CHAPTER 2

CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING

IFRS questions a e a!ai"a#"e at t$e en% o& t$is '$a(te )

TRUE*FALSE+Con'e(tua"
Ans,e
F T F T F T F T T F F F T T F F T T F F

No)
1. 2. 3. 4 5. #. %. &. *. 1+. 11. 12. 13. 14. 15. 1#. 1%. 1&. 1*. 2+.

Des' i(tion
Nature of conceptual framework. Conceptual framework definition. Levels of conceptual framework. International conceptual framework. tatements of Financial !ccountin" Concepts. $ecision usefulness. Financial statement users. 'elevance and relia(ilit). Consistenc). 'elevance. 'elia(ilit). ,asic elements. Compre-ensive income. .oin" concern assumption. /conomic entit) assumption. /0pense reco"nition principle. 'eali1a(le revenues. upplementar) information. 2aterialit) factors Conservatism.

MULTIPLE CHOICE+Con'e(tua"
Ans,e
c d c d d d a d a a a ( c c

No)
21. 22. 23. 24. 25. 2#. 2%. 2&. 3 2*. 3+. 31. 32. 33. 34.

Des' i(tion
.!!3 defined. 3urpose of conceptual framework. Conceptual framework. Conceptual framework purpose. Conceptual framework (enefits. 4(5ectives of financial reportin". $ecision usefulness. 4(5ectives of financial reportin". Financial reportin" o(5ectives. 3rimar) o(5ective of financial reportin". 3rimar) o(5ective of financial reportin". C-aracteristic of accountin" information. C-aracteristic of accountin" information. 2eanin" of compara(ilit).

2*2 a

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition 35. 2eanin" of consistenc).

MULTIPLE CHOICE+Con'e(tua"
Ans,e
d c a ( d a c a c ( ( d c d ( d c a c d ( ( d d c c d ( d ( a ( a d c d c ( ( a c c d a ( a d d

6cont.7

No)
3#. 3%. 3&. 3*. 4+. 41. 42. 43. 44. 45. 4#. 4%. 4&. 4*. 5+. 51. 52. 53. 54. 55. 5#. 5%. 5&. 5*. #+. #1. #2. #3. 3 #4. #5. ##. #% #&. #*. %+. %1. %2. %3 %4. %5. %#. %%. %&. %*. &+. &1. &2. &3.

Des' i(tion
In"redient of relevance. In"redient of relia(ilit). Consistenc) c-aracteristic. 3rimar) 8ualit) of accountin" information. 9ualit) of relevance. 9ualit) of relia(ilit). 3urpose of understanda(le information. $ecision:usefulness criterion. 3rimar) 8ualities of accountin" information. $efinition of relevance. $efinition of relia(ilit). 'elevance and relia(ilit). Timeliness c-aracteristic. ;erifia(ilit) c-aracteristic. Neutralit) c-aracteristic. Neutralit) c-aracteristic. $efinition of verifia(ilit). 9ualit) of predictive value. 9ualit) of representational fait-fulness. Consistenc). Consistenc) c-aracteristic. Compara(ilit) and consistenc). Compara(ilit). /lements of financial statements. $istinction (etween revenues and "ains. $efinition of a loss. $efinition of compre-ensive income. Components of compre-ensive income. Compre-ensive income. /arnin"s vs. compre-ensive income. 'eportin" financial statement elements. ,asic element of financial statements. ,asic element of financial statements. ,asic element of financial statements. $efinition of "ains. <istorical cost assumption. 3eriodicit) assumption. .oin" concern assumption. 3eriodicit) assumption. 2onetar) unit assumption. 3eriodicit) assumption. 2onetar) unit assumption. /conomic entit) assumption. /conomic entit) assumption. 3eriodicit) assumption. .oin" concern assumption. .oin" concern assumption. Implications of "oin" concern assumption.

Conceptual Framework =nderl)in" Financial !ccountin" a &4. <istorical cost principle.

2*2

MULTIPLE CHOICE+Con'e(tua"
Ans,e
d c d d d c ( ( ( ( c a d ( c a d c a d c a d c a c d c ( a d a c d d a ( a c c

6cont.7

No)
&5. &#. &%. &&. &*. *+. *1. *2. *3. *4. *5. *#. *%. *&. **. 1++. 1+1. 1+2. 1+3. 1+4. 1+5. 1+#. 1+%. 1+&. 1+*. 11+. 111. 112. 113. 114. 115. 11#. 11%. 11&. 11*. 12+. 121. 122. 123. 3 124.

Des' i(tion
<istorical cost principle. 'evenue reco"nition principle. 'evenue reco"nition principle. 'evenue reco"nition principle. Timin" of revenue reco"nition. 'eali1ation concept. $efinition of reali1ed. /0pense reco"nition principle. /0pense reco"nition principle. /0pense reco"nition. Full:disclosure principle. !r"ument a"ainst -istorical cost. 'eco"nition of revenue. 'evenue reco"nition principle. $eviation from revenue reco"nition principle. 'e8uired components of financial statements. 'eco"nition of e0penses. <istorical cost principle. /0pense reco"nition principle e0ample. 'ecordin" e0penditure as asset. <istorical cost principle violation. Full disclosure principle violation. Full disclosure principle. <istorical cost principle violation. 2aterialit) constraint. Costs of providin" financial information. ,enefits of providin" financial information. =se of materialit). $efinition of conservation. /0ample of materialit) constraint. Constraints to limit t-e cost of reportin". Cost:(enefit constraint. 2aterialit) constraint. 2aterialit). 3ervasive constraints. Conservatism constraint. Conservatism constraint. Trade:offs (etween c-aracteristics of accountin" information. Trade:offs (etween c-aracteristics of accountin" information. Conservatism constraint.

2*6

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

MULTIPLE CHOICE+CPA A%a(te%

Ans,e
a ( ( ( a ( d d a
3

No)
125. 12#. 12%. 12&. 12*. 13+. 131. 132. 133.

Des' i(tion
9ualit) of predictive value. Consistenc) c-aracteristic. Classification of "ains and losses. /arnin"s concept. Components of compre-ensive income. Components of compre-ensive income. Components of compre-ensive income. Components of compre-ensive income. $efinition of reco"nition.

Note> t-ese 8uestions also appear in t-e 3ro(lem: olvin" urvival .uide. Note> t-ese 8uestions also appear in t-e tud) .uide.

E3ERCISES
Ite/Des' i(tion
/2:134 /2:135 /2:13# /2:13% /2:13& /2:13* /2:14+ /2:141 /2:142 /0amination of t-e conceptual framework. !ccountin" concepts?identification. !ccountin" concepts?identification. !ccountin" concepts?matc-in". !ccountin" concepts?fill in t-e (lanks. ,asic assumptions. 'evenue reco"nition. <istorical cost principle. 2atc-in" concept.

CHAPTER LEARNING O-4ECTI5ES

1. $escri(e t-e usefulness of a conceptual framework. 2. $escri(e t-e F! ,@s efforts to construct a conceptual framework. 3. =nderstand t-e o(5ectives of financial reportin". 4. Identif) t-e 8ualitative c-aracteristics of accountin" information. 5. $efine t-e (asic elements of financial statements. #. $escri(e t-e (asic assumptions of accountin". %. /0plain t-e application of t-e (asic principles of accountin". &. $escri(e t-e impact t-at constraints -ave on reportin" accountin" information.

Conceptual Framework =nderl)in" Financial !ccountin"

2*:

SUMMARY OF LEARNING O-4ECTI5ES -Y 7UESTIONS

Item Type Item Type Item Type Lea 2C 2C Lea TF Lea 2C 2C Lea 2C 2C 2C 2C 2C 2C Lea 2C 2C 2C Lea 2C 2C 2C Lea 2C 2C 2C 2C 2C 2C Lea 2C 2C 2C Item Type Item Type Item Typ Item Type

1. 2. 3. #. %. &. *. 1+. 11. 32. 33. 12. 13. 5*. 14. 15. %1. 1#. 1%. 1&. &4. &5. &#. 1*. 2+. 1+*. Note>

TF TF TF TF TF TF TF TF TF 2C 2C TF TF 2C TF TF 2C TF TF TF 2C 2C 2C TF TF 2C

21. 22. 4. 2%. 2&. 34. 35. 3#. 3%. 3&. 3*. #+. #1. #2. %2. %3. %4. &%. &&. &*. *+. *1. *2. 11+. 111. 112.

2C 2C TF 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C

23. 24. 5.
3

2*. 3+. 4+. 41. 42. 43. 44. 45. #3. #4. #5. %5. %#. %%. *3. *4. *5. *#. *%. *&.

113. 114. 115.

nin0 O#8e'ti!e 9 25. 2C 134. / nin0 O#8e'ti!e 2 2#. 2C *4. nin0 O#8e'ti!e 2 31. 2C 134. / nin0 O#8e'ti!e 6 4#. 2C 52. 4%. 2C 53. 4&. 2C 54. 4*. 2C 55. 5+. 2C 5#. 51. 2C 5%. nin0 O#8e'ti!e : ##. 2C #*. #%. 2C %+. #&. 2C 12%. nin0 O#8e'ti!e ; %&. 2C &1. %*. 2C &2. &+. 2C &3. nin0 O#8e'ti!e < **. 2C 1+5. 1++. 2C 1+#. 1+1. 2C 1+%. 1+2. 2C 1+&. 1+3. 2C 133. 1+4. 2C 135. nin0 O#8e'ti!e = 11#. 2C 11*. 11%. 2C 12+. 11&. 2C 121.

2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C 2C / 2C 2C 2C

5&. 125. 12#. 135. 13#. 13%. 12&. 12*. 13+. 135. 13&. 13*. 13#. 13%. 13&. 14+. 141. 142. 122. 123. 3 124.

2C 2C 2C / / / 2C 2C 2C / / / / / / / / / 2C 2C 2C

13&.

131. 132.

2C 2C

14+. 141.

/ /

135. 13#.

/ /

TF A True:False 2C A 2ultiple C-oice / A /0ercise

2*;

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

TRUE*FALSE+Con'e(tua"
1. T-e conceptual framework for accountin" -as (een discovered t-rou"- empirical researc-. 2. ! conceptual framework is a co-erent s)stem of interrelated o(5ectives and fundamentals t-at can lead to consistent standards. 3. T-e first level of t-e conceptual framework identifies t-e reco"nition and measurement concepts used in esta(lis-in" accountin" standards. 4. T-e I! , -as issued a conceptual framework t-at is (roadl) consistent wit- t-at of t-e =nited tates. 5. !lt-ou"- t-e F! , intends to develop a conceptual frameworkB no tatements of Financial !ccountin" Concepts -ave (een issued to date. #. $ecision usefulness is t-e underl)in" t-eme of t-e conceptual framework. %. =sers of financial statements are assumed to -ave no knowled"e of (usiness and financial accountin" matters () financial statement preparers. &. 'elevance and relia(ilit) are t-e two primar) 8ualities t-at make accountin" information useful for decision makin". *. T-e idea of consistenc) does not mean t-at companies cannot switc- from one accountin" met-od to anot-er. 1+. Timeliness and neutralit) are two in"redients of relevance. 11. ;erifia(ilit) and predictive value are two in"redients of relia(ilit). 12. 'evenuesB "ainsB and distri(utions to owners all increase e8uit). 13. Compre-ensive income includes all c-an"es in e8uit) durin" a period e0cept t-ose resultin" from investments () owners and distri(utions to owners. 14. T-e -istorical cost principle would (e of limited usefulness if not for t-e "oin" concern assumption. 15. T-e economic entit) assumption means t-at economic activit) can (e identified wit- a particular le"al entit). 1#. T-e e0pense reco"nition principle states t-at de(its must e8ual credits in eac- transaction. 1%. 'evenues are reali1a(le w-en assets received or -eld are readil) converti(le into cas- or claims to cas-. 1&. upplementar) information ma) include details or amounts t-at present a different perspective from t-at adopted in t-e financial statements.

1*. Companies consider onl) 8uantitative factors in determinin" w-et-er an item is material.

Conceptual Framework =nderl)in" Financial !ccountin"

2*<

2+. Conservatism in accountin" means t-e accountant s-ould attempt to understate assets and income w-en possi(le.

T ue Fa"se Ans,e s+Con'e(tua"

Ite/ 1. 2. 3. 4. 5. Ans) F T F T F Ite/ #. %. &. *. 1+. Ans) T F T T F Ite/ 11. 12. 13. 14. 15. Ans) F F T T F Ite/ 1#. 1%. 1&. 1*. 2+. Ans) F T T F F

MULTIPLE CHOICE+Con'e(tua"
21. .enerall) accepted accountin" principles a. are fundamental trut-s or a0ioms t-at can (e derived from laws of nature. (. derive t-eir aut-orit) from le"al court proceedin"s. c. derive t-eir credi(ilit) and aut-orit) from "eneral reco"nition and acceptance () t-e accountin" profession. d. -ave (een specified in detail in t-e F! , conceptual framework. ! soundl) developed conceptual framework of concepts and o(5ectives s-ould a. increase financial statement usersC understandin" of and confidence in financial reportin". (. en-ance compara(ilit) amon" companiesC financial statements. c. allow new and emer"in" practical pro(lems to (e more 8uickl) solved. d. all of t-ese. D-ic- of t-e followin" 6a:c7 are not true concernin" a conceptual framework in account: in"E a. It s-ould (e a (asis for standard:settin". (. It s-ould allow practical pro(lems to (e solved more 8uickl) () reference to it. c. It s-ould (e (ased on fundamental trut-s t-at are derived from t-e laws of nature. d. !ll of t-e a(ove 6a:c7 are true. D-at is a purpose of -avin" a conceptual frameworkE a. To ena(le t-e profession to more 8uickl) solve emer"in" practical pro(lems. (. To provide a foundation from w-ic- to (uild more useful standards. c. Neit-er a nor (. d. ,ot- a and (. D-ic- of t-e followin" is not a (enefit associated wit- t-e F! , Conceptual Framework 3ro5ectE a. ! conceptual framework s-ould increase financial statement usersC understandin" of and confidence in financial reportin". (. 3ractical pro(lems s-ould (e more 8uickl) solva(le () reference to an e0istin" conceptual framework. c. ! co-erent set of accountin" standards and rules s-ould result. d. ,usiness entities will need far less assistance from accountants (ecause t-e financial reportin" process will (e 8uite eas) to appl).

22.

23.

24.

25.

2*= 2#.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition In t-e conceptual framework for financial reportin"B w-at provides Ft-e w-)F::t-e "oals and purposes of accountin"E a. 2easurement and reco"nition concepts suc- as assumptionsB principlesB and constraints (. 9ualitative c-aracteristics of accountin" information c. /lements of financial statements d. 4(5ectives of financial reportin" T-e underl)in" t-eme of t-e conceptual framework is a. decision usefulness. (. understanda(ilit). c. relia(ilit). d. compara(ilit). D-ic- of t-e followin" is not an o(5ective of financial reportin"E a. To provide information a(out economic resourcesB t-e claims to t-ose resourcesB and t-e c-an"es in t-em. (. To provide information t-at is -elpful to investors and creditors and ot-er users in assessin" t-e amountsB timin"B and uncertaint) of future cas- flows. c. To provide information t-at is useful to t-ose makin" investment and credit decisions. d. !ll of t-ese are o(5ectives of financial reportin". T-e o(5ectives of financial reportin" include all of t-e followin" e0cept to provide information t-at a. is useful to t-e Internal 'evenue ervice in allocatin" t-e ta0 (urden to t-e (usiness communit). (. is useful to t-ose makin" investment and credit decisions. c. is -elpful in assessin" future cas- flows. d. identifies t-e economic resources 6assets7B t-e claims to t-ose resources 6lia(ilities7B and t-e c-an"es in t-ose resources and claims. D-at is a primar) o(5ective of financial reportin" as indicated in t-e conceptual frameworkE a. provide information t-at is useful to t-ose makin" investin" and credit decisions. (. provide information t-at is useful to mana"ement. c. provide information a(out t-ose investin" in t-e entit). d. !ll of t-e a(ove. D-at is a primar) o(5ective of financial reportin" as indicated in t-e conceptual frameworkE a. 3rovide information t-at is -elpful to present and potential investorsB creditorsB and ot-er users in assessin" t-e amountsB timin"B and uncertaint) of future cas- flows. (. 3rovide information t-at is -elpful to present investorsB creditorsB and ot-er users in assessin" t-e amountsB timin"B and uncertaint) of future cas- flows. c. 3rovide information t-at is -elpful to potential investorsB creditorsB and ot-er users in assessin" t-e amountsB timin"B and uncertaint) of future cas- flows. d. None of t-e a(ove.

2%.

2&.

2*.

3+.

31.

Conceptual Framework =nderl)in" Financial !ccountin" 32. D-ic- of t-e followin" is a primar) c-aracteristic of useful accountin" informationE a. Compara(ilit). (. 'elevance. c. Consistenc). d. 2aterialit). D-ic- of t-e followin" is a primar) c-aracteristic of useful accountin" informationE a. Conservatism. (. Compara(ilit). c. 'elia(ilit). d. Consistenc). D-at is meant () compara(ilit) w-en discussin" financial accountin" informationE a. Information -as predictive or feed(ack value. (. Information is reasona(l) free from error. c. Information t-at is measured and reported in a similar fas-ion across companies. d. Information is timel).

2*>

33.

34.

35.

D-at is meant () consistenc) w-en discussin" financial accountin" informationE a. Information t-at is measured and reported in a similar fas-ion across points in time. (. Information is timel). c. Information is measured similarl) across t-e industr). d. Information is verifia(le. D-ic- of t-e followin" is an in"redient of relevanceE a. ;erifia(ilit). (. 'epresentational fait-fulness. c. Neutralit). d. Timeliness. D-ic- of t-e followin" is an in"redient of relia(ilit)E a. 3redictive value. (. Timeliness. c. Neutralit). d. Feed(ack value. C-an"in" t-e met-od of inventor) valuation s-ould (e reported in t-e financial statements under w-at 8ualitative c-aracteristic of accountin" informationE a. Consistenc). (. ;erifia(ilit). c. Timeliness. d. Compara(ilit). Compan) ! issuin" its annual financial reports wit-in one mont- of t-e end of t-e )ear is an e0ample of w-ic- in"redient of primar) 8ualit) of accountin" informationE a. Neutralit). (. Timeliness. c. 3redictive value. d. 'epresentational fait-fulness.

3#.

3%.

3&.

3*.

2 * 9? 4+.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition D-at is t-e 8ualit) of information t-at ena(les users to (etter forecast future operationsE a. 'elia(ilit). (. 2aterialit). c. Compara(ilit). d. 'elevance. 'epresentational fait-fulness is an in"redient of w-ic- primar) 8ualit) of informationE a. 'elia(ilit). (. Compara(ilit). c. 'elevance. d. Consistenc). $ecision makers var) widel) in t-e t)pes of decisions t-e) makeB t-e met-ods of decision makin" t-e) emplo)B t-e information t-e) alread) possess or can o(tain from ot-er sourcesB and t-eir a(ilit) to process information. Conse8uentl)B for information to (e useful t-ere must (e a linka"e (etween t-ese users and t-e decisions t-e) make. T-is link is a. relevance. (. relia(ilit). c. understanda(ilit). d. materialit). T-e overridin" criterion () w-ic- accountin" information can (e 5ud"ed is t-at of a. usefulness for decision makin". (. freedom from (ias. c. timeliness. d. compara(ilit). T-e two primar) 8ualities t-at make accountin" information useful for decision makin" are a. compara(ilit) and consistenc). (. materialit) and timeliness. c. relevance and relia(ilit). d. relia(ilit) and compara(ilit). !ccountin" information is considered to (e relevant w-en it a. can (e depended on to represent t-e economic conditions and events t-at it is intended to represent. (. is capa(le of makin" a difference in a decision. c. is understanda(le () reasona(l) informed users of accountin" information. d. is verifia(le and neutral. T-e 8ualit) of information t-at "ives assurance t-at it is reasona(l) free of error and (ias and is a fait-ful representation is a. relevance. (. relia(ilit). c. verifia(ilit). d. neutralit). !ccordin" to Statement of Financial Accounting Concepts No. 2, w-ic- of t-e followin" relates to (ot- relevance and relia(ilit)E a. 2aterialit) (. =nderstanda(ilit) c. =sefulness d. !ll of t-ese

41.

42.

43.

44.

45.

4#.

4%.

Conceptual Framework =nderl)in" Financial !ccountin" 4&.

2 * 99

!ccordin" to Statement of Financial Accounting Concepts No. 2, timeliness is an in"redient of t-e primar) 8ualit) of 'elevance 'elia(ilit) a. Ges Ges (. No Ges c. Ges No d. No No !ccordin" to Statement of Financial Accounting Concepts No. 2, verifia(ilit) is an in"redient of t-e primar) 8ualit) of 'elevance 'elia(ilit) a. Ges No (. Ges Ges c. No No d. No Ges !ccordin" to Statement of Financial Accounting Concepts No. 2, neutralit) is an in"redient of t-e primar) 8ualit) of 'elevance 'elia(ilit) a. Ges Ges (. No Ges c. Ges No d. No No Information is neutral if it a. provides (enefits w-ic- are at least e8ual to t-e costs of its preparation. (. can (e compared wit- similar information a(out an enterprise at ot-er points in time. c. would -ave no impact on a decision maker. d. is free from (ias toward a predetermined result. T-e c-aracteristic t-at is demonstrated w-en a -i"- de"ree of consensus can (e secured amon" independent measurers usin" t-e same measurement met-ods is a. relevance. (. relia(ilit). c. verifia(ilit). d. neutralit). !ccordin" to Statement of Financial Accounting Concepts No. 2, predictive value is an in"redient of t-e primar) 8ualit) of 'elevance 'elia(ilit) a. Ges No (. Ges Ges c. No No d. No Ges =nder Statement of Financial Accounting Concepts No. 2, representational fait-fulness is an in"redient of t-e primar) 8ualit) of 'elia(ilit) 'elevance a. Ges Ges (. No Ges c. Ges No d. No No

4*.

5+.

51.

52.

53.

54.

2 * 92 55.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition Financial information does not demonstrate consistenc) w-en a. firms in t-e same industr) use different accountin" met-ods to account for t-e same t)pe of transaction. (. a compan) c-an"es its estimate of t-e salva"e value of a fi0ed asset. c. a compan) fails to ad5ust its financial statements for c-an"es in t-e value of t-e measurin" unit. d. none of t-ese. Financial information e0-i(its t-e c-aracteristic of consistenc) w-en a. e0penses are reported as c-ar"es a"ainst revenue in t-e period in w-ic- t-e) are paid. (. accountin" entities "ive accounta(le events t-e same accountin" treatment from period to period. c. e0traordinar) "ains and losses are not included on t-e income statement. d. accountin" procedures are adopted w-ic- "ive a consistent rate of net income. Information a(out different entities and a(out different periods of t-e same entit) can (e prepared and presented in a similar manner. Compara(ilit) and consistenc) are related to w-ic- of t-ese o(5ectivesE Compara(ilit) Consistenc) a. /ntities /ntities (. /ntities 3eriods c. 3eriods /ntities d. 3eriods 3eriods D-en information a(out two different enterprises -as (een prepared and presented in a similar mannerB t-e information e0-i(its t-e c-aracteristic of a. relevance. (. relia(ilit). c. consistenc). d. none of t-ese. T-e elements of financial statements include investments () owners. T-ese are increases in an entit)Cs net assets resultin" from ownersC a. transfers of assets to t-e entit). (. renderin" services to t-e entit). c. satisfaction of lia(ilities of t-e entit). d. all of t-ese. In classif)in" t-e elements of financial statementsB t-e primar) distinction (etween revenues and "ains is a. t-e materialit) of t-e amounts involved. (. t-e likeli-ood t-at t-e transactions involved will recur in t-e future. c. t-e nature of t-e activities t-at "ave rise to t-e transactions involved. d. t-e costs versus t-e (enefits of t-e alternative met-ods of disclosin" t-e transactions involved. ! decrease in net assets arisin" from perip-eral or incidental transactions is called a6n7 a. capital e0penditure. (. cost. c. loss. d. e0pense.

5#.

5%.

5&.

5*.

#+.

#1.

Conceptual Framework =nderl)in" Financial !ccountin" #2.

2 * 92

4ne of t-e elements of financial statements is compre-ensive income. !s descri(ed in Statement of Financial Accounting Concepts No. 6, F/lements of Financial tatementsBF compre-ensive income is e8ual to a. revenues minus e0penses plus "ains minus losses. (. revenues minus e0penses plus "ains minus losses plus investments () owners minus distri(utions to owners. c. revenues minus e0penses plus "ains minus losses plus investments () owners minus distri(utions to owners plus assets minus lia(ilities. d. none of t-ese. D-ic- of t-e followin" elements of financial statements is not a component of compre: -ensive incomeE a. 'evenues (. $istri(utions to owners c. Losses d. /0penses D-ic- of t-e followin" is false wit- re"ard to t-e element Fcompre-ensive incomeFE a. It is more inclusive t-an t-e traditional notion of net income. (. It includes net income and all ot-er c-an"es in e8uit) e0clusive of ownersC invest: ments and distri(utions to owners. c. T-is concept is not )et (ein" applied in practice. d. It e0cludes prior period ad5ustments 6transactions t-at relate to previous periodsB sucas corrections of errors7. !ccordin" to t-e F! , conceptual frameworkB earnin"s a. are t-e same as compre-ensive income. (. e0clude certain "ains and losses t-at are included in compre-ensive income. c. include certain "ains and losses t-at are e0cluded from compre-ensive income. d. include certain losses t-at are e0cluded from compre-ensive income. !ccordin" to t-e F! , Conceptual FrameworkB t-e elements assetsB lia(ilitiesB and e8uit)descri(e amounts of resources and claims to resources atHdurin" a a. (. c. d. 2oment in Time Ges Ges No No 3eriod of Time No Ges Ges No

#3.

#4.

#5.

##.

#%.

D-ic- of t-e followin" is not a (asic element of financial statementsE a. !ssets. (. ,alance s-eet. c. Losses. d. 'evenue. D-ic- of t-e followin" (asic elements of financial statements is more associated wit- t-e (alance s-eet t-an t-e income statementE a. /8uit). (. 'evenue. c. .ains. d. /0penses.

#&.

2 * 96 #*.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition Issuance of common stock for cas- affects w-ic- (asic element of financial statementsE a. 'evenues. (. Losses. c. Lia(ilities. d. /8uit). D-ic- (asic element of financial statements arises from perip-eral or incidental transactionsE a. !ssets. (. Lia(ilities. c. .ains. d. /0penses. D-ic- of t-e followin" is not a (asic assumption underl)in" t-e financial accountin" structureE a. /conomic entit) assumption. (. .oin" concern assumption. c. 3eriodicit) assumption. d. <istorical cost assumption. D-ic- (asic assumption is illustrated w-en a firm reports financial results on an annual (asisE a. /conomic entit) assumption. (. .oin" concern assumption. c. 3eriodicit) assumption. d. 2onetar) unit assumption. D-ic- (asic assumption ma) not (e followed w-en a firm in (ankruptc) reports financial resultsE a. /conomic entit) assumption. (. .oin" concern assumption. c. 3eriodicit) assumption. d. 2onetar) unit assumption. D-ic- accountin" assumption or principle is (ein" violated if a compan) provides financial reports in connection wit- a new product introductionE a. /conomic entit). (. 3eriodicit). c. 'evenue reco"nition. d. Full disclosure. D-ic- of t-e followin" (asic accountin" assumptions is t-reatened () t-e e0istence of severe inflation in t-e econom)E a. 2onetar) unit assumption. (. 3eriodicit) assumption. c. .oin":concern assumption. d. /conomic entit) assumption.

%+.

%1.

%2.

%3.

%4.

%5.

Conceptual Framework =nderl)in" Financial !ccountin" %#.

2 * 9:

$urin" t-e lifetime of an entit) accountants produce financial statements at artificial points in time in accordance wit- t-e concept of a. (. c. d. 4(5ectivit) No Ges No Ges 3eriodicit) No No Ges Ges

%%.

=nder current .!!3B inflation is i"nored in accountin" due to t-e a. economic entit) assumption. (. "oin" concern assumption. c. monetar) unit assumption. d. periodicit) assumption. T-e economic entit) assumption a. is inapplica(le to unincorporated (usinesses. (. reco"ni1es t-e le"al aspects of (usiness or"ani1ations. c. re8uires periodic income measurement. d. is applica(le to all forms of (usiness or"ani1ations. 3reparation of consolidated financial statements w-en a parent:su(sidiar) relations-ip e0ists is an e0ample of t-e a. economic entit) assumption. (. relevance c-aracteristic. c. compara(ilit) c-aracteristic. d. neutralit) c-aracteristic. $urin" t-e lifetime of an entit)B accountants produce financial statements at ar(itrar) points in time in accordance wit- w-ic- (asic accountin" conceptE a. CostH(enefit constraint (. 3eriodicit) assumption c. Conservatism constraint d. 2atc-in" principle D-at accountin" concept 5ustifies t-e usa"e of accruals and deferralsE a. .oin" concern assumption (. 2aterialit) constraint c. Consistenc) c-aracteristic d. 2onetar) unit assumption T-e assumption t-at a (usiness enterprise will not (e sold or li8uidated in t-e near future is known as t-e a. economic entit) assumption. (. monetar) unit assumption. c. conservatism assumption. d. none of t-ese.

%&.

%*.

&+.

&1.

&2.

2 * 9; &3.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition D-ic- of t-e followin" is an implication of t-e "oin" concern assumptionE a. T-e -istorical cost principle is credi(le. (. $epreciation and amorti1ation policies are 5ustifia(le and appropriate. c. T-e current:noncurrent classification of assets and lia(ilities is 5ustifia(le and si"nif): cant. d. !ll of t-ese. 3roponents of -istorical cost ordinaril) maintain t-at in comparison wit- all ot-er valuation alternatives for "eneral purpose financial reportin"B statements prepared usin" -istorical costs are more a. relia(le. (. relevant. c. indicative of t-e entit)Cs purc-asin" power. d. conservative. ;aluin" assets at t-eir li8uidation values rat-er t-an t-eir cost is inconsistent wit- t-e a. periodicit) assumption. (. matc-in" principle. c. materialit) constraint. d. -istorical cost principle. 'evenue is "enerall) reco"ni1ed w-en reali1ed or reali1a(le and earned. T-is statement descri(es t-e a. consistenc) c-aracteristic. (. matc-in" principle. c. revenue reco"nition principle. d. relevance c-aracteristic. .enerall)B revenue from sales s-ould (e reco"ni1ed at a point w-en a. mana"ement decides it is appropriate to do so. (. t-e product is availa(le for sale to t-e ultimate consumer. c. t-e entire amount receiva(le -as (een collected from t-e customer and t-ere remains no furt-er warrant) lia(ilit). d. none of t-ese. 'evenue "enerall) s-ould (e reco"ni1ed a. at t-e end of production. (. at t-e time of cas- collection. c. w-en reali1ed. d. w-en reali1ed or reali1a(le and earned. D-ic- of t-e followin" is not a time w-en revenue ma) (e reco"ni1edE a. !t time of sale (. !t receipt of casc. $urin" production d. !ll of t-ese are possi(le times of revenue reco"nition.

&4.

&5.

&#.

&%.

&&.

&*.

Conceptual Framework =nderl)in" Financial !ccountin" *+.

2 * 9<

=nder Statement of Financial Accounting Concepts No. 5, w-ic- of t-e followin"B in t-e most precise senseB means t-e process of convertin" noncas- resources and ri"-ts into cas- or claims to cas-E a. 'eco"nition (. 2easurement c. 'eali1ation d. !llocation FD-en products 6"oods or services7B merc-andiseB or ot-er assets are e0c-an"ed for cas- or claims to cas-F is a definition of a. allocated. (. reali1ed. c. reali1a(le. d. earned. T-e allowance for dou(tful accountsB w-ic- appears as a deduction from accounts receiva(le on a (alance s-eet and w-ic- is (ased on an estimate of (ad de(tsB is an application of t-e a. consistenc) c-aracteristic. (. matc-in" principle. c. materialit) constraint. d. revenue reco"nition principle. T-e accountin" principle of matc-in" is (est demonstrated () a. not reco"ni1in" an) e0pense unless some revenue is reali1ed. (. associatin" effort 6e0pense7 wit- accomplis-ment 6revenue7. c. reco"ni1in" prepaid rent received as revenue. d. esta(lis-in" an !ppropriation for Contin"encies account. D-ic- of t-e followin" serves as t-e 5ustification for t-e periodic recordin" of depreciation e0penseE a. !ssociation of efforts 6e0pense7 wit- accomplis-ments 6revenue7 (. )stematic and rational allocation of cost over t-e periods (enefited c. Immediate reco"nition of an e0pense d. 2inimi1ation of income ta0 lia(ilit) !pplication of t-e full disclosure principle a. is t-eoreticall) desira(le (ut not practical (ecause t-e costs of complete disclosure e0ceed t-e (enefits. (. is violated w-en important financial information is (uried in t-e notes to t-e financial statements. c. is demonstrated () t-e use of supplementar) information presentin" t-e effects of c-an"in" prices. d. re8uires t-at t-e financial statements (e consistent and compara(le. D-ic- of t-e followin" is an ar"ument a"ainst usin" -istorical cost in accountin"E a. Fair values are more relevant. (. <istorical costs are (ased on an e0c-an"e transaction. c. <istorical costs are relia(le. d. Fair values are su(5ective.

*1.

*2.

*3.

*4.

*5.

*#.

2 * 9= *%.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition D-en is revenue "enerall) reco"ni1edE a. D-en cas- is received. (. D-en t-e warrant) e0pires. c. D-en production is completed. d. D-en t-e sale occurs. D-ic- of t-e followin" are t-e two components of t-e revenue reco"nition principleE a. Cas- is received and t-e amount is material. (. 'eco"nition occurs w-en earned and reali1ed or reali1a(le. c. 3roduction is complete and t-ere is an active market for t-e product. d. Cas- is reali1ed or reali1a(le and production is complete. D-ic- of t-e followin" practices ma) not (e an accepta(le deviation from reco"ni1in" revenue at t-e point of saleE a. =pon receipt of cas-. (. $urin" production. c. =pon receipt of order. d. /nd of production. D-ic- of t-e followin" is not a re8uired component of financial statements prepared in accordance wit- "enerall) accepted accountin" principlesE a. 3residentCs letter to s-are-olders. (. ,alance s-eet. c. Income statement. d. Notes to financial statements. D-at is t-e "eneral approac- as to w-en product costs are reco"ni1ed as e0pensesE a. In t-e period w-en t-e e0penses are paid. (. In t-e period w-en t-e e0penses are incurred. c. In t-e period w-en t-e vendor invoice is received. d. In t-e period w-en t-e related revenue is reco"ni1ed. Not ad5ustin" t-e amounts reported in t-e financial statements for inflation is an e0ample of w-ic- (asic principle of accountin"E a. /conomic entit). (. .oin" concern. c. <istorical cost. d. Full disclosure. 'eco"nition of e0pense related to amorti1ation of an intan"i(le asset illustrates w-icprinciple of accountin"E a. /0pense reco"nition. (. Full disclosure. c. 'evenue reco"nition. d. <istorical cost. D-en s-ould an e0penditure (e recorded as an asset rat-er t-an an e0penseE a. Never. (. !lwa)s. c. If t-e amount is material. d. D-en future (enefit e0its.

*&.

**.

1++.

1+1.

1+2.

1+3.

1+4.

Conceptual Framework =nderl)in" Financial !ccountin" 1+5.

2 * 9>

D-ic- accountin" assumption or principle is (ein" violated if a compan) reports its corporate -ead8uarter (uildin" at its fair value on t-e (alance s-eetE a. .oin" concern. (. 2onetar) unit. c. <istorical cost. d. Full disclosure. D-ic- accountin" assumption or principle is (ein" violated if a compan) is a part) to ma5or liti"ation t-at it ma) lose and decides not to include t-e information in t-e financial statements (ecause it ma) -ave a ne"ative impact on t-e compan)Cs stock priceE a. Full disclosure. (. .oin" concern. c. <istorical cost. d. 2atc-in". D-ic- assumption or principle re8uires t-at all information si"nificant enou"- to affect a decision of reasona(l) informed users s-ould (e reported in t-e financial statementsE a. 2atc-in". (. .oin" concern. c. <istorical cost. d. Full disclosure. ! compan) -as a factor) (uildin" t-at ori"inall) cost t-e compan) I25+B+++. T-e current fair value of t-e factor) (uildin" is I3 million. T-e president would like to report t-e difference as a "ain. T-e write:up would represent a violation of w-ic- accountin" assumption or principleE a. 'evenue reco"nition. (. .oin" concern. c. <istorical cost. d. 2onetar) unit. D-ic- of t-e followin" is a constraint in presentin" financial informationE a. 2aterialit). (. Full disclosure. c. 'elevance. d. Consistenc). !ll of t-e followin" represent costs of providin" financial information e0cept a. preparin". (. disseminatin". c. accessin" capital. d. auditin". D-ic- of t-e followin" are (enefits of providin" financial informationE a. 3otential liti"ation. (. !uditin". c. $isclosure to competition. d. Improved allocation of resources.

1+#.

1+%.

1+&.

1+*.

11+.

111.

2 * 2? 112.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition D-ere is materialit) not used in providin" financial informationE a. !ppl)in" t-e revenue reco"nition principle. (. $eterminin" w-at items to include in t-e financial statements. c. !ppl)in" t-e "oin" concern assumption. d. $eterminin" t-e level of disclosure. D-at is conservatismE a. =nderstatin" assets and net income. (. D-en in dou(tB reco"ni1in" t-e option t-at is least likel) to overstate assets and income. c. 'eco"ni1in" t-e option t-at is least likel) to overstate assets and income. d. 'eco"ni1in" revenue w-en earned and reali1ed. /0pensin" t-e cost of cop) paper w-en t-e paper is ac8uired is an e0ample of w-icconstraintE a. 2aterialit). (. Cost:(enefit. c. Conservatism. d. Industr) practices. D-ic- of t-e followin" statements concernin" t-e cost:(enefit relations-ip is not trueE a. ,usiness reportin" s-ould e0clude information outside of mana"ementCs e0pertise. (. 2ana"ement s-ould not (e re8uired to report information t-at would si"nificantl) -arm t-e compan)Cs competitive position. c. 2ana"ement s-ould not (e re8uired to provide forecasted financial information. d. If needed () financial statement usersB mana"ement s-ould "at-er information not included in t-e financial statements t-at would not ot-erwise (e "at-ered for internal use. =nder Statement of Financial Accounting Concepts No. 2, w-ic- of t-e followin" relates to (ot- relevance and relia(ilit)E a. Cost:(enefit constraint (. 3redictive value c. ;erifia(ilit) d. 'epresentational fait-fulness C-ar"in" off t-e cost of a waste(asket wit- an estimated useful life of 1+ )ears as an e0pense of t-e period w-en purc-ased is an e0ample of t-e application of t-e a. consistenc) c-aracteristic. (. matc-in" principle. c. materialit) constraint. d. -istorical cost principle. D-ic- of t-e followin" statements a(out materialit) is not correctE a. !n item must make a difference or it need not (e disclosed. (. 2aterialit) is a matter of relative si1e or importance. c. !n item is material if its inclusion or omission would influence or c-an"e t-e 5ud"ment of a reasona(le person. d. !ll of t-ese are correct statements a(out materialit).

113.

114.

115.

11#.

11%.

11&.

Conceptual Framework =nderl)in" Financial !ccountin" 11*.

2 * 29

D-ic- of t-e followin" are considered pervasive constraints () Statement of Financial Accounting Concepts No. 2E a. Cost:(enefit relations-ip and conservatism (. Timeliness and feed(ack value c. Conservatism and verifia(ilit) d. 2aterialit) and cost:(enefit relations-ip T-e (asic accountin" concept t-at refers to t-e tendenc) of accountants to resolve uncertaint) in favor of understatin" assets and revenues and overstatin" lia(ilities and e0penses is known as t-e a. conservatism constraint. (. materialit) constraint. c. su(stance over form principle. d. industr) practices constraint. D-ic- of t-e followin" (est illustrates t-e accountin" concept of conservatismE a. =se of t-e allowance met-od to reco"ni1e (ad de(t losses from credit sales (. =se of t-e lower of cost or market approac- in valuin" inventories. c. =se of t-e same accountin" met-od from one period to t-e ne0t in computin" depreciation e0pense d. =tili1ation of a polic) of deli(erate understatement of asset values in order to present a conservative net income fi"ure Trade:offs (etween t-e c-aracteristics t-at make information useful ma) (e necessar) or (eneficial. Issuance of interim financial statements is an e0ample of a trade:off (etween a. relevance and relia(ilit). (. relia(ilit) and periodicit). c. timeliness and materialit). d. understanda(ilit) and timeliness. !llowin" firms to estimate rat-er t-an p-)sicall) count inventor) at interim 68uarterl)7 periods is an e0ample of a trade:off (etween a. verifia(ilit) and relia(ilit). (. relia(ilit) and compara(ilit). c. timeliness and verifia(ilit). d. neutralit) and consistenc).

12+.

121.

122.

123.

124. In matters of dou(t and "reat uncertaint)B accountin" issues s-ould (e resolved () c-oosin" t-e alternative t-at -as t-e least favora(le effect on net incomeB assetsB and ownersC e8uit). T-is "uidance comes from t-e a. materialit) constraint. (. industr) practices constraint. c. conservatism constraint. d. full disclosure principle.

2 * 22

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

Mu"ti("e C$oi'e Ans,e s+Con'e(tua"

Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans)

21. 22. 23. 24. 25. 2#. 2%. 2&. 2*. 3+. 31. 32. 33. 34. 35. 3#.

c d c d d d a d a a a ( c c a d

3%. 3&. 3*. 4+. 41. 42. 43. 44. 45. 4#. 4%. 4&. 4*. 5+. 51. 52.

c a ( d a c a c ( ( d c d ( d c

53. 54. 55. 5#. 5%. 5&. 5*. #+. #1. #2. #3. #4. #5. ##. #%. #&.

a c d ( ( d d c c d ( d ( a ( a

#*. %+. %1. %2. %3. %4. %5. %#. %%. %&. %*. &+. &1. &2. &3. &4.

d c d c ( ( a c c d a ( a d d a

&5. &#. &%. &&. &*. *+. *1. *2. *3. *4. *5. *#. *%. *&. **. 1++.

d c d d d c ( ( ( ( c a d ( c a

1+1. 1+2. 1+3. 1+4. 1+5. 1+#. 1+%. 1+&. 1+*. 11+. 111. 112. 113. 114. 115. 11#.

d c a d c a d c a c d c ( a d a

11%. 11&. 11*. 12+. 121. 122. 123. 124.

c d d a ( a c c

olutions to t-ose 2ultiple C-oice 8uestions for w-ic- t-e answer is Jnone of t-ese.K 55. a compan) c-an"es its inventor) met-od ever) few )ears in order to ma0imi1e reported income 6ot-er answers are possi(le7. 5&. compara(ilit). #2. c-an"e in e8uit) of an entit) durin" a period from transactions and ot-er events and circumstances from nonowner sources. &2. "oin" concern assumption. &%. an e0c-an"e -as taken place and t-e earnin"s process is virtuall) complete.

MULTIPLE CHOICE+CPA A%a(te%

125. !ccordin" to t-e F! ,Cs conceptual frameworkB predictive value is an in"redient of 'elevance 'elia(ilit) a. Ges No (. Ges Ges c. No Ges d. No No !ccordin" to t-e F! ,Cs conceptual frameworkB w-ic- of t-e followin" relates to (otrelevance and relia(ilit)E Consistenc) ;erifia(ilit) a. Ges Ges (. Ges No c. No Ges d. No No

12#.

Conceptual Framework =nderl)in" Financial !ccountin" 12%.

2 * 22

T-e F! ,Cs conceptual framework classifies "ains and losses (ased on w-et-er t-e) are related to an entit)Cs ma5or on"oin" or central operations. T-ese "ains or losses ma) (e classified as Nonoperatin" 4peratin" a. Ges No (. Ges Ges c. No Ges d. No No !ccordin" to t-e F! ,Cs conceptual frameworkB earnin"s a. is t-e same as compre-ensive income. (. e0cludes certain "ains and losses t-at are included in compre-ensive income. c. includes certain "ains and losses t-at are e0cluded from compre-ensive income. d. includes certain losses t-at are e0cluded from compre-ensive income. !ccordin" to t-e F! ,Cs conceptual frameworkB compre-ensive income includes w-ic- of t-e followin"E 4peratin" Income Investments () 4wners a. Ges No (. Ges Ges c. No Ges d. No No !ccordin" to t-e F! ,Cs conceptual frameworkB t-e calculation of compre-ensive income includes w-ic- of t-e followin"E Income from $istri(utions Continuin" 4perations to 4wners a. No No (. Ges No c. Ges Ges d. No Ges !ccordin" to t-e F! ,Cs conceptual frameworkB compre-ensive income includes w-ic- of t-e followin"E .ross 2ar"in 4peratin" Income a. No Ges (. No No c. Ges No d. Ges Ges =nder tatements of Financial !ccountin" ConceptsB compre-ensive income includes w-ic- of t-e followin"E .ains .ross 2ar"in a. No No (. No Ges c. Ges No d. Ges Ges

12&.

12*.

13+.

131.

132.

2 * 26 133.

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition !ccordin" to t-e F! ,Cs conceptual frameworkB t-e process of reportin" an item in t-e financial statements of an entit) is a. reco"nition. (. reali1ation. c. allocation. d. matc-in".

Mu"ti("e C$oi'e Ans,e s+CPA A%a(te%

Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans) Ite/ Ans)

125. 12#.

a (

12%. 12&.

( (

12*. 13+.

a (

131. 132.

d d

133.

E3ERCISES
E@) 2*926?/0amination of t-e conceptual framework. !t an F! , Concept Framework )mposiumB a former mem(er of t-e F! , discussed -is views of a conceptual framework. ome e0cerpts> tandard ettin" in t-e 3rivate ector ! framework of concepts comprises ideas t-at coordinate to form t-e fa(ric of a s)stem> t-e) determine its (ounds. In a s)stem like financial reportin" t-at serves a (road pu(lic purposeB t-e first plank in t-e framework identifies t-e pu(lic role. T-e decision of t-e pu(lic sector in t-e 1*3+s to look at t-e private sector for t-e principal t-rust to standard settin" was sound and e0traordinaril) enli"-tened. T-e credence "iven financial reportin" will determine w-et-er t-e private sectorCs role in standard settin" will "row or s-rink. !n opera(le conceptual framework will "o a lon" wa) in providin" t-e necessar) level of credi(ilit). Dit-out an opera(le conceptual frameworkB continuation of standard settin" () t-e private sector would stand in considera(le 5eopard). /ssence of t-e Conceptual Framework T-e conceptual formulation starts wit- t-e (road role of financial reportin" in societ). It>

Identifies its uni8ue competenceB t-at isB its (ounds. tates t-e o(5ectives of t-e reportin". $efines t-e t-in"s admissi(le to financial statements. Identifies t-e circumstances tri""erin" admission and 8ualities to (e met for admission to financial statements. elects useful measurements of t-in"s admitted. Furnis-es criteria for displa).

T-ose are ma5or pieces of t-e framework. T-ere are ot-ersB of course. T-e various parts are in a -ierarc-) ran"in" from -i"-l) a(stract to reasona(l) concrete. T-e) lend "uidance?t-e) do not provide simpleB no:t-ink answers. T-e) leave open a si"nificant ran"e for -ard t-inkin" and deli(eration a(out reportin" standards. T-e) furnis- t-e reference point for t-e t-inkin".

Conceptual Framework =nderl)in" Financial !ccountin" Inst u'tions 1. D-at are t-e (asic components of t-e conceptual frameworkE 2. D-at are )our views a(out t-e success of t-e conceptual frameworkE So"ution 2*926

2 * 2:

1. T-e (asic components of t-e conceptual framework are> a. 4(5ectives?present t-e "oals and purposes of accountin". (. 9ualitative c-aracteristics?t-e c-aracteristics t-at make accountin" information useful. c. /lements?provide t-e definitions of t-e (road classifications of items found in financial statements. d. 4perational "uidelines 6reco"nition and measurement concepts7?recommend concepts to "uide decisions concernin" t-e displa) and disclosure of information a(out incomeB cas- flowsB and financial position. T-e operational "uidelines are composed of t-ree parts> 617 ,asic assumptions. 627 !ccountin" principles. 637 Constraints. 2. In "eneralB t-e success of t-e conceptual framework will (e determined () its acceptance in practice. T-e acceptance in practice will (e (ased in lar"e part upon t-e F! ,Cs solution of practical pro(lems on a timel) (asis. It is a matter of opinion and )et to (e seen w-et-er or not t-e conceptual framework will (rin" a(out t-e followin" (enefits. a. T-e F! , s-ould (e a(le to issue more useful and consistent standards in t-e future. (. New practice pro(lems s-ould (e solved more rapidl) () reference to an e0istin" framework. c. ,etter understandin" of and confidence in t-e financial reportin" process () financial statement users s-ould result. d. /n-anced compara(ilit) amon" companiesC financial statements s-ould result.

E@) 2*92:?!ccountin" concepts?identification. tate t-e accountin" assumptionB principleB information c-aracteristicB or constraint t-at is most applica(le in t-e followin" cases. 1. !ll pa)ments less t-an I25 are e0pensed as incurred. 6$o not use conservatism.7 2. T-e compan) emplo)s t-e same inventor) valuation met-od from period to period. 3. ! patent is capitali1ed and amorti1ed over t-e periods (enefited. 4. !ssumin" t-at dollars toda) will (u) as muc- as ten )ears a"o. 5. 'ent paid in advance is recorded as prepaid rent. #. Financial statements are prepared eac- )ear. %. !ll si"nificant post:(alance s-eet events are reported. &. 3ersonal transactions of t-e proprietor are distin"uis-ed from (usiness transactions.

2 * 2;

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

So"ution 2*92: 1. 2. 3. 4. 5. #. %. &. 2aterialit) constraint. Consistenc) c-aracteristic. 2atc-in" principle or "oin" concern assumption. 2onetar) unit assumption. 2atc-in" principle or "oin" concern assumption. 3eriodicit) assumption. Full disclosure principle. /conomic entit) assumption.

E@) 2*92;?!ccountin" concepts?identification. 3resented (elow are a num(er of accountin" procedures and practices in 'amire1 Corp. For eac- of t-ese itemsB list t-e assumptionB principleB information c-aracteristicB or modif)in" convention t-at is violated. 1. ,ecause t-e compan)Cs income is low t-is )earB a switc- from accelerated depreciation to strai"-t:line depreciation is made t-is )ear. 2. T-e president of 'amire1 Corp. (elieves it is foolis- to report financial information on a )earl) (asis. InsteadB t-e president (elieves t-at financial information s-ould (e disclosed onl) w-en si"nificant new information is availa(le related to t-e compan)Cs operations. 3. 'amire1 Corp. decides to esta(lis- a lar"e loss and related lia(ilit) t-is )ear (ecause of t-e possi(ilit) t-at it ma) lose a pendin" patent infrin"ement lawsuit. T-e possi(ilit) of loss is considered remote () its attorne)s. 4. !n officer of 'amire1 Corp. purc-ased a new -ome computer for personal use wit- compan) mone)B c-ar"in" miscellaneous e0pense. 5. ! mac-ineB t-at cost I4+B+++B is reported at its current market value of I45B+++. So"ution 2*92; 1. 2. 3. 4. 5. Consistenc). 3eriodicit). 2atc-in" 6alsoB conservatism7. /conomic entit). <istorical cost 6alsoB revenue reco"nition7L. L'eportin" t-e asset at F2; of I45B+++ implies t-e followin" entr)> 2ac-ine..................................................................................... 5B+++ 'evenue........................................................................

5B+++

E@) 2*92<?!ccountin" concepts?matc-in". Listed (elow are several information c-aracteristics and accountin" principles and assumptions. 2atc- t-e letter of eac- wit- t-e appropriate p-rase t-at states its application. 6Items a t-rou"- k ma) (e used more t-an once or not at all.7 a. /conomic entit) assumption (. .oin" concern assumption c. 2onetar) unit assumption ". 2atc-in" principle -. Full disclosure principle i. 'elevance c-aracteristic

Conceptual Framework =nderl)in" Financial !ccountin" E@) 2*92< 6cont.7 d. 3eriodicit) assumption e. <istorical cost principle f. 'evenue reco"nition principle MMMMM 1. 5. 'elia(ilit) c-aracteristic k. Consistenc) c-aracteristic

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ta(le:dollar assumption 6do not use -istorical cost principle7.

MMMMM 2. /arnin" process completed and reali1ed or reali1a(le. MMMMM 3. 3resentation of error:free information wit- representational fait-fulness. MMMMM 4. Gearl) financial reports. MMMMM 5. !ccruals and deferrals in ad5ustin" and closin" process. 6$o not use "oin" concern.7 MMMMM #. =seful standard measurin" unit for (usiness transactions. MMMMM %. Notes as part of necessar) information to a fair presentation. MMMMM &. !ffairs of t-e (usiness distin"uis-ed from t-ose of its owners. MMMMM *. ,usiness enterprise assumed to -ave a lon" life. MMMMM 1+. ;aluin" assets at amounts ori"inall) paid for t-em. MMMMM 11. !pplication of t-e same accountin" principles as in t-e precedin" )ear. MMMMM 12. ummari1in" si"nificant accountin" policies. MMMMM 13. 3resentation of timel) information wit- predictive and feed(ack value. So"ution 2*92< 1. c 2. f 3. 5 4. d 5. " #. c %. &. a *. ( 1+. e 11. k 12. 13. i

E@) 2*92=?!ccountin" concepts?fill in t-e (lanks. Fill in t-e (lanks (elow wit- t-e accountin" principleB assumptionB or related item t-at best completes t-e sentence. 1. MMMMMMMMMMMMMMMMMMMMMMMM and MMMMMMMMMMMMMMMMMMMMMMM are t-e two primar) 8ualities t-at make accountin" information useful for decision makin". 2. Information t-at -elps users confirm or correct prior e0pectations -as MMMMMMMMMMMMMMMMM MMMMMMMMMMMMMMMMMMM. 3. MMMMMMMMMMMMMMMMMMMMMMMM ena(les users to identif) t-e real similarities and differences in economic p-enomena (ecause t-e information -as (een measured and reported in a similar manner for different enterprises. 4. ome costs w-ic- "ive rise to future (enefits cannot (e directl) associated wit- t-e revenues t-e) "enerate. uc- costs are allocated in a MMMMMMMMMMMMMMMMMM and MMMMMMMMMMMMMMMMM manner to t-e periods e0pected to (enefit from t-e cost.

2 * 2=

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

E@) 2*92= 6cont.7 5. MMMMMMMMMMMMMMMMMMMMMMM would allow t-e e0pensin" of all repair tools w-en purc-asedB even t-ou"- t-e) -ave an estimated life of 3 )ears. #. T-e MMMMMMMMMMMMMMMMMMMMMMMM c-aracteristic re8uires t-at t-e same accountin" met-od (e used from one accountin" period to t-e ne0tB unless it (ecomes evident t-at an alternative met-od will (rin" a(out a (etter description of a firmCs financial situation. %. MMMMMMMMMMMMMMMMMMMM "uides accountants to select t-e accountin" treatment t-at is least likel) to overstate income and assets. &. 3arent-etical (alance s-eet disclosure of t-e inventor) met-od utili1ed () a particular compan) is an application of t-e MMMMMMMMMMMMMMMMMMMMMMM principle. *. Corporations must prepare accountin" reports at least )earl) due to t-e MMMMMMMMMMMMMMM assumption. 1+. 'ecordin" and reportin" inflows at t-e end of production is an allowa(le e0ception to t-e MMMMMMMMMMMMMMMMM principle. So"ution 2*92= 1. 2. 3. 4. 5. 'elevanceN relia(ilit) feed(ack value Compara(ilit) rationalN s)stematic T-e materialit) convention #. %. &. *. 1+. consistenc) Conservatism full disclosure periodicit) revenue reco"nition

E@) 2*92>?,asic assumptions. ,riefl) e0plain t-e four (asic assumptions t-at underlie financial accountin". So"ution 2*92> 1. T-e economic entit) assumption states t-at economic activit) can (e identified wit- a particular unit of accounta(ilit). 2. T-e "oin" concern assumption assumes t-at a (usiness enterprise will -ave a lon" life. 3. T-e monetar) unit assumption means t-at mone) is t-e common denominator of economic activit) and provides an appropriate (asis for accountin" measurement and anal)sis. In additionB t-e monetar) unit remains reasona(l) sta(le. 4. T-e periodicit) assumption implies t-at t-e economic activities of an enterprise can (e divided into artificial time periods.

Conceptual Framework =nderl)in" Financial !ccountin" E@) 2*96??'evenue reco"nition.

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'evenue is "enerall) reco"ni1ed at t-e point of sale. T-ere are t-ree e0ceptionsB -owever. Name t-e time for eac- e0ceptionB "ive two 8ualifications or criteria for t-e use of eac- e0ceptionB and "ive an e0ample for eac- e0ception. So"ution 2*96? 1. $urin" production. T-e revenue is known 6contract7 or dependa(l) estima(le. Total costs are estima(le or ot-er means are availa(le to estimate pro"ress toward completion. /0amples are lon":term construction contracts and service:t)pe transactions. 2. !t completion. T-ere are 8uoted prices. =nits are interc-an"ea(le. T-ere are no si"nificant distri(ution costs. /0amples are precious metals or a"ricultural products. 3. !t collection. T-ere is no reasona(le (asis for estimatin" t-e de"ree of collecti(ilit). Costs of collectionB (ad de(tsB and repossessions are not estima(le. /0amples are installment sales and cost recover) met-od.

E@) 2*969?<istorical cost principle. Cost as a (asis of accountin" for assets -as (een severel) critici1ed. D-at defense can )ou (uild for cost as t-e (asis for financial accountin"E So"ution 2*969 Cost is definite and verifia(le and not a matter for con5ecture or opinion. 4nce esta(lis-edB cost is fi0ed as lon" as t-e asset remains t-e propert) of t-e part) t-at incurred t-e cost. Cost is (ased on factN t-at isB it is t-e result of an armCs len"t- transaction. Cost is also measura(le or determina(le. 4ver t-e )earsB accountants -ave found cost to (e t-e most practical (asis for record keepin". Financial statements prepared on a cost (asis provide (usiness enterprise information -avin" a commonB accepted (asis from w-ic- eac- reader can make inferencesB comparisonsB and anal)ses.

E@) 2*962?2atc-in" concept. ! concept is a "roup of related ideas. 2atc-in" could (e considered a concept (ecause it includes ideas related to (ot- revenue reco"nition and e0pense reco"nition. ,riefl) e0plain t-e ideas in 6a7 revenue reco"nition and 6(7 e0pense reco"nition. So"ution 2*962 6a7 T-e ideas in revenue reco"nition include t-e Ft-ree 'CsF and FearnedF> 1. 'evenues are inflows of net assets from deliverin" or producin" "oods or services or ot-er earnin" activities t-at are t-e ma5or operations of an enterprise durin" a period. 2. 'eco"nition is recordin" and reportin" in t-e financial statements. 3. 'evenues are realized w-en "oods or services are e0c-an"ed for cas- or claims to cas-.

2 * 2?

Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

So"ution 2*962 6cont.7 4. 'evenues are earned w-en t-e earnin"s process is complete or virtuall) complete. T-e revenue reco"nition principle is t-at revenue is reco"ni1ed w-en it is reali1ed and it is earned. 6(7 T-e ideas in e0pense reco"nition include Fe0penseF and Fmatc-in"F> 1. /0penses are outflows of net assets durin" a period from deliverin" or producin" "oods or services or ot-er activities t-at are t-e ma5or operations of t-e entit). 2. /0penses are reco"ni1ed w-en t-e "oods or services 6efforts7 make t-eir contri(ution to revenue. T-e e0pense reco"nition principle is t-at e0penses are matc-ed wit- revenues. /0penses are matc-ed t-ree wa)s> 1. D-en t-ere is an association wit- revenueB e0penses are matc-ed wit- revenues in t-e period t-e revenues are reco"ni1ed. 2. D-en no association wit- revenue is evidentB e0penses are allocated on some s)stematic and rational (asis. 3. D-en no association wit- revenue is evident and no future (enefits are e0pectedB e0penses are reco"ni1ed immediatel).

Conceptual Framework =nderl)in" Financial !ccountin"

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IFRS 7UESTIONS
T ue A Fa"se 1. T-e conceptual framework underl)in" =. . .!!3 is similar to t-at underl)in" i.!!3. 2. T-e F! , conceptual framework specificall) identifies accrual (asis accountin" as one of its fundamental assumptions. 3. 4ne of two assumptions made () t-e I! , conceptual framework is t-at t-e reportin" entit) is a "oin" concern. 4. 4ne of t-e c-allen"es in developin" a common conceptual framework will (e to a"ree on -ow t-e framework s-ould (e or"ani1ed since t-e F! , and I! , conceptual frameworks are or"ani1ed in ver) different wa)s. 5. 4ne issue t-at t-e I! , and F! , must resolve in developin" a common conceptual framework is -ow control s-ould (e defined wit- re"ard to t-e definition of an asset. Ans,e s to T ue A Fa"se questionsB 1. True 2. False 3. True 4. False 5. True

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Test -an. &o Inte /e%iate A''ountin01 T$i teent$ E%ition

Mu"ti("e C$oi'e 7uestionsB 1. D-ic- of t-e followin" statements re"ardin" t-e I! , and F! , conceptual frameworks is not correctE a. T-e e0istin" I! , and F! , conceptual frameworks are or"ani1ed in similar wa)s. (. T-e two assumptions of t-e I! , framework are t-at t-e financial statements are prepared on an accrual (asis and t-at t-e reportin" entit) is a "oin" concern. c. T-e F! , and I! , a"ree t-at t-e sole o(5ective of financial reportin" is to provide users wit- information t-at is useful for decision:makin". d. T-e F! , conceptual framework discusses t-e concept of accrual (asis accountin" in detailB (ut does not specificall) identit) it as an assumption. T-e issues w-ic- t-e F! , and I! , must address in developin" a common conceptual framework include all of t-e followin" e0cept> a. -ould t-e common framework lead to standards t-at are principles:(ased or rules: (asedE (. -ould t-e role of financial reportin" focus on stewards-ip as well as providin" information to assist users in decision makin"E c. -ould t-e c-aracteristic of relia(ilit) (e traded:off in favor of information t-at is verifia(leE d. -ould a sin"le measurement met-od suc- as -istorical cost (e usedE

2.

Ans,e s to Mu"ti("e C$oi'eB 1. c 2. a

S$o t Ans,e B 1. D-at two assumptions are central to t-e i.!!3 conceptual frameworkE 1. T-e I! , framework makes two assumptions. 4ne assumption is t-at financial statements are prepared on an accrual (asisN t-e ot-er is t-at t-e reportin" entit) is a "oin" concern. T-e F! , discuss accrual accountin" e0tensivel) (ut does not identif) it as an assumption. T-e "oin" concern concept is onl) (riefl) discussed. T-e "oin" concern concept will undou(tedl) (e de(ated as to its place in t-e conceptual framework. 2. $o t-e i.!!3 and =. . .!!3 conceptual frameworks differ in terms of t-e role of financial reportin"E /0plain. 2. D-ile t-ere is some a"reement t-at t-e role of financial reportin" is to assist users in decision:makin"B t-e I! , framework -as -ad more of a focus on t-e o(5ective of providin" information on mana"ement@s performance?often referred to as stewards-ip. It is likel) t-at t-ere will (e muc- de(ate re"ardin" t-e role of stewards-ip in t-e conceptual framework.