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CFAS Conceptual Framework (Millan&Valix)| 223
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A complete, comprehensive and single document promulgated by the International Accounting Standards Board. Correct Answer: Conceptual Framework for Financial Reporting A summary of the terms and concepts that underlie the preparation and presentation of financial statements for external users. It is also an attempt to provide an overall theoretical foundation for accounting. Correct Answer: Conceptual Framework Intended to guide standard-setters, preparers and users of financial information in the preparation and presentation of statements. Correct Answer: Conceptual Framework It is the underlying theory for the development of accounting standards and revision of previously issued accounting standards. It is also concerned with general purpose financial statements, including consolidated financial statements. Correct Answer: Conceptual Framework The financial statements are prepared at least ___________ and are directed toward the common needs of a wide range of users. Correct Answer: Annually 1)PFRSs 2)Judgment When making the judgment:
Management shall consider the following: a) Requirements in other PFRSs dealing with similar transactions b) Conceptual Framework Management may consider the following: a) Pronouncements issued by other standard-setting bodies b) Other accounting literature and industry practices Correct Answer: Hierarchy of Reporting Standards a. To assist the FRSC in developing accounting standards and reviewing existing standards. b. To assist preparers of financial statements in applying accounting standards and in dealing with issues not yet covered by GAAP. c. To assist the FRSC in the review and adoption of International Financial Reporting Standards. d. To assist users of financial statements in interpreting the information contained in the financial statements. e. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP. f. To provide information to those interested in the work of the FRSC in the formulation of PFRS. Correct Answer: Purposes of Conceptual Framework
If there is a standard or an interpretation that specifically applies to a transaction, the standard or interpretation overrides the ____________ _______________. Correct Answer: Conceptual Framework In the absence of standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the ____________ _____________ in developing and applying an accounting policy that results in information that is relevant and reliable. Correct Answer: Conceptual Framework It is to be stated that the Conceptual Framework is not a ______________. Correct Answer: Philippine Financial Reporting Standard/PRFS In case where there is a conflict, the requirements of the ________________________ shall prevail over the Conceptual Framework. Correct Answer: Philippine Financial Reporting Standards/PFRSs The ________________________ may be revised from time to time based on the IASB's experience of working with it. However, revisions do not automatically result to changes in the Standards-not until after the IASB goes through its due process of amending a Standard. Correct Answer: Conceptual Framework To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Correct Answer: Objective of General Purpose Financial Reporting The objective of General Purpose Financial Reporting is the ______________ of the Conceptual Framework. Correct Answer: Foundation Include the existing and potential investors, lenders and other creditors. They are the parties to whom general purpose financial reports are primarily directed. They cannot require reporting entities to provide information directly to them and therefore must rely on general purpose financial reports for much of the financial information they need. Correct Answer: Primary users Are concerned with the risk inherent in and return provided by their investments. They need information to help them determine whether they should buy, hold or sell. Correct Answer: Existing and Potential Investors Are also interested in information which enables them to assess the ability of the entity to pay dividends. Correct Answer: Shareholders Are interested in information which enables them to determine whether their loans, interest thereon and other amounts owing to them will be paid when due. Correct Answer: Lenders and other creditors Refer to those who extend loans. (E.g., banks). Correct Answer: Lenders
Include not only financial statements but also other information such as financial highlights, summary of important financial figures, analysis of financial statements and significant ratios. Correct Answer: Financial Reports Include nonfinancial information such as description of major products and a listing of corporate officers and directors. Correct Answer: Financial Reports Is directed primarily to the existing and potential investors, lenders and other creditors which compose the primary user group. Correct Answer: Financial Reporting These are the parties and users of financial information that provide resources to the entity. Correct Answer: Primary Users Information that meets the needs of the specified primary users is likely to meet the needs of ______________ such as employees, customers, governments and other agencies. Correct Answer: Other users To provide information that is useful for decision making. Correct Answer: Overall Objective of Financial Reporting States the following objectives of financial reporting: a. To provide information useful in making decisions about providing resources to the entity. b. To provide information useful in assessing the cash flow prospects of the entity. c. To provide information about entity resources, claims and changes in resources and claims. Correct Answer: Conceptual Framework for Financial Reporting Need general purpose financial reports in order to enable them in making decision Correct Answer: Existing and potential investors They need general purpose financial reports in order to enable them in making decisions whether to provide or settle loans and other forms of credit. Correct Answer: Existing and potential lenders and other creditors It should provide information that is useful in assessing the amount, timing and uncertainty of prospects for future net cash inflows to the entity. Correct Answer: Financial Reporting Provide information about the financial position of a reporting entity. Correct Answer: General Purpose Financial Reports Information about the entity's economic resources and the claims against the reporting entity. In other words, it comprises the assets, liabilities and equity of an entity at a particular moment of time. Correct Answer: Financial Position Are the assets and claims or the liabilities and equity of the entity. Correct Answer: Economic Resources
Information on financial performance(income and expenses) and other transactions and events that lead to changes in financial position. Correct Answer: Changes in economic resources and claims Under the Conceptual Framework, information on economic resources, claims and changes in economic resources and claims are called _______________________. Correct Answer: Economic phenomena Information about the nature and amounts of an entity's economic resources(assets) and claims(liabilities and equity) that can help users to identify the entity's financial strengths and weaknesses. Correct Answer: Economic resources and claims Information about _____________________________ can help users to assess the entity's liquidity, solvency and the need for additional financing. Correct Answer: Financial Position Is the availability of cash in the near future to cover currently maturing obligations. In other words, it refers to the entity's ability to pay short-term obligations. Correct Answer: Liquidity Is the availability of cash over a long term to meet financial commitments when they fall due. In other words, it refers to the entity's ability to meet its long-term obligations. Correct Answer: Solvency Information on _____________________________ helps users assess the entity's ability to produce return from its economic resources. Correct Answer: Financial Performance Also provide information about the effects of transactions and other events that change the economic resources and claims. Correct Answer: General purpose financial reports Changes in economic resources and claims result from ___________________ and from other events or transactions, such as issuing debt or equity instruments. Correct Answer: Financial Performance The ______________________ of an entity comprises revenue, expenses and net income or loss for a period of time. In other words, it is the level of income earned by the entity through the efficient and effective use of its resources. Correct Answer: Financial Performance The financial performance of an entity is also known as ___________________________ and is portrayed in the income statement and statement of comprehensive income. Correct Answer: Results of operations Information about ______________________________ is usually helpful in predicting the future returns on the entity's economic resources. Correct Answer: Past Financial Performance Information about ____________________________ during a period is useful in assessing the entity's ability to generate future cash inflows from operations. Correct Answer: Financial Performance
The going concern postulate is the very foundation of the _____________________. Correct Answer: Cost Principle With this assumption, assets are normally recorded at cost. As a rule, market values are ignored. Correct Answer: Going Concern If there is evidence that the entity would experience large and persistent losses or that the entity's operations are to be terminated, the going concern assumption is abandoned. Correct Answer: Liquidating Concern Under this assumption, the entity is separate from the owners, managers, and employees who constitute the entity. Accordingly, the transactions of the entity shall not be merged with the transactions of the owners. Correct Answer: Accounting entity The reason for this assumption is to have a fair presentation of financial statements. The personal transactions of the owners shall not be allowed to distort the financial statements of the entity. Correct Answer: Accounting Entity When parent and subsidiary relationship exists, ____________________ for the affiliates are usually made because for practical and economic purposes, the parent and the subsidiary are a single economic entity. Correct Answer: Consolidated Statements Requires that the indefinite life of an entity is subdivided into accounting periods which are usually of equal length for the purpose of preparing financial reports on financial position, performance and cash flow. Correct Answer: Time Period Assumption By convention, the accounting period or fiscal period is ___________ or _____________. Correct Answer: One year/12 months The ______________ is traditionally the accounting period because usually it is the time after that government reports are required. Correct Answer: One-year period A _____________ is a twelve-month period that ends on December 31. Correct Answer: Calendar year A ___________________ is a twelve-month period that ends on any month when the business is at the lowest or experiencing slack season. Correct Answer: Natural business year/fiscal year It has two aspects, namely quantifiability and stability of the peso. Correct Answer: Monetary Unit Assumption Means that the assets, liabilities, equity, income and expenses should be stated in terms of a unit of measure which is the peso in the Philippines. Correct Answer: Quantifiability Means that the purchasing power of the peso is stable or constant and that its instability is insignificant and therefore may be ignored. It is usually an amplification of the going concern
assumption so much so that the adjustments are unnecessary to reflect any changes in purchasing power. Correct Answer: Stability of the peso assumption The _______________________ is to account for nominal pesos only and not for constant pesos or changes in purchasing power. Correct Answer: Accounting function Are the qualities and attributes that make financial accounting information useful to the users. It also identify the types of information that are likely to be most useful to the primary users in making decisions using an entity's financial report. Correct Answer: Qualitative Characteristics The Conceptual Framework classifies qualitative characteristics into __________________________________ and _____________________________________. Correct Answer: Fundamental Qualitative Characteristics and Enhancing Qualitative Characteristics. These are characteristics that make information useful to users. They relate to the content or substance of financial information. They consist of Relevance and Faithful Representation. Correct Answer: Fundamental Qualitative Characteristics Information must be both ________________ and ___________________ if it is to be useful. Correct Answer: Relevant and Faithfully represented It is the capacity of the information to influence a decision. The financial information must be capable of making a difference in the decisions made by users. It requires that the financial information should be related or pertinent to the economic decision. Correct Answer: Relevance Financial information is capable of making a difference in a decision if it has _________________ and ________________. Correct Answer: Predictive value and confirmatory value The financial information can be used as an input to processes employed by users to predict future outcome or when it can help users increase the likelihood of correctly or accurately predicting or forecasting outcome of events. Correct Answer: Predictive Value The financial information provides feedback about previous evaluations or when it enables users confirm or correct earlier expectations. Correct Answer: Confirmatory Value Predictive value and confirmatory value are _________________. Information that has predictive value is likely to also have confirmatory value. Correct Answer: Interrelated Is a practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are not significant enough to affect the evaluation, decision, and fairness of the financial statements. It is also known as the doctrine of convenience. Correct Answer: Materiality
financial facts significant enough to influence the judgment of informed users. Correct Answer: Standard Adequate Disclosure/Full Disclosure Principle Provide narrative description or disaggregation of the items presented in the financial statements and information about items that do not qualify for recognition Correct Answer: Notes to financial statements The depiction is without bias in the preparation or presentation of financial information. In other words, the depiction is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the probability that financial information will be received favorably or unfavorably by users. Correct Answer: Neutrality Neutrality means that the information contained in the financial statements must be _______________. Correct Answer: Free from bias Neutrality is synonymous with the all-encompassing ___________________. Correct Answer: Principle of Fairness To be _________ is to be fair. Correct Answer: Neutral Means that there are no errors or omissions in the description of the phenomenon or transaction. However, it does not mean that the information is perfectly accurate in all respects. It means there no errors in the description and in the process by which the information is selected and applied. If the information is an estimate, that fact should be described clearly, including an explanation of the process used in making that estimate. Correct Answer: Free from error If information is to represent faithfully the transactions and other events it purports to represent, it is necessary that the transactions and events are accounted in accordance with their substance and reality and not merely their legal form. (E.g., financial lease, computation of earnings per share) Correct Answer: Substance over form Means that when alternative exist, the alternative which has the least effect on equity should be chosen. In simplest words, in case of any doubt, record any loss and do not record any gain. Correct Answer: Conservatism With conservatism, ______________________ is recognized as a provision if the loss is probable and the amount can be reliably measured. Correct Answer: Contingent Loss With conservatism, __________________ is not recognized but disclosed only. Correct Answer: Contingent Gain Conservatism is synonymous with _________________. Correct Answer: Prudence Is the desire to exercise care and caution when dealing with the uncertainties in the measurement process such that assets or income are not overstated and liabilities or expenses are not understated. Correct Answer: Prudence
Relate to the presentation or form of the financial information. These are intended to increase or enhance the usefulness of the financial information that is relevant and faithfully represented. They consist of comparability, understandability, verifiability, and timeliness Correct Answer: Enhancing qualitative characteristics The ability to bring together for the purpose of noting points of likeness and difference. It enables users to identify and understand similarities and dissimilarities among items. Correct Answer: Comparability The quality of information that allows comparisons within a single entity through time or from one accounting period to the next. Correct Answer: Comparability within an entity/Horizontal Comparability/Intracomparability The quality of information that allows comparisons between two or more entities engaged in the same industry. Correct Answer: Comparability between and across entities/Dimensional Comparability/Intercomparability For information to be ______________, like things must look alike and different things must look different. Correct Answer: Comparable Implicit in the qualitative characteristics of comparability is the principle of ____________________. Correct Answer: Consistency ______________________ is the goal while __________________ is the means of achieving that goal. Correct Answer: Comparabilty, Consistency Refers to the use of the same method for the same item, either from period to period within an entity or in a single period across entities. In other words, it is the uniform application of accounting method from period to period within an entity. However, it does not mean that no change in accounting method can be made. If the change would result to a more useful and meaningful information, then such change shall be made. But there shall be full disclosure of the change and the peso effect thereof. Correct Answer: Consistency Requires that financial information must be comprehensible or intelligible if it is to be most useful. The information should be presented in a form and expressed in terminology that a user understands. Accordingly, the user shall have an understanding of the complex economic activities, the financial accounting process and the terminology in the financial statements. Correct Answer: Understandability Means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. The financial information is supported by evidence so that an accountant that would look into the same evidence would arrive at the same economic decision or conclusion. It also helps to assure users that information represents the economic phenomenon or transaction it purports to represent. Correct Answer: Verifiability
Information in financial statements is prepared from the perspective of the reporting entity, not from the perspective of any particular group of financial statement user. Correct Answer: Perspective adopted in financial statements The elements directly related to the measurement of _________________ are: a. Assets b. Liabilities c. Equity Correct Answer: Financial Position The elements directly related to the measurement of ____________________ are: a. Income b. Expenses Correct Answer: Financial Performance Is the residual interest in the assets of the entity after deducting all of the liabilities. Correct Answer: Equity Means the reporting of an asset, liability, income or expense on the face of the financial statements of an entity. Correct Answer: Recognition Is defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Correct Answer: Asset An asset is recognized when it is probable that future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. This principle has two conditions: a. it is probable that future economic benefits will flow to the entity b. the cost or value of the asset can be measured reliably Correct Answer: Asset Recognition Principle Means that the chance of the future economic benefit arising is more likely rather than less likely. Correct Answer: Probable The _______________________ embodied in an asset is the potential to contribute directly or indirectly to the flow of cash and cash equivalents to the entity. Correct Answer: Future economic benefit Inherent in asset recognition is the ___________________. Correct Answer: Cost principle Requires that assets should be recorded initially at original acquisition cost. Correct Answer: Cost Principle In a _________________, cost is equivalent to the cash payments. Correct Answer: Cash Transaction In a _________________, the cost is equal to the fair value of the asset given or fair value of the asset received, whichever is clearly evident. Correct Answer: Noncash/exchange transaction
Defined as a present obligation arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Correct Answer: Liability A liability is recognized when it is probable that an outflow of resources embodying economic benefits will be required for the settlement of a present obligation and the amount of the obligation can be measured reliably. This principle has two conditions: a. it is probable that an outflow of economic benefits will be required for the settlement of a present obligation b. the amount of obligation can be measured reliably Correct Answer: Liability Recognition Principle An essential characteristics of a liability is that the entity has a present obligation which may be _____________ or ____________________. Correct Answer: Legal, Constructive Obligations may be ____________________________ as a consequence of a binding contract or statutory requirement. Correct Answer: Legally enforceable Arise from normal business practice, custom and a desire to maintain good business relations or act in an equitable manner. Correct Answer: Constructive obligations Is increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution from equity participants. Correct Answer: Income Arises in the course of the ordinary regular activities and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Correct Answer: Revenue The essence of revenue is ________________. Correct Answer: Regularity Represented other items that meet the definition of income and do not arise in the course of the ordinary regular activities. Correct Answer: Gains The basic principle is that income is recognized when ________________. Correct Answer: Earned Income is recognized when it is probable that an increase in future economic benefits related to an increase in an asset or a decrease in a liability has arisen and that the increase in economic benefits can be measured reliably. Thus, this principle has two conditions: a. it is probable that future economic benefits will flow to the entity as a result of an increase in an asset or a decrease in a liability b. the economic benefits can be measured reliably Correct Answer: Income Recognition Principle The _________________ is the point of income recognition. Correct Answer: Point of Sale
Expenses are recognized when it is probable that a decrease in future economic benefits related to decrease in an asset or an increase in liability has occurred and that is the decrease in economic benefits can be measured reliably. Thus, this principle has two conditions: a. it is probable that a decrease in future economic benefits has occurred as a result of a decrease in an asset or an increase in liability b. the decrease in economic benefits can be measured reliably Correct Answer: Expense Recognition Principle Expense recognition principle is the application of the ______________________________. Correct Answer: Matching Principle Requires that those costs and expenses incurred in earning a revenue shall be reported in the same period. In generally speaking, this principle facilitates the "There is no gain if there is no pain" rule. Correct Answer: Matching Principle The expense is recognized when the revenue is already recognized. This process, commonly referred to as the matching of cost with revenue, involves the simultaneous or combined recognition of revenue and expenses that result directly and jointly from the same transactions or events. Correct Answer: Cause and effect association Some costs are expensed by simply allocating them over the periods benefited. Correct Answer: Systematic and rational allocation The cost incurred is expensed outright because of uncertainty of future economic benefits or difficulty of reliably associating certain costs with future revenue. In this method, an expense is recognized immediately: a. When an expenditure produces no future economic benefit. b. When cost incurred does not qualify or ceases to qualify for recognition as an asset. Correct Answer: Immediate Recognition Is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the statement of financial position and income statement. Correct Answer: Measurement Is the amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at the time of acquisition. Correct Answer: Historical Cost/Past Purchase Exchange Price Is the amount of cash or cash equivalent that would have to be paid if the same or equivalent asset was acquired currently. Correct Answer: Current Cost/Current Purchase Exchange Price Is the amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal. Correct Answer: Realizable Value/Current Sale Exchange Price Is the discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business. Correct Answer: Present Value/Future Exchange Price
Is one that is required, or chooses, to prepare financial statements, and is not necessarily a legal entity. It can be a single entity or a group or combination of two or more entities. Correct Answer: Reporting Entity Sometimes an entity controls another entity. The controlling entity is called _________________, while the controlled entity is called the ___________________. Correct Answer: Parent, subsidiary If a reporting entity comprises both the parent and its subsidiaries, the reporting entity's financial statements are referred to as _____________________________________. Correct Answer: Consolidated Financial Statements If a reporting entity is the parent alone, the reporting entity's financial statements are referred to as ____________________________________. Correct Answer: Unconsolidated Financial Statements If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship, the reporting entity's financial statements are referred to as ______________________. Correct Answer: Combined Financial Statements Means that the entity has the exclusive right over the benefits of an asset and the ability to prevent others from accessing those benefits. Correct Answer: Control Is a duty or responsibility that an entity has no practical ability to avoid. Correct Answer: Obligation An obligation that results from a contract, legislation, or other operation of law. Correct Answer: Legal Obligation An obligation that results from an entity's actions(e.g., past practice or publishes policies) that create a valid expectation on others that the entity will accept and discharge certain responsibilities. Correct Answer: Constructive Obligation Is a contract that is equally unperformed - neither party has fulfilled any of its obligations, or both parties have partially fulfilled their obligations to an equal extent. It establishes a combined right and obligation to exchange economic resources, which are interdependent and inseparable. Thus, the two constitute a single asset or liability. Correct Answer: Executory Contract The entity has an asset if the terms of the contract are _________________; a liability if the terms are _____________________. Correct Answer: Favorable, unfavorable The amount at which an asset, liability or equity is recognized in the statement of financial position. Correct Answer: Carrying Amount
Arises when there is uncertainty about the amount or timing of any inflow or outflow of economic benefits that will result from an asset or liability. Correct Answer: Outcome uncertainty Arises when it is uncertain whether an asset or liability exists. Correct Answer: Existence uncertainty It is not measured directly. It is simply equal to the difference between the carrying amounts of recognized assets and recognized liabilities. Correct Answer: Total Equity Reflects the average amount within the entire range, giving more weight to the outcomes that are more likely. It is not intended to predict the ultimate cash inflow(outflow) from an asset(liability. Correct Answer: Statistical Mean/Expected value/Probability-weighted average Is the middle amount within the range and reflects the probability of an inflow or outflow to be no more than that amount. Correct Answer: Statistical Median/Maximum amount that is more likely than not to occur Reflects the single most likely ultimate inflow(outflow) from the asset(liability), which is the amount that occurs the highest number of times within the range. Correct Answer: Statistical Mode/Most Likely outcome Are not measurement bases, but rather used in applying a measurement basis. Accordingly, when using such technique, it is necessary to identify which measurement basis is used and the extent to which the technique reflects the factors applicable to that measurement basis. Correct Answer: Cash-Flow-Based Measurement Techniques Occurs when an asset and a liability with separate units of account are combined and only the net amount is presented in the statement of financial position. Correct Answer: Offsetting Is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are included in the same classification. Correct Answer: Aggregation Capital is regarded as the invested money or invested purchasing power. Correct Answer: Financial concept of capital Is synonymous with equity, net assets, or net worth. Correct Answer: Capital Capital is regarded as the entity's productive capacity e.g., units of output per day. Correct Answer: Physical concept of capital Under this concept, profit is earned if the net assets at the end of the period exceeds the net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. It can be measured in either nominal monetary units or units of constant purchasing power. Correct Answer: Financial Capital Maintenance
Under this concept, profit is earned only if the entity's productive capacity at the end of the period exceeds the productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Correct Answer: Physical capital Maintenance The concept of _______________________ is essential in distinguishing between a return on capital and a return of capital. Correct Answer: Capital Maintenance Correct Answer: Regularity
