Financial Reporting: Conceptual Framework

Conceptual Framework for Financial Reporting

True or False

• Users of financial statements are assumed to need prior knowledge of business and financial accounting matters to understand the information in them (False).
• Relevance and faithful representation are the two primary qualities that make accounting information useful for decision-making (True).
• Verifiability and predictive value are ingredients of faithful representation (False). The ingredients are completeness, neutrality, and being free from error.
• Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners (True).
• Revenues are realizable when assets received or held are readily convertible into cash or claims to cash (True).
• Consistency means that companies cannot switch from one accounting method to another (False).
• A soundly developed conceptual framework of concepts and objectives should allow new and emerging practical problems to be more quickly solved (True).
• The underlying theme of the conceptual framework is decision usefulness (True).
• Neutrality means that information cannot favor one set of interested parties over another (True).
• Justifying a particular measurement or disclosure requires that the benefits derived from it must equal the costs associated with it (False).
• Timeliness and neutrality are two ingredients of relevance (False). Predictive value, confirmatory value, and materiality are the ingredients of relevance.
• A decrease in net assets arising from peripheral or incidental transactions is called a loss (True).
• Revenue should generally be recognized at the end of production (False).
• An expenditure should be recorded as an asset rather than an expense when the amount is material (False).
• The Conceptual Framework should be a basis for standard-setting (True).
• The historical cost principle would be of limited usefulness if not for the going concern assumption (True).
• The Conceptual Framework should be based on fundamental truths derived from the laws of nature (True).
• Prudence or conservatism means when in doubt, select the solution that will be least likely to overstate liabilities or expenses (False).
• The expense recognition principle states that debits must equal credits in each transaction (False).
• When a company issues its annual financial reports within one month of the end of the year, this depicts the characteristic of timeliness (True).

Multiple Choice - Theories

• Concepts of income and expenditure is not a chapter in the IASB Conceptual Framework.
• The first step within the hierarchy of guidance to which management refers when selecting accounting policies is to consider the applicability of the definitions, recognition criteria, and measurement concepts in the Conceptual Framework.
• When there is a conflict between the Conceptual Framework and a Philippine Financial Reporting Standard, the requirements of the Philippine Financial Reporting Standard prevail over those of the Conceptual Framework.
• Revisions of the Conceptual Framework will automatically lead to changes to the Standards (False).
• General purpose financial reports are intended to meet the information needs of users who are unable to require the preparation of financial reports tailored to meet their specific information needs.
• The primary users to whom general purpose of financial reports are directed are existing and potential investors, and lenders and other creditors.
• The reason that financial statements may appear similar around the world is due to different audit opinions resulting in various losses, litigations, and differences in audit standards.
• Attributes that make the information provided in financial statements useful to user describes the qualitative characteristics of financial statements.
• Faithful representation replaces the “reliability” characteristic under the old Conceptual Framework.
• If accounting information has confirmatory value, it confirms or corrects prior expectations.
• When the information can help users increase the likelihood of correctly depicting or forecasting the outcome of events. is not needed to be a perfectly faithful representation.
• Neutrality is the qualitative objective of financial accounting that is directed towards meeting the common needs of users and is independent of presumptions about particular needs and desires of specific uses of the information.
• Serves as threshold in determining materiality is incorrectly describing the enhancing qualitative characteristics of financial statements.
• Comparability, verifiability, timeliness, and understandability are the enhancing qualitative characteristics of financial reporting.
• Comparability is uniformity is not a feature of financial information's “comparability" characteristics.
• The trade association to which the enterprise belongs as a member is an indirect user of financial accounting information.
• Corporate management is most likely to prepare the most accurate financial forecast for a corporate enterprise based on empirical evidence.
• Providers of risk capital and their advisors are concerned with the risk inherent in and return provided by their investment and need information to help determine whether they should buy or sell.
• Suppliers and trade creditors have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with or are dependent on the enterprise (Incorrect statement).
• Financial information exhibits the characteristic of consistency when accounting entities give similar events the same accounting treatment each period.
• Legal evidence implies verifiability.
• An essential quality of the information provided in financial statements is that it is readily understandable by users, who are assumed to have a reasonable knowledge of business and economic activities and accounting, and will be willing to study the information with reasonable diligence, and who are informed of the accounting policies employed and changes in those policies and the effects of such changes.
• An accounting transaction with an arms' length transaction between two independent parties is assumed to achieve objectivity.
• Overstating an expense in the current period is acceptable only when the amount involved is immaterial.
• He should classify, characterize, and present the information clearly and precisely when dealing with the situation.
• Faithful representation concept or qualitative characteristic influenced the decision in (I) above.
• Relevance concept or qualitative characteristic has been applied in making this decision.
• The financial statements should then be prepared on a different basis, if it were decided that MAU was no longer a going concern at 31 March 20x1, in accordance with the Conceptual Framework.
• All of these is statements describe a reporting entity.
• An item that meets the definition of an element should be recognized when it is probable that any future economic benefit associated with the item will flow to or from the entity, and the item has a cost or value that can be measured with reliability.
• Assets, liability, and equity relate to financial position in a set of financial statements.
• Income and expenses relates to financial performance in a set of financial statements.
• An economic resource is a right that has the potential to produce economic benefits.
• An economic resource could produce economic benefits for an entity by entitling or enabling it to do one or more of the following, except exchange economic resources with another party on unfavorable terms.
• An obligation is a duty or responsibility that an entity has no practical ability to avoid.
• Rights to use intellectual property rights that do not correspond to an obligation of another party.
• The unit of account is the right or the group of rights, the obligation or the group of obligations, or the group of rights and obligations, to which recognition criteria and measurement concepts are applied.
• the revised definition of asset excludes from which future economic benefits are expected to flow to the entity.
• Ownership is excluded in the three aspects in the revised definition of asset.
• The obligation to provide goods that customers have ordered and paid for during the current year represents a liability.
• All monetary liabilities should be stated in the balance sheet at their present (discounted) values, and Under current GAAP, there are instances where an increase in liability is matched with an increase in revenue are false statements relating to liabilities.
• PDAC has estimated the tax charged on its profits for the year just ended as P165,000 would be classified as a liability.
• Income refers to increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to distributions to holders of equity claims.
• Expenses refers to decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
• Depreciated equipment was sold in exchange for a note receivable conforms to the realization concept.
• Derecognition pertains to the removal of all or part of a recognized asset or liability from the an entity's statement of financial position.
• The two measurement bases mentioned in the Conceptual Framework are historical cost and fair value.
• Historical cost means that assets are recorded at the amount of cash or cash equivalents paid, or the fair value of the consideration given to acquire them at the time of acquisition.
• Historical cost, P25,000 is the relevant measure of the value of the equipment.
• Profit is measured as the amount that an enterprise could distribute to its owners and be as well off at the end of the period as it was at the beginning of the period in the net worth method.
• Current cost is the measurement basis adopted in the physical capital maintenance concept.
• the financial amount of the net assets at the end exceeds the financial amount of the net assets of the beginning after excluding any distribution and contribution from owners falls under a financial capital maintenance concept.
• This concept should be used if the main concern of users is with the operating capabilitys of the entity (physical capital concept).