Conceptual Framework

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One element of the objective of financial reporting is to provide information that will attract new investors. that is useful in assessing cash flows prospects. about the investors in the entity. about the liquidation value of the resources held by the entity. Ans. that is useful in assessing cash flows prospects. What is the concept that supports the issuance of interim reports? Consistency Relevance Faithful representation Materiality Ans. Relevance To achieve faithful representation, the financial statements Must have predictive and confirmatory value Must be complete, neutral and reasonably free from error Are comparable, understandable, verifiable and timely All of these would achieve faithful representation Ans. Must be complete, neutral and reasonably free from error What is the underlying concept that supports estimating a fixed asset impairment charge? Consistency Matching Faithful representation Substance over form. Ans. Faithful representation The economic entity assumption is inapplicable to unincorporated businesses recognizes the legal aspects of business organizations requires periodic income measurement is applicable to all forms of business organizations

Ans. is applicable to all forms of business organizations Identify the pervasive constraint and underlying assumption mentioned in the Conceptual Framework. Pervasive constraint Underlying assumption Cost Accrual basis Cost Going concern Timeliness Accrual basis Timeliness Going concern Ans. Cost Going concern During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of Objectivity Periodicity No No Yes No No Yes Yes Yes Ans. No Yes Valuing assets at their liquidation values rather than their cost is inconsistent with the periodicity assumption matching principle materiality constraint historical cost principle Ans. historical cost principle Which basic assumption may not be followed when a firm in bankruptcy reports financial results? Economic entity assumption Going concern assumption Periodicity assumption Monetary unit assumption Ans. Going concern assumption Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?

Monetary unit assumption Periodicity assumption Going-concern assumption Economic entity assumption Ans. Monetary unit assumption Which of the following is an implication of the going concern assumption? The historical cost principle is credible Depreciation and amortization policies are justifiable and appropriate The current-noncurrent classification of assets and liabilities is justifiable and signify- cant All of these Ans. All of these The assumption that a business enterprise will not be sold or liquidated in the near future is known as the economic entity assumption monetary unit assumption materiality assumption none of these Ans. none of these When a parent and subsidiary relationships exist, consolidated financial statement are prepared in recognitions of Legal entity Economic entity Stable monetary unit Time period Ans. Economic entity Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the economic entity assumption relevance characteristic comparability characteristic neutrality characteristic Ans. economic entity assumption The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include all of the following except :

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Going concern Periodicity Accrual basis Materiality Ans. Materiality Which of the following is not a basic assumption underlying the financial accounting structure? Economic entity assumption. Going concern assumption. Periodicity assumption. Historical cost assumption. Ans. Historical cost assumption. Which basic assumption is illustrated when a firm reports financial results on an annual basis? Economic entity assumption Going concern assumption Periodicity assumption Monetary unit assumption Ans. Periodicity assumption Which of the following basic assumptions of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate Periodicity Decision usefulness Monetary unit Going concern Ans. Going concern The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include Neutrality. Periodicity. Understandability. Materiality. Ans. Periodicity.

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? Cost/benefit constraint Periodicity assumption Materiality constraint Expense recognition principle Ans. Periodicity assumption Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more Verifiable Relevant indicative of the entity's purchasing power conservative Ans. Verifiable Which accounting assumption or principle is being violated if a company provides financial reports in connection with a new product introduction? Economic entity Periodicity Revenue recognition Full disclosure Ans. Economic entity Under current IFRS, inflation is ignored in accounting due to the economic entity assumption going concern assumption monetary unit assumption periodicity assumption Ans. monetary unit assumption Which of the following is not a time when revenue may be recognized? At time of sale At receipt of cash During production All of these are possible times of revenue recognition.

Ans. All of these are possible times of revenue recognition. The International Accounting Standards Board (IASB) defines one of the 5 elements as follows: “the residual interest in the assets of the entity after deducting all its liabilities” Which element matches this description? Retained earnings. Income. Equity. All of the choices match this definition. Ans. Equity. Which of the following practices may not be an acceptable deviation from recognizing revenue at the point of sale? Upon receipt of cash. During production Upon receipt of order. End of production. Ans. Upon receipt of order. When should an expenditure be recorded as an asset rather than an expense? Never. Always. If the amount is material. When future benefit exits Ans. When future benefit exits Revenue generally should be recognized at the end of production. at the time of cash collection. when realized. when a sale occurs. Ans. when a sale occurs.

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The International Accounting Standards Board (IASB) defines five interrelated elements of financial statements. Which of the following is not one of those elements? Asset. Income. Equity. All of the choices are elements defined by the IASB Ans. All of the choices are elements defined by the IASB Which of the following is not a basic element of financial statements? Assets. Statement of financial position Equity Income. Ans. Statement of financial position When is revenue generally recognized? When cash is received. When the warranty expires. When production is completed. When the sale occurs. Ans. When the sale occurs. Application of the full disclosure principle is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits. is violated when important financial information is buried in the notes to the financial statements. is demonstrated by the use of supplementary information presenting the effects of changing prices. requires that the financial statements be consistent and comparable. Ans. is demonstrated by the use of supplementary information presenting the effects of changing prices.

The accounting principle of expense recognition is best demonstrated by not recognizing any expense unless some revenue is realized. associating effort (expense) with accomplishment (revenue). recognizing prepaid rent received as revenue. establishing an Appropriation for Contingencies account. Ans. associating effort (expense) with accomplishment (revenue). Not adjusting the amounts reported in the financial statements for inflation is an example of which basic principle of accounting? Economic entity. Going concern. Historical cost. Full disclosure. Ans. Historical cost. What is the general approach as to when product costs are recognized as expenses? In the period when the expenses are paid. In the period when the expenses are incurred. In the period when the vendor invoice is received. In the period when the related revenue is recognized. Ans. In the period when the related revenue is recognized. Issuance of common stock for cash affects which basic element of financial statements? Revenues. Equity. Liability. Asset. Ans. Equity. Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting? Expense recognition.

Full disclosure. Revenue recognition. Historical cost. Ans. Expense recognition. Generally, revenue from sales should be recognized at a point when management decides it is appropriate to do so. the product is available for sale to the ultimate consumer. the entire amount receivable has been collected from the customer and there remains no further warranty liability. none of these Ans. none of these Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles? President's letter to shareholders Statement of financial position. Income statement. Notes to financial statements. Ans. President's letter to shareholders Which of the following is an argument against using historical cost in accounting? Fair values are more relevant. Historical costs are based on an exchange transaction. Historical costs are reliable. Fair values are subjective. Ans. Fair values are more relevant. Revenue is generally recognized when a sale occurs. This statement describes the consistency characteristic. matching principle.

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revenue recognition principle relevance characteristic. Ans. revenue recognition principle The financial capital concepts requires that net assets shall be stated at Current cost Historical cost Historical cost adjusted for changes in purchasing power Current cost adjusted for changes in purchasing power Ans. Historical cost Which of the following statements is incorrect? The principal difference between the two concepts of capital maintenance is the treatment of the effects of changes in the prices of assets and liabilities of the entity. In general terms, an entity has maintained its capital if it has as much capital at the end of the period as it had at the beginning of the period. Any amount over and above that required to maintain the capital at the beginning of the period is profit. And upward change in the value of its assets is profit. Ans. And upward change in the value of its assets is profit. Which of the following statements is incorrect? Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity. Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on, for example, units of output per day. The selection of the appropriate concept of capital by an entity should be based on the needs of the management of its financial statements. Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned with the maintenance of nominal invested capital or the purchasing power of invested capital. Ans. The selection of the appropriate concept of capital by an entity should be based on the needs of the management of its financial statements.

Which of the following statements regarding the concept of capital maintenance is incorrect? The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured. it is a prerequisite for distinguishing between an entity’s return on capital and its return of capital. Only outflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Ans. Only outflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. The following statements are correct with regard to the concept of financial capital maintenance, except: Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. Holding gains may not be recognised as such, however, until the assets are recognized in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity. Ans. Holding gains may not be recognised as such, however, until the assets are recognized in an exchange transaction. The physical capital maintenance concept required the adoptions of which measurements basis? Historical cost Current cost Realizable value Present value Ans. Current cost

Under the financial capital concepts, a profit is earned only if The monetary amount of the net assets at the end of the period exceeds the monetary amounts of net asset of the beginning of the period The monetary amount of net asset at the beginning of the period exceeds the monetary amount of net asset at the end of the period The monetary amount of net asset at the beginning of the period exceeds the monetary amount of net asset at the end of the period , after excluding any distributions to and contributions from owners The monetary amount of net asset at the end of the period exceeds the monetary amount of net asset at the beginning of the period , after excluding any distributions to and contributions from owners Ans. The monetary amount of net asset at the end of the period exceeds the monetary amount of net asset at the beginning of the period , after excluding any distributions to and contributions from owners Which of the following statements is incorrect? If, however, the main concern of users is with the operating capability of the entity, a physical concept of capital should be used. The concept chosen indicates the goal to be attained in determining profit, even though there may be some measurement difficulties in making the concept operational. The concepts of capital maintenance include the financial capital maintenance and unit capital maintenance. Under the financial capital maintenance concept a profit is earned only if the financial (or money) amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. Under the physical capital maintenance concept a profit is earned only if the physical productive capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to, and contributions from, owners during the period. Ans. The concepts of capital maintenance include the financial capital maintenance and unit capital maintenance.

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Which of the following statements is incorrect? Profit is the residual amount that remains after expenses (including capital maintenance adjustments, where appropriate) have been deducted from income. The physical capital maintenance concept requires the adoption of the current cost basis of measurement. The financial capital maintenance concept does not require the use of a particular basis of measurement. Selection of the basis under this concept is independent on the type of financial capital that the entity is seeking to maintain. Ans. Selection of the basis under this concept is independent on the type of financial capital that the entity is seeking to maintain. Under the physical capital concepts, a profit is earned only if The physical productive capacity of the entity of the end of the period exceeds the physical productive capacity at the beginning of the period The physical productive capacity of the entity at the beginning of the period exceeds the physical productive capacity at the end of the period The physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period after excluding any distributions to and contributions from owners The physical productive capacity of the entity at the beginning of the period exceeds the physical productive capacity at the end of the period , after excluding any distributions to and contributions from owners Ans. The physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period after excluding any distributions to and contributions from owners The Allowance for Doubtful Accounts, which appears as a deduction from Accounts Receivable on a statement of financial position and which is based on an estimate of bad debts, is an application of the consistency characteristic. expense recognition principle materiality constraint. revenue recognition principle Ans. expense recognition principle