when received and expense is recognized when incurred regardless of when paid.

Under this basis, the effects of transactions and other events are recognizedwhen they occurand not as cash or its equivalent is received or paid, and they are recorded in the accounting records and reported in the financial statements of the period to which they relate.

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Under this basis, the effects of transactions and other events are recognizedwhen they occurand not as cash or its equivalent is received or paid, and they are recorded in the accounting records and reported in the financial statements of the period to which they relate.

The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income, and accrued income.

QUESTION 1-27

Explain briefly the going concern assumption.

ANSWER 1-27

Going concern assumptionmeans that the accounting entity is viewed as continuing in operation

indefinitely in the absence of evidence to the contrary.

In other words, financial statements are prepared normally on the assumption that the entity shall continue in operation for the foreseeable future.

Thus, assets are normally recorded at original acquisition cost. As a rule, market values are ignored. However, the new standards require measurement of certain assets at fair value.

This postulate is the very foundation of thecost principle.It is also known as thecontinuity assumption. QUESTION 1-29

Explain briefly thetime period assumption.

ANSWER 1-29

Thetime period assumption requires that “the indefinite life of an entity is subdivided into time periods

or accounting periods which are usually of equal length for the purpose of preparing financial reports on

financial position, financial performance, and cash flows.”

The accounting period or fiscal period is one year or a period of twelve months. The “one-year period” is

traditionally the accounting period because usually it is after one year that government reports are required.

The accounting period may be a calendar year or a natural business year. A calendar year is a twelve-month period that ends on December 31. A natural businessyear is a twelve-month period that ends on

any monthwhen the business is at the lowest or experiencing slack season.

QUESTION 1-30

Explain fully themonetary unit assumption.

ANSWER 1-30

The monetary unit assumption has two aspects, namelyquantifiability and stability of the peso.The

quantifiability aspect means that the assets, liabilities, equity, income and expenses should be stated in terms of a unit of measure which is the peso in the Philippines.

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The monetary unit assumption has two aspects, namelyquantifiability and stability of the peso.The

quantifiability aspect means that the assets, liabilities, equity, income and expenses should be stated in terms of a unit of measure which is the peso in the Philippines.

How awkward to see financial statements without any common unit of measure. Such statements would be largely unintelligible and incomprehensible.

Thestable peso postulateis actually an amplification of the going concern assumptions so much so that the adjustments are unnecessary to reflect any changes in purchasing power.

The accounting function is to account for pesos only and not for changes in purchasing power.

In today’s world, the assumption that the peso is a stable measure over time is not necessarily valid.

Consider an equipment that was imported 10 years ago from the united States for $100, 00 when the exchange rate was P35 to $1 or an equivalent of P3,500,000.

If the same equipment is purchased now and assuming there is no change in the $100,000 purchase price, the replacement cost in terms of pesos would be in the vicinity of P4, 800, 00, considering a current exchange rate of P48 to $1.

Obviously, there is a significant gap between historical cost and current replacement cost.

In this regard, PAS 16 provides that an entity shall choose either the cost model or revaluation model as its accounting policy to an entire class of property, plant and equipment.

On the other hand,US GAAP encouragesentities to make supplementary disclosuresrelating to the impact of changing prices.

QUESTION 1-31

What do you understand by the by the framework for the Preparation and Presentation of financial statements?

ANSWER 1-31

The framework for the Preparation and Presentation of financial statements is promulgated by the International Accounting Standards Board and adopted by the local Financial Reporting Standards Council.

TheFramework is a summary of the terms and concepts that underlie the preparation and presentation of financial statements. It is the underlying theory for thedevelopment of accounting standards and revision of previously issued accounting standards.

TheFramework is an attempt to provide an overall theoretical foundationfor accounting which will guide standard-setters, preparers and users of financial information in the preparation and presentation of statements.

In other words, the concepts are the foundation on which financial statements are constructed, and provide a platform from which accounting standards are developed and revised.

TheFramework is concerned with general-purpose financial statements,includingconsolidated financial statements.

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In other words, the concepts are the foundation on which financial statements are constructed, and provide a platform from which accounting standards are developed and revised.

TheFramework is concerned with general-purpose financial statements,includingconsolidated financial statements.

The financial statements are prepared at least annually and are directed toward the commonneeds of a widerange of users.

QUESTION 1-32

What are the basic purposes of the Framework ?

ANSWER 1-32

The basic purposes of theFramework are:

a. To assist the Financial Reporting Standards Council indevelopingaccounting standards that represents Philippine GAAP.

b. To assist preparers of financial statements inapplyingaccounting standards and in dealing with issues not yet covered by GAAP.

c. To assist the Financial Reporting Standards Council in its review andadaptionof International Accounting Standards.

d. To assist users of financial statements ininterpretingthe information contained in the financial statements.

e. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP.

f. To provide information to those interested in the work of the Financial Reporting Standards Council in the formulation of Philippine Financial Reporting Standards.

QUESTION 1-33

Explain theauthoritative statusof theFramework .

ANSWER 1-33

If there is astandard or an interpretation that specifically applies to a transaction, the standard or interpretation overrides the Framework .

In theabsence of a standardor an interpretation that specifically applies to a transaction, management shall consider the applicability of theFramework in developing and applying an accounting policy that results in information that is relevant and reliable.

However, it is to be stated that the Framework is not a Philippine Financial Reporting Standard and hence does not define standard for any particular measurement or disclosure issue.

Nothing in theFramework overrides any specific Philippine Financial Reporting Standard.

In case where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall prevail over theFramework .

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In case where there is a conflict, the requirements of the Philippine Financial Reporting Standards shall prevail over theFramework .

QUESTION 1-34

What is the scope of the Framework ?

ANSWER 1-34

a. Objective of financial statements.

b. Qualitative characteristics that determine the usefulness of information in financial statements. c. Definition, recognition and measurement of the elements from which financial statements are

constructed.

d. Concepts of capital and capital maintenance.

TheFramework is applies to the financial statements of all commercial, industrial and business reporting entities, whether in the public or private sector.

However,special purposefinancial reports, for example, prospectuses and computations prepared for taxation purposes, are outside the scope of the Framework .

QUESTION 1-35

What is the objective of financial statements?

ANSWER 1-35

The objective of financial statements is to provide information about the financial position, financial performanceandcash flowsof an entity that is useful to a wide range of users in making economic

decisions.

QUESTION 1-36

What is the financial position of an entity?

ANSWER 1-36

The financial positionof an entity comprises its assets, liabilities and equity at a particular date. The financial position pertains to the economic resources, liquidity, solvency, financial structureand

capacity for adaptationof an entity. Such information is pictured in the statement of financial position.

QUESTION 1-37

Define the following:

1. Economic Resources 2. Liquidity

3. Solvency

4. Financial structure 5. Capacity for adaptation

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3. Solvency

4. Financial structure 5. Capacity for adaptation

ANSWER 1-37

1. Economic resourcessimply refer to the assets owned by the entity. Information about the economic resources controlled by the entity and its capacity to modify these resources is useful in predicting the ability of the entity to generate cash and cash equivalents in the future.

2. Liquidityis the availability of cash in the near future to cover currently maturing obligations. 3. Solvencyis the availability of cash over a long term to meet financial commitments when they

fall due.

Information about liquidity and solvency is useful in predicting the ability of the entity to comply with its future financial commitments.

4. Financial structureis the source of financing for the assets of the entity.

Financial structure indicates what amount of assets has been financed by creditors which is the

borrowed capital,and how much has been financed by owners which is theinvested orequity capital.

5. Capacity for adaptationis the ability of the entity to use its available cash for unexpected requirements and investment opportunities.

This may be accomplished by raising cash at a short notice through borrowing and issuance of securities or by raising cash through disposal of assets without disrupting normal operations. Capacity for adaptation is also known as financial flexibility.

QUESTION 1-38

What is themeaning of “financial performance of an entity?” ANSWER 1-38

Thefinancial performance of an entitycomprises its revenue, expenses and net income or loss for a period of time.

Financial performance is thelevel of incomeearned by the entity through the efficient and effective use of its resources.

The financial performance of an entity is also known asresult of operationsand is portrayed in the

income statement and statement of comprehensive income.

Information about performance is useful in predicting the capacity of the entity to generate cash flows from its operations. It is also useful in forming judgment about the effectiveness of the entity in

employing additional resources.

QUESTION 1-39

What is financial reporting?

ANSWER 1-39

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What is financial reporting?

ANSWER 1-39

Financial reportingis the provision of financial information about an entity to external users that is

useful to them in making economic decisions and for assessing the effectiveness of the entity’s

management.

The principal way of providing financial information to external users is through the annual financial statements.

However,financial reportingencompasses not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of financial statements and significant ratios.

Financial reportsalso include nonfinancial information such as descriptions of major products and a listing of corporate officers and directors.

QUESTION 1-40

What is the objective of financial reporting?

ANSWER 1-40

Theoverall objectiveof financial reporting is to provide information that is useful for decision making. Specifically, theAICPAFinancial Accounting Standards Board in its Statement of financial Accounting Concepts enumerates the following objectives of financial reporting:

a. To provide information useful in investment, credit and similar decision. b. To provide information useful in assessingcash flow prospects.

c. To provide information about entityresourcesclaims to those resources and changes in them.

QUESTION 1-41

Explain the following concepts in conjunction with the objective of financial statements. 1. Entity theory

2. Proprietary theory 3. Residual equity theory 4. Fund theory

ANSWER 1-41

1. Entity theory- The accounting objective is geared toward proper income determination. Proper matching of cost against revenue is the ultimate end.

Thus, the entity theory emphasizes the importance of the income statement. This is explained by the equation:

Assets= Liabilities + Capital

2. Proprietary theory- The accounting objective is directed toward proper valuation of assets. Thus, this theory emphasizes the importance of the balance sheet. It is exemplified by the

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Thus, the entity theory emphasizes the importance of the income statement. This is explained by the equation:

Assets= Liabilities + Capital

2. Proprietary theory- The accounting objective is directed toward proper valuation of assets. Thus, this theory emphasizes the importance of the balance sheet. It is exemplified by the equation:

Assets- Liabilities= Capital

3. Residual equity theory- The accounting objective is also proper valuation of assets. This is applicable where there are two classes of shareholders, ordinary and preference. Thus, the equation is:

Assets- Liabilities-Preference Shareholders’ Equity= Ordinary Shareholders’ Equity

4. Fund theory- The accounting objective is neither proper income determination nor proper valuation of assets but the custody and administration of funds.

The objective is directed toward cash flows exemplified by the formula “cash inflows minus cash outflows equals fund.”

Government accounting and fiduciary accounting are examples of the application of this concept.

QUESTION 1-42

Enumerate the users of financial statements and their information needs.

ANSWER 1-42

a. Investors- The providers of risk capital and their advisers are concerned with the risk inherent in and return provided by their investments.

Investors need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends.

b. Employees- Employees are interested in information about the stability and profitability of the entity.

The employees are interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities.

c. Lenders-Lenders are interested in information which enables them to determine whether their loans and interest thereon will be paid when due.

d. Suppliers and other trade creditors-These users are interested in information which enables them to determine whether amounts owing to them will be paid on maturity.

e. Customers-Customers have an interest in information about the continuance of an entity especially when they have a long-term involvement with or are dependent on the entity.

f. Government and its agencies-Government and its agencies are interested in the allocation of resources and therefore the activities of the entity.

These users require information to regulate the activities of the entity, determine taxation policies and as a basis for national income and similar statistics.

g. Public-Entities affect members of the public in a variety of ways.

For example, entities make substantial contributions to the local economy in many ways including the number ofpeople they employ and their patronage of local suppliers.

Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities.

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g. Public-Entities affect members of the public in a variety of ways.

For example, entities make substantial contributions to the local economy in many ways including the number ofpeople they employ and their patronage of local suppliers.

Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities.

QUESTION 1-43 Multiple choice (ACP)

1. Accounting is a service activity and its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision. This accounting definition is given by

a. Accounting Standards Council

b. AICPA Committee on Accounting terminology c. American Accounting Association

d. Board of Accountancy

2. The Basic purpose of accounting is

a. To provide the information that the managers of an economic entity need to control its operations.

b. To provide information that the creditors of an economic entity can use in deciding whether to make additional loans to the entity.

c. To measure the periodic income of the economic entity.

d. To provide quantitative financial information about an entity that is useful in making rational economic decision.

3. These are the events that affect the entity and in which other entities participate. a. Internal events

b. External events c. Summarizing d. Interpreting

4. The “communicating” process of accounting includes all of the following, except

a. Recording b. Classifying c. Summarizing d. Interpreting

5. What is the law regulating the practice of accountancy in the Philippines? a. R.A. No. 9298

b. R.A. No. 9198 c. R.A. No. 9928 d. R.A. No. 9892

6. It is the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines.

a. Board of Accountancy

b. Philippine Institute of Certified Public Accountants

c. Securities and exchange Commission d. Financial Reporting Standards Council

7. Accountants employed in entities in various capacity as accounting staff, chief accountant or controller are said to be engaged in

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c. Securities and exchange Commission d. Financial Reporting Standards Council

7. Accountants employed in entities in various capacity as accounting staff, chief accountant or controller are said to be engaged in

a. Public accounting b. Private accounting c. Government accounting d. Financial accounting

8. It is the accounting standard setting body created by PRC upon recommendation the Board of Accountancy to assist the Board of Accountancy in carrying out its powers and functions under R.A No.9298.

a. Accounting Standards Council

b. Auditing and Assurance Standards Council c. Philippine Accounting Standards Board d. Financial Reporting Standards Council

9. Which isnotrequired to be represented in the FRSC? a. Bangko Sentral ng Pilipinas

b. Bureau of Internal Revenue c. Commission on Audit

d. Department of Budget and Management

10. Which statement istrueabout the Philippine Interpretations Committee?

I. The role of the Philippine Interpretations Committee is to prepare interpretations of PFRS for approval by the Financial Reporting Standards Council and in the context of the

framework,to provide timely guidance on financial accounting issues not specifically addressed in current PFRS.

II. The interpretations are intended to give “authoritative guidance” on issues that are

likely to receive divergent or unacceptable treatment because standards do not provide specific clear cut rules and guidelines.

a. I only b. II only c. Both I and II d. Neither I or II ANSWER 1-43 1. a 6.a 2. d 7.b 3. b 8.d 4. d 9.d 5. a 10.c QUESTION 1-44 Multiple choice (IAA)

1. Financial accounting is covered with

a. General-purpose reports on financial position and financial performance. b. Specialized reports for inventory management and control

c. Specialized reports for income tax computation and recognition

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1. Financial accounting is covered with

a. General-purpose reports on financial position and financial performance. b. Specialized reports for inventory management and control

c. Specialized reports for income tax computation and recognition

d. General-purpose reports on changes in stock prices and future estimates of market position. 2. Financial accounting can be broadly defined as the area of accounting that prepares

a. General purpose financial statements to be used by parties internal to the entity only. b. Financial statements to be used by investors only.

c. General purpose financial statements to be used by parties both internal and external to the entity.

d. Financial statements to be used primarily by management.

3. The primary focus of financial accounting has been on meeting the needs of which of the following groups?

a. Managers of an entity

b. Present and potential creditors of an entity c. National and local existing authorities d. Independent auditors

4. Financial accounting is the area of accounting that emphasizes reporting to a. Management

b. Regulatory bodies c. Internal auditors

d. Creditors and investors

5. Managerial 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 an entity

ANSWER 1-44 1. a 2. c 3. b 4. d 5. d QUESTION 1-45

1. 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 SEC

d. Derive their credibility and authority from general recognition and acceptance by the accountancy profession

2. Which of the following statements best describes generally accepted accounting principles? a. They have been formulated in the public sector.

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d. Derive their credibility and authority from general recognition and acceptance by the accountancy profession

2. Which of the following statements best describes generally accepted accounting principles? a. They have been formulated in the public sector.

b. They have been developed on the basis of such factors as usage and practical necessity. c. They are the same as laws within our legal system.

d. They do not apply to small entities

3. 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

4. The process of establishing financial accounting standards

a. Is a democratic process in that a majority of practicing accountants must agree with a standard before it becomes implemented.

b. Is a legislative process based on rules promulgated by government agencies. c. Is based solely on economic analysis of the effects each standard will have if it is

implemented.

d. Is a social process which incorporates political actions of various interested user groups as well as professional research and logic.

5. Once an accounting standard has been established

a. The standard is continually reviewed to see if modification is necessary. b. The standard is not reviewed unless 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 standard. 6. As independent or external auditors, CPAs are primarily responsible for

a. Preparing financial statements in conformity with the 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

7. The singularly unique function performed by Certified Public Accountants is a. Tax preparation

b. Management advisory services c. The attest function

d. The preparation of financial statements

8. The purpose of the International Financial Reporting Standards is to

a. Issue enforceable standards which regulate the financial accounting and reporting of multinational entities.

b. Develop a uniform currency in which the financial transactions of entities throughout the world would be measured.

c. Promote uniform accounting standards among countries of the world. d. Arbitrate accounting disputes between auditors and international entities.

9. The International Accounting Standards Board was formed to a. Enforce IFRS in foreign countries

b. Develop worldwide accounting standards

c. Establish accounting standards for multinational entities

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9. The International Accounting Standards Board was formed to a. Enforce IFRS in foreign countries

b. Develop worldwide accounting standards

c. Establish accounting standards for multinational entities

d. Develop accounting standards for countries that do not have their standard-setting bodies 10. It is a “global phenomenon” intended to bring about transparency and a higher degree of

comparability in financial reporting, both of which will benefit the investors and are essential to achieve the goal of one uniform and globally accepted financial reporting standards.

a. IFRS b. Borderless accounting c. World trade d. Information technology ANSWER 1-45 1. d 6.c 2. b 7.c 3. d 8.c 4. d 9.b 5. a 10.a

QUESTION 1-46 Multiple choice (assumptions)

1. The framework specifically mentions two underlying assumptions, namely a. Accrual and going concern

b. Accrual and accounting entity c. Going concern and time period d. Time period and monetary unit

2. Which of the following is listed in the Framework as underlying assumption regarding financial statements?

a. The financial statements are reliable.

b. Any changes in accounting policy are neutral.

c. The financial statements are prepared under accrual basis. d. The entity can be viewed as a liquidating concern.

3. Which of the following terms best describes financial statements whose basis of accounting recognizes transactions and other events when they occur?

a. Accrual basis of accounting

b. Going concern basis of accounting c. Cash basis of accounting

d. Invoice basis of accounting

4. The accrual basis of accounting is based primarily on a. Conservatism and revenue realization

b. Conservatism and matching

c. Consistency and matching

d. Revenue realization and matching

5. Which of the following statements best describes the term “going concern”?

a. When current liabilities of an entity exceeds assets

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c. Consistency and matching

d. Revenue realization and matching

5. Which of the following statements best describes the term “going concern”?

a. When current liabilities of an entity exceeds assets

b. The ability of the entity to continue in operation for the foreseeable future c. The potential to contribute to the flow of cash and cash equivalents to the entity d. The expenses of the entity exceeds its income

6. Which of the following is notan implication of the going concern assumption? a. The historical cost assumption is credible.

b. Depreciation and amortization policies are justifiable and appropriate.

c. The current and noncurrent classification of assets and liabilities is justifiable and significant. d. Amortizing research and development costs over several periods is justifiable and

appropriate.

7. The relatively stable economic, political and social environment supports a. Conservatism

b. Materiality c. Timeliness d. Going Concern

8. Which underlying concept serves as the basis for preparing financial statements at regular intervals?

a. Accounting entity b. Going concern c. Accounting period d. Stable monetary unit

9. Which of the following is notan important characteristic of the financial statements that accountants currently prepare?

a. The information in financial statements is expressed in units of money adjusted for changing purchasing power.

b. Financial statements articulate with one another because measuring financial position is related to measuring changes in financial position.

c. The information in financial statements is summarized and classified to help meet users’

needs.

d. Financial statements can be justified only if the benefits they provide exceed the costs.

10. Which of the following statements is incorrect?

a. The accrual method, which builds directly on the revenue and matching principles, ignores the timing of the cash receipts or payments in determining when to recognize revenue or expenses.

b. In accordance with the unit of measure assumption, the changing purchasing power of money due to inflation or deflation.

c. In accordance with the going concern assumption, the life of an entity is presumed to be indefinite.

d. Accountants prepare financial statements at arbitrary points in time during an entity’s

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c. In accordance with the going concern assumption, the life of an entity is presumed to be indefinite.

d. Accountants prepare financial statements at arbitrary points in time during an entity’s

lifetime in accordance with the accounting period.

ANSWER 1-46 1. A 6. D 2. C 7. D 3. A 8. C 4. D 9. A 5. B 10. B

QUESTION 1-47 multiple choice (AICPA Adapted)

1. The concept of accounting entity is applicable

a. Only to the legal aspects of business organizations b. Only tot the economic aspects of business organization c. Only to business organizations

d. Whenever accounting is involved

2. When a parent and subsidiary relationship exists, consolidated financial statements are prepared in recognition of

a. Legal entity b. Economic entity c. Stable monetary unit d. Time period

3. The valuation of a promise to receive cash in the future at present value is valid because of the accounting concept of

a. Entity

b. Time period c. Going concern d. Monetary unit

4. This accounting concept justifies the usage of accruals and deferrals. a. Going concern

b. Materiality c. Consistency

d. Stable monetary unit

5. During the lifetime of an entity accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?

a. Accrual b. Periodicity

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5. During the lifetime of an entity accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?

a. Accrual b. Periodicity c. Unit of measure d. Continuity ANSWER 1-47 1. D 2. B 3. C 4. A 5. B

QUESTION 1-48 multiple choice (Framework)

1. The Framework for the Preparation and Presentation of Financial Statements should a. Lead to uniformity of financial statements among entities within the same industry. b. Eliminate alternative accounting principles and methods.

c. Guide the PICPA in developing generally accepted auditing standards. d. Define the basic objectives, terms and concepts of accounting.

2. Which is not a basic purpose of the Framework?

a. To assist the Financial Reporting Standards Council in developing accounting standards. b. To assist the preparers of financial statements in applying accounting standards.

c. To assist the Financial Reporting Standards Council in reviewing and adopting International Accounting Standards.

d. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of accountancy in the Philippines.

3. Which of the following is not a purpose of the Framework?

a. To provide definitions of key terms 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 Financial Reporting Standards Council in the standard-setting process.

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d. To assist the Financial Reporting Standards Council in the standard-setting process.

4. Which is a basic purpose of the Framework?

I. To assist users of financial statements in interpreting the information contained in the financial statements.

II. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP.

III. To provide information to those interested in the work of the Financial Reporting Standards Council in the formulation of PFRS.

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

5. What is the authoritative status of theFramework ? a. TheFramework has the highest level of authority

b. In the absence of a standard or an interpretation that specifically applies to a transaction, the Framework shall be followed.

c. In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Framework in

developing and applying an accounting policy that result in information that is relevant and reliable.

d. TheFramework applies only when the FRSC develops new or revised standards. 6. TheFramework is intended to establish

a. Generally accepted accounting principles in financial reporting by entities. b. The meaning of “ present fairly in accordance with GAAP”

c. The objectives and concept for use in developing standards of financial accounting and reporting.

d. The hierarchy of sources of GAAP.

7. Which statements isincorrectconcerning the framework ?

I. TheFramework applies to the financial statements of all commercial, industrial and business reporting entities, whether in the public and private sector.

II. Special purpose financial reports, for example, prospectuses, are within the scope of theFramework .

a. I only b. II only c. Both I and II d. Neither I nor II

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8. Which statement iscorrectconcerning theFramework ?

I. TheFramework is not a Philippine Financial Reporting Standard and hence does not define standard for any particular measurement or disclosure issue.

II. TheFramework is concerned with general-purpose financial statements including consolidated financial statement.

9. Which isnotincluded in the scope of theFramework ?

a. Qualitative characteristics that determine usefulness of financial accounting information b. Definition, recognition and measurement of the elements of financial statements

c. Objective of financial statements

d. Generally accepted accounting principles

10. As regards the relationship between PFRS and the Framework , which of the following statements istrue?

I. TheFramework is a reporting standard.

II. In case of conflict, the requirements of theFramework prevail over those of the relevant PFRS. a. I only. b. II only c. Both I and II d. Neither I nor II ANSWER 1-48 1. D 6. C 2. D 7. B 3. B 8. C 4. D 9. D 5. C 10. D

QUESTION 1-49 Multiple Choice (Users of Information)

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5. C 10. D

QUESTION 1-49 Multiple Choice (Users of Information)

1. Which of the following is an internal user of an entity’s financial information?

a. Board of Directors

b. Shareholder in the entity c. Holder of the entity’s bonds

d. Creditor with long term contracts with the entity

2. These users require information on risk and return on investment and hence an entity’s ability

to pay dividends. a. Investors b. Employees c. Lenders d. Customers

3. These users are interested in information about the profitability and stability of an entity in order to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities.

a. Customers b. The public

c. Government and their agencies d. Employees

4. These users are interested in information that enables them to determine whether amounts owing to them will be paid when due.

a. Suppliers and trade creditors b. Lenders

c. Banks

d. Finance entities

5. These users are interested in information about the profitability and stability of an entity in order to assess whether an entity is able to repay loans and related interest when the loans fall due.

a. Lenders

b. Borrowers c. Trade creditors d. Owners

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b. Borrowers c. Trade creditors d. Owners

6. These users are interested in information about the continuance of an entity, especially when they have a long-term involvement with or are dependent on the entity.

a. Customers b. Employees c. Trade unions d. Suppliers

7. These users are interested in information in order to regulate the activities of an entity, determine taxation policies and provide a basis for national statistics.

a. Governments and their agencies b. Major organization of users c. Bureau of internal revenue d. Department of finance

8. These users are interested in information on trends and recent developments where an entity makes a substantial contribution to the local economy providing employment and using local suppliers.

a. The public

b. Governments and their agencies c. Finance entities

d. Private entities

9. The providers of risk capital and their advisers

I. Are concerned with the risk inherent in and return provided by their investments. II. Need information to help them determine whether they should buy or sell.

a. I only b. Ii only c. Both I and II d. Neither I and II

10. Which statement iscorrectregarding information needs?

I. All information needs of users cannot be met by financial statements.

II. As investors are providers of risk capital to the entity, the provision of financial

statements that meet their needs will also meet most of the needs of other users that financial statements can satisfy.

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I. All information needs of users cannot be met by financial statements.

II. As investors are providers of risk capital to the entity, the provision of financial

statements that meet their needs will also meet most of the needs of other users that financial statements can satisfy.

a. I only b. II only c. Both I and II d. Neither I and II ANSWERS 1-49 1. A 6. A 2. A 7. A 3. D 8. A 4. A 9. C 5. A 10. C

QUESTIONS 1-50 Multiple Choice (AICPA Adapted)

1. The theory of accounting which best describes the accounting equation expressed “assets + equity” is the

a. Entity theory b. Fund theory

c. Proprietary theory d. Residual equity theory

2. What theory of ownership equity is enumerated by the following equation: assets minus liabilities minus preference share equity equals ordinary share equity?

a. Fund b. Entity c. Proprietary d. Residual equity

3. Classifying preference dividends as expense is an application of what concept? a. Entity

b. Proprietary c. Residual equity

d. Fund

4. The primary accounting objective is fair presentation of the financial performance of the entity. Entity

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d. Fund

4. The primary accounting objective is fair presentation of the financial performance of the entity. a. Entity

b. Proprietary c. Residual equity d. Fund

5. Fiduciary accounting is an application of a. Entity theory

b. Proprietary theory c. Residual equity theory d. Fund theory ANSWER 1-50 1. A 2. D 3. C 4. A 5. D

QUESTION 1-51 multiple choice (IAA)

1. The overall objective of financial reporting is to provide information a. That is useful for decision making

b. Aboutan entity’s assets, liabilities and owner’s equity

c. About an entity’s financial performance during a period

d. That allows owners to assess management’s performance

2. Which of the following statements concerning the objective 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 are the end result of the conceptual framework project.

d. The objectives encompass not only financial statement disclosures but other information as well.