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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

1. Which of the following is correct regarding asset recognition?

a. Items that do not meet all the requirements for recognition are always ignored.
b. Before an entity recognizes an item as an asset, the item must be owned by the
entity.
c. Physical form is necessary for an item to be recognized as an asset.
d. Costs are recognized as assets if they meet the definition of an asset as well as
the recognition criteria of “probable future economic benefits” and “reliable
measurement of cost or other value.”

2. Which of the following is one of the fundamental qualitative characteristics?

a. Relevance
b. Comparability
c. Reliability
d. Faithful representation

3. According to the Conceptual Framework, the correct classifications of Relevance

and Reliability, respectively, are
a. Fundamental, Enhancing
b. Fundamental, Fundamental
c. Enhancing, Fundamental
d. Fundamental, None

4. The qualitative characteristics that enhance the usefulness of financial information

includes all of the following, except
a. Comparability
b. Verifiability
c. Timeliness
d. Materiality

5. The elements related to relevance do not include

a. Predictive value
b. Materiality
c. Feedback or Confirmatory value
d. Timeliness

6. Information has this quality when it influences the economic decisions of users by
helping them evaluate past, present or future events or confirming, or correcting,
their past evaluations.
a. Predictive Value
b. Reliability
c. Relevance
d. Understandability

7. Which of the following is an element of the financial position of an entity?

a. income
b. loss
c. gains
d. none of these

8. Which of the following transactions results to the recognition of an asset?

a. An entity forecasts a purchase of inventory in the coming month. The purchase
is highly probable.
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b. An entity enters into firm commitment to purchase inventory in the coming

month. The entity cannot cancel the commitment without paying a penalty. The
contract is not onerous
c. During the period, one of the buildings of an entity was destroyed by a calamity.
d. An entity receives a non-monetary grant from the government.

9. Which of the following are elements of faithful representation under the

Conceptual Framework?
I. Completeness
II. Neutrality
III. Free from error
IV. Reliability

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

10. The Full Disclosure Principle recognizes that the nature and amount of information
included in financial reports reflects a series of judgmental trade-offs. The trade-
offs strive for
I. sufficient detail to disclose matters that make a difference to users.
II. sufficient condensation to make the information understandable, keeping in
mind costs of preparing and using it.
a. I
b. II
c. I and II
d. None

11. These are events that result to a sudden or unanticipated loss from fortuitous
events.
a. Internal Events
b. External Events Other Than Transfers
c. Non-reciprocal transfers
d. Casualty

12. The manner in which the accounting records are organized and employed within a
business is referred to as
a. Accounting system
b. Voucher system
c. Business document
d. Special journals

13. The process of converting non-cash resources and rights into cash or equivalent
claims to cash is called
a. realization
b. recognition
c. allocation
d. disposition

14. A concept that states that all the components of a complete set of financial
statement are interrelated
a. Entity
b. Concept of Articulation
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c. Accounting Process
d. Principle of Fair Presentation

15. PFRSs are adopted from the standards issued by the

a. IASC
b. IASCF
c. IASB
d. FASB

16. Choose the correct statement

a. Financial accounting is a social science and cannot be influenced by changes in
legal, political, business and social environments.
b. Financial accounting is an information system designed to provide information
primarily to internal users.
c. General-purpose financial statements must be prepared by a certified public
accountant.
d. The preparation of general-purpose financial statements is usually based on the
assumption that the primary users of the information are external decision
makers.

17. What type of users’ needs is catered by general purpose financial statements?
a. common needs
b. specific needs
c. a and b
d. neither a nor b

18. The issuance of financial reporting standards in the Philippines is the responsibility
of the
a. PICPA
b. FRSC
c. AASC
d. CPE Council

19. Reporting entities commonly place the sentence “See notes to the financial
statements” or “See accompanying notes to the financial statements” or a similar
sentence on the face of the financial statements. This practice is most in keeping
with what accounting concept?
a. Articulation
b. Materiality
c. Separate entity
d. Full disclosure

20. Comprehensive income excludes which of the following

a. Gains and losses arising from translation of foreign operation
b. Gains and losses from investments measured at fair value through other
comprehensive income
c. Correction of prior period error
d. Share in the profit or loss of an associate that is accounted for using the equity
method.

21. Which of the following is not included among the general features of financial
statement presentation?
a. Growing concern
b. Accrual basis
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c. Frequency of reporting
d. Comparative information

22. A company is issuing its comparative financial statements for the years 20x1 and
20x2. If the company is required to issue an additional statement of financial
position, such statement should be dated
a. as of Jan. 1, 20x1.
b. as of Jan. 1, 20x2.
c. as of Dec. 31, 20x2.
d. as of Dec. 31, 20x1.

23. According to PAS 2, inventories are measured at

a. cost
b. fair value less costs to sell
c. net realizable value
d. lower of a and b

24. Which of the following is added to the cost of inventories?

a. Cost of wasted material due to production inefficiencies
b. Import duties on shipping of inventory inwards
c. Storage costs of finished goods
d. Trade discounts received on the purchase of inventory

25. Entity A, a trading entity, buys and sells Product Z. Movements in the inventory of
Product Z during the period are as follows:

Unit
Date Transaction Units Total cost
cost
Beginning
Feb. 1 100 ₱15 ₱1,500
inventory
7 Purchase 300 18 5,400
12 Sale 320
21 Purchase 200 21 4,200

How much is the ending inventory under the Weighted Average cost formula? (The
average is calculated on a periodic basis.)
a. 5,180
b. 5,290
c. 5,460
d. 5,920

Solution:

Date Transaction Units

Jan. 1 Beginning inventory 100
7 Purchase 300
12 Sale (320)
21 Purchase 200
Ending inventory (in units) 280

Date Transaction Units Unit cost Total cost

Jan. 1 Beginning inventory 100 ₱15 ₱1,500
7 Purchase 300 18 5,400
21 Purchase 200 21 4,200
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Total goods available for sale 600 ₱11,100

Formula:
Total goods available for sale (TGAS) in
Weighted pesos
=
ave. cost Total goods available for sale (TGAS) in
units

Weighted average unit cost = ₱11,100 ÷ 600 = ₱18.50

Ending inventory (in units) 280

Weighted average unit cost ₱18.50
Ending inventory (at cost) ₱5,180

26. This method of presenting cash flows from (used in) operating activities shows each
major class of gross cash receipts and gross cash payments..
a. Direct method
b. Inverse method
c. Indirect method
d. Straight method

27. According to PAS 10, this is the date when management authorizes the financial
statements for issue regardless of whether such authorization is final or subject to
further approval.
a. Date of authorization of the financial statements
b. Date of declaration
c. Date of events after the reporting period
d. Adjustment date

28. Entity A’s inventories on December 31, 20x1 have a cost of ₱100,000 and a net
realizable value of ₱80,000. Accordingly, Entity A recognized a write-down of
inventories of ₱20,000. Shortly after December 31, 20x1, but before the financial
statements were authorized for issue, the inventories were sold for a net sale
proceeds of ₱70,000. The correct amount of inventory write-down to be reported in
Entity A’s December 31, 20x1 financial statements is
a. 20,000
b. 0
c. 30,000
d. any of these

29. Which of the following is not considered an item of PPE?

a. land classified as investment property
b. land used in agricultural activity by a farming entity
c. equipment manufactured or acquired primarily to be held for rentals
d. all of these

30. Which of the following assets may not be depreciated?

a. Building that is measured under the revaluation model.
b. Equipment that becomes idle or is retired from active use.
c. Land
d. Landfill site

31. A change in depreciation method, estimate of useful life or residual value is

accounted for as a
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a. change in accounting policy

b. correction or error
c. change in accounting estimate
d. any of these

32. Entity A exchanges its equipment for the equipment owned by Entity B. If the
exchange has commercial substance, Entity A should measure the equipment
received from Entity B on initial recognition at
a. the fair value of the equipment received.
b. the fair value of the equipment given up.
c. the carrying amount of the equipment received.
d. the carrying amount of the equipment given up.

33. In accounting parlance, depreciation means

a. the decline in the value of an asset during the period.
b. the amount derived by dividing the cost of an asset over its useful life.
c. the amount derived by multiplying the cost of an asset by its useful life.
d. the systematic allocation of the depreciable amount of an asset over its useful
life.

34. Entity A pays salaries on a bi-monthly basis. Entity A has 10 employees, each
earning ₱20,000 per month. During the month of April 20x1, none of the employees
were absent, late or have rendered overtime service. Which of the following is the
correct regarding the timing of recognition and the amount of salaries expense
recognized on the first payday in the month of April 20x1?
Timing of recognition Amount recognized
a. April 1 20,000
b. April 15 20,000
c. April 1 100,000
d. April 15 100,000

Solution: (₱20,000 x 10 employees x ½) = 100,000

35. Grants are normally recognized at

a. current value.
b. market value.
c. fair value.
d. net realizable value.

36. On December 1, 20x1, you imported a machine from a foreign supplier for
$100,000, due for settlement on January 6, 20x2. Your functional currency is the
Philippine peso. The relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1

How much is your net foreign exchange gain (loss) on the importation?
a. 200,000
b. (200,000)
c. 300,000
d. (300,000)

C [$100,000 x (47 – 50)] = 300,000 net FOREX gain

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37. On January 1, 20x1, Entity A obtained a 10%, ₱5,000,000 loan, specifically to

finance the construction of a building. The proceeds of the loan were temporarily
invested and earned interest income of ₱180,000. The construction was completed
on December 31, 20x1 for a total construction costs of ₱7,000,000. How much are
the borrowing costs capitalized to cost of the building?
a. 320,000
b. 300,000
c. 500,000
d. 680,000

A (5M x 10%) – 180,000 = 320,000

38. Which of the following are not related parties under PAS 24?
a. A parent and its subsidiaries
b. An investor and its associate
c. Family member of a Chief Executive Officer and the entity
d. A shareholder who holds 2% interest in the voting rights of the entity

39. Entity B, a trustee, undertakes to manage the retirement benefit fund of Entity A
for the benefit of Entity A’s employees. When reporting to Entity A regarding the
status and performance of the fund, Entity B would most likely apply which of the
following standards?
a. PAS 19
b. PAS 24
c. PAS 26
d. PFRS 6

40. According to PAS 27, investments in subsidiaries, associates or joint ventures are
accounted for in the separate financial statements
a. at cost.
b. at fair value in accordance with PFRS 9.
c. using the equity method under PAS 28.
d. any of these, as a matter of accounting policy choice.

41. On January 1, 20x1, Entity A acquires 30% interest in Entity B for ₱600,000. Entity
B reports profit of ₱200,000 and declares dividends of ₱50,000 in 20x1. How much
is the carrying amount of the investment in associate on December 31, 20x1?
a. 600,000
b. 660,000
c. 645,000
d. 630,000

Solution:
Investment in associate
1/1/x1 600,000
Sh. in profit (200K x 30%) 60,000 15,000 Dividends (50K x 30%)
645,000 12/31/x1

42. Under constant peso accounting, items are restated using this formula:
a. Historical cost x (Current price index ÷ Average price index)
b. Historical cost x (Current price index ÷ Historical price index)
c. Revalued amount x (Current price index ÷ Historical price index)
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d. Historical cost x (Current price index ÷ Historical price index*) *However, if it

is impracticable to determine this amount, the average price index may be used.

43. Entity A issues convertible bonds with face amount of ₱2,000,000 for ₱2,600,000.
Each ₱1,000 bond is convertible into 10 shares with par value of ₱60 per share. On
issuance date, the bonds are selling at 102 without the conversion option. What is
the value allocated to the equity component on initial recognition?
a. 2,040,000
b. 540,000
c. 560,000
d. 460,000

Solution:
Issue price 2,600,000
Fair value of debt instrument without equity feature (2M x 102%) (2,040,000)
Equity component 560,000

44. Entity A had 100,000, ₱10 par, 10% cumulative preference shares outstanding all
throughout 20x1. Entity A reported profit after tax of ₱2,800,000 for the year
ended December 31, 20x1. The movements in the number of ordinary shares are as
follows:
1/1/20x1 Ordinary shares outstanding 120,000
3/1/20x1 Shares issued for cash 42,000
9/30/20x1 Subscribed shares 20,000
11/1/20x1 Reacquisition of treasury shares (12,000)
Outstanding shares at the end of period 170,000

What is the basic earnings per share?

a. 18.92
b. 17.09
c. 18.07
d. 16.98

Solution:

Date No. of sh. Months outstanding Weighted average

(a) (b) (c) = (a) x (b)
1/1/20x1 120,000 12/12 120,000
3/1/20x1 42,000 10/12 35,000
9/30/20x1 20,000 3/12 5,000
11/1/20x1 (12,000) 2/12 (2,000)
158,000

Basic Profit (Loss) less Preferred dividends

=
EPS Weighted average number of outstanding ordinary shares

Basic 2,800,000 – (100,000 x ₱10 x 10%)

=
EPS 158,000

Basic EPS = ₱17.09

45. According to PAS 34, income tax expenses in interim periods are computed using
a. a weighted average annual income tax rate.
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b. a substantially enacted future tax rate.

c. a uniform tax rate for all periods presented, including comparatives.
d. an imputed tax rate.

46. According to PAS 36, which of the following is an indication of impairment from
internal sources of information?
a. Significant decline in the asset’s (market) value.
b. Indications that the economic performance of an asset is, or will be, worse than
expected.
c. Significant changes in technological, market, economic, or legal environment
that adversely affect the recoverable amount of an asset.
d. The carrying amount of the entity’s net assets exceeds its market capitalization.

47. If the carrying amount of an asset is less than its recoverable amount, the asset
a. is impaired.
b. should be written-down.
c. is not impaired.
d. should be written-off in profit or loss.

48. Which of the following assets is not tested for impairment in accordance with PAS
36?
a. Property, plant and equipment
b. Inventory
c. Intangible assets
d. Goodwill

49. According to PAS 37, contingent liabilities are

a. recognized and disclosed.
b. always disclosed.
c. disclosed, only if their expected occurrence is remote.
d. not disclosed if their expected occurrence is remote.

50. Which of the following assets can be measured using the revaluation model?
a. Property, plant and equipment
b. Investment property
c. Intangible assets
d. a and c
e. all of these

51. Entity A acquires a building for ₱1,000,000. The building is to be leased out under
various operating leases. The building has an estimated useful life of 10 years and
zero residual value. Entity A uses the cost model for its property, plant and
equipment and the fair value model for its investment property. At the end of Year
1, the building is assessed to have a fair value of ₱1,080,000. How much should
Entity A recognize in profit or loss in relation to the building?
a. 80,000 gain on change in fair value
b. 100,000 depreciation
c. 180,000 gain on change in fair value
d. b and c

52. Which of the following is considered an agricultural activity under PAS 41?
a. fishing in the open seas
b. illegal logging
c. floriculture
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d. farming in the computer or cellphone

53. Which of the following is accounted for under PAS 41?

a. bearer plants
b. bearer animals
c. government grants related to biological assets measured at cost
d. plants used in landscaping

54. Prior to the full adoption of the IFRSs in 2005, the reporting standards used in the
Philippines were primarily based on
a. US GAAP (SFASs)
b. Japanese GAAP
c. Spaniard GAAP
d. A combination of a, b and c

55. According to PFRS 1, an entity’s first PFRS financial statements shall include, at
the minimum, at least (choose the incorrect statement)
a. three statements of financial position
b. two statements of financial position
c. two statements of comprehensive income
d. two statements of cash flows

56. On January 1, 20x4, Entity A has granted 600 share options to each of its 100
employees. The options vest in three years’ time. Each share option has a fair value
of ₱100 on grant date. Information on employee departure is as follows:
• January 1, 20x4: estimate of employees leaving the entity during the vesting
period – 4%
• December 31, 20x4: revision of estimate of employees leaving to 5% before
vesting date
• December 31, 20x5: revision of estimate of employees leaving to 6% before
vesting date
• December 31, 20x6: actual employees leaving 5%

How much is the salaries expense in 20x5?

a. 2,000,000
b. 1,880,000
c. 1,860,000
d. d. 0

C (600 x 100 x 100) x 94% x 2/3 = 3,760,000 - 1,900,000 = 1,860,000

57. According to PFRS 3, how does an acquirer account for negative goodwill?
a. as an asset
b. as a deferred credit (liability), but only after reassessment of the identifiable net
assets acquired
c. as gain in profit or loss on the acquisition date
d. as gain in profit or loss in the period of business combination but only after
reassessment of the identifiable net assets acquired

58. Which of the following assets of an acquiree may not be included when computing
for the goodwill arising from a business combination?
a. capitalized kitchen utensils and equipment
b. intangible assets not previously recorded
c. research and development costs charged as expenses
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d. goodwill recorded by the acquiree prior to the business combination

59. Imagine you are an awesome auditor. Your “not-so-awesome” client does not know
when to classify assets and liabilities as current or non-current. Which of the
following standards would you suggest your client should refer to?
a. PAS 1
b. PAS 24
c. PAS 34
d. PFRS 1000

60. Imagine you are an awesome accountant. You client, Entity A which is engaged in
farming activities, asked you for an advice on how it will account for its agricultural
land. Which of the following standards would you advise Entity A should use?
a. PAS 7
b. PAS 16
c. PAS 40
d. PAS 41

61. Provisions, contingent liabilities and contingent assets are accounted for using
a. PAS 37
b. PFRS 6
c. PAS 29
d. PAS 8

62. To account for additions and disposals of items of property, plant and equipment, a
CPA would most likely refer to the accounting and disclosure requirements of
a. PAS 2
b. PAS 40
c. PFRS 5
d. PAS 16

63. Entity X acquires 90% interest in Entity Y in a business combination. The most
relevant Standard to be applied to this transaction is
a. PAS 28
b. PAS 3
c. PFRS 5
d. PFRS 3

64. Inventories are accounted for under

a. PAS 1
b. PAS 2
c. PFRS 1
d. PFRS 2

65. You are a member of the board of directors of ABC Co. Your company acquired a
building to be held solely for rentals. You are tasked in selecting an appropriate
accounting policy for the building. In this regard, you will most likely refer to which
of the following standards?
a. PAS 17
b. PAS 39
c. PAS 40
d. PAS 41
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66. You are the sole proprietor of Entity A. As a requisite to your business loan
application, you were required by the bank to submit audited financial statements.
During the audit of your financial statements, the auditor questioned the carrying
amount of your land. The auditor believes that the carrying amount is overstated
and needs to be written down to its recoverable amount. In your discussions with
your auditor, the auditor would most likely refer to this standard in her report?
a. PAS 36
b. PFRS 1
c. PAS 26
d. PAS 12

67. Events after the reporting period are accounted for under
a. PAS 1
b. PAS 10
c. PFRS 1
d. PAS 24

68. The presentation of financial statements is addressed by this standard.

a. PAS 1
b. PAS 8
c. PFRS 3
d. PAS 28

69. PAS 34 relates to

a. the accounting for inventories.
b. the identification and disclosure of related party relationships.
c. interim financial reporting.
d. the presentation of financial instruments.

70. Which of the following is not one of the current PFRSs?

a. PAS 2
b. PAS 3
c. PAS 7
d. PAS 10