EXERCISES – Chapters 2 and 3

Part I True or False

1. Fundamental qualitative characteristics define the usefulness of financial information, whereas enhancing
qualitative characteristics make these financial information more useful to the users of the financial statements.

2. Information is faithfully represented when it can influence the economic decisions of the users by helping them
evaluate past, present or future events, or confirming or correcting, their past evaluations.

3. In achieving a balance between relevance and faithful representation, the overriding consideration is how best to
satisfy the economic decision making needs of the users.

4. Relevance and faithful representation are enhancing qualitative characteristics.

5. Under the accrual basis of accounting, revenues are recognized when collected and expenses are recognized
when paid.

6. Because of the assumption that the life of an economic entity will continue to exist in the foreseeable future, an
entity needs to prepare financial statements on regular time intervals, at least, annually.

7. Information exhibits characteristics of verifiability if it can be replicated using the same measurement method and
applying the same process.

8. Income encompasses revenues and gains. Gains arise from the ordinary activities of the enterprise, whereas
revenues arise from incidental or peripheral transactions.

9. Expenses are recognized in the income statement when there is a decrease in an asset, or an increase in liability,
including distributions made to owners.

10. Recognition is the process of incorporating in the face of the financial statements an item that meets the definition
of an element and satisfies the criteria for recognition set out in the Framework.

11. Reports that are presented outside of the financial statements – including financial reviews by management,
environmental reports, and value added statements – are outside the scope of IFRSs.

12. A change in reporting framework from PFRS for SMEs to full PFRS require a third statement of financial position
at the beginning of the earliest period presented.

13. Financial statements are directed toward the specific information needs of users.

14. Presenting receivables net of the related allowance for bad debts on the face of the statement of financial position
is an example of offsetting.

15. Presenting trading gains, net of applicable trading losses violates the principle of offsetting.

Part II Multiple Choice

1. Which of the following is not a purpose of the Conceptual Framework?

a. To provide definitions of key terms and fundamental concepts
b. To provide specific guidelines for resolving situations not covered by the existing accounting standards
c. To assist accountants and others in selecting among alternative accounting and reporting methods
d. To assist the FRSC in the standard setting process

2. Which is not included in the scope of the Conceptual Framework?

a. Qualitative characteristics of useful financial accounting information
b. Definition, recognition and measurement of the elements of financial statements
c. Objectives of financial reporting
d. Supplementary information

3. As regards to the relationship between PFRS and the Conceptual Framework, which of the following
statements is true?

I. The Conceptual Framework is a reporting standard

II. In case of conflict, the requirements of the Conceptual Framework prevail over those of the relevant
PFRS
a. I only
b. II only
c. Both I and II
 d. Neither I nor II

4. The primary users of financial information include

I. Existing and potential investors
II. Lenders and other creditors
III. User group such as employees, customers, governments and their agencies and the public
a. I only
b. I and II only
c. I and III only
d. I, II and II

5. Which of the following qualitative characteristics of financial information requires that information should
not be biased in favor of one group of users to the detriment of others?
a. Relevance c. Verifiability
b. Reliability d. Neutrality

6. What is meant by comparability when discussing financial accounting information?

a. Information has predictive confirmatory value
b. Information is reasonably free form error
c. Information is measured and reported in a similar fashion across entities
d. Information is timely

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

a. information is material if the omission or misstatement could influence the economic decisions that
users make on the basis of the financial information about entities
b. materiality depends on the absolute size of the item or error judged in the particular circumstances of
the omission or misstatements
c. materiality is not a fundamental qualitative characteristic but rather a threshold or cut off point in
determining useful information
d. materiality is dependent on professional judgment because no threshold limit is defined in the Conceptual
Framework

8. Classifying, characterizing and presenting information clearly and concisely makes the information
a. Understandable c. Verifiable
b. Comparable d. Timely

9. It is a decrease in economic benefit during the accounting period related to a decrease in asset or
increase in liability that results in decrease in equity other than distribution to owners
a. asset
b. liability
c. income
d. expense

10. An item that meets the definition of an element shall be recognized when
I. It is probable that future economic benefits associated with the item will flow to or form the entity
II. The item has a cost or value that can be measures with reliability

a. I only
b. II only
c. Either I or II
d. Both I and II

11. These are present obligations of an entity arising from past transactions or events the settlement of
which is expected to result in an outflow from the entity of resources embodying economic benefits. For it
to exist, the entity must have no practical ability to avoid the obligation, which is a duty or responsibility.
 a. Assets
b. Liabilities
c. Equity
d. Expenses

12. It is an increase in economic benefit during the accounting period related to an increase in asset or
decrease in liability that results in increase in equity other than contribution form owners.
a. asset
b. liability
c. income
d. expense

13. What concept justifies the use of accruals and deferrals.

a. Going concern
b. Consistency
c. Materiality
d. Timeliness

14. Under the accrual basis,

a. Income and expenses, assets and liabilities are measured based on the occurrence of changes in the
economic resources and obligations.
b. Assets and liabilities are measured on the basis of their liquidation values.
c. Income and expenses are recognized on the basis of cash receipts and payments including depreciation
of property, plant and equipment.
d. Financial position and financial performance are measured on the basis of cash received and paid.

15. Statement I. An entity shall not present separately each material class of similar items.
Statement II. An entity shall present separately items of a dissimilar nature or function, unless they are
immaterial.

a. Only statement I is true

b. Only statement II is true

c. Both statements are true

d. Both statements are false

16. Offsetting of assets and liabilities is:

a. Not allowed unless permitted by relevant accounting standards.

b. Allowed but not permitted by relevant accounting standards.
c. Allowed in all cases
d. Not allowed in all cases

17. Information about the entity’s ability to generate cash and cash equivalents from different sources is
presented on the:

a. Statement of Comprehensive Income

b. Statement of Changes in Equity
c. Statement of Cash Flows
d. Statement of Financial Position
e. Notes to Financial Statements

18. An entity is required to present at least two of each of the following primary financial statements. A third
statement is required to be presented if the entity retrospectively applies an accounting policy, restates
items, or reclassifies items, and those adjustments had a material effect on the information in the statement
of financial position at the beginning of the comparative period. Identify the third financial statement referred
to in the aforementioned statement:

a. Statement of Comprehensive Income

b. Statement of Changes in Equity
c. Statement of Cash Flows
d. Statement of Financial Position
e. Notes to Financial Statements
 19. If a prospective investor wishes to know how much is the peso return for every share of stock that he/she
will own, he/she should refer to the:

a. Statement of Comprehensive Income

b. Statement of Changes in Equity
c. Statement of Cash Flows
d. Statement of Financial Position
e. Notes to Financial Statements

20. A Statement of financial position is dated

a. as at the end of the reporting period
b. for the period ended
c. either a or b
d. neither a nor b

PART III Match the following entities with their applicable financial reporting framework.
A. Full PFRS
B. PFRS for Small and Medium-sized Entities (PFRS for SMEs)
C. PFRS for Small Entities
D. Income Tax Reporting

1. A retail store with total assets of P5M.

2. A service business with assets and liabilities of less than P3M

3. Entities that are required to file financial statements under Part II of SRC Rule 68.

4. A publicly-listed entity whose shares of stock are traded with the Philippine Stock Exchange

5. Entities whose total assets of more than P100M to P350M or liabilities of more than P100M
to P250M.

6. Entities whose total assets or liabilities of between P3M and P100M.

7. A trading business whose total assets and liabilities are less than P3 million

8. A life insurance company not publicly listed in the stock exchange. The company is under
supervision by the Insurance Commission.

9. A bank regulated by the Bangko Sentral ng Pilipinas.

10. An entity whose total assets met the requirements of a large entity, but its liabilities met the
requirements of a medium- sized entity.