NAME: _____________________________________________________

DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

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Parable Of The Pencil - Pencil story

The Pencil Maker took the pencil aside, just before putting him into the box.
"There are 5 things you need to know," he told the pencil, "Before I send you out into the world. Always remember them and never forget, and you
will become the best pencil you can be."

"One: You will be able to do many great things, but only if you allow yourself to be held in Someone's hand."
"Two: You will experience a painful sharpening from time to time, but you'll need it to become a better pencil."
"Three: You will be able to correct any mistakes you might make."
"Four: The most important part of you will always be what's inside."
"And Five: On every surface you are used on, you must leave your mark. No matter what the condition, you must continue to write."

The pencil understood and promised to remember, and went into the box with purpose in its heart.
Now replacing the place of the pencil with you. Always remember them and never forget, and you will become the best person you can be.

One: You will be able to do many great things, but only if you allow yourself to be held in God's hand. And allow other human beings to access you
for the many gifts you possess.
Two: You will experience a painful sharpening from time to time, by going through various problems in life, but you'll need it to become a stronger
person.
Three: You will be able to correct any mistakes you might make.

1 | Page

NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

Four: The most important part of you will always be what's on the inside.
And Five: On every surface you walk through, you must leave your mark. No matter what the situation, you must continue to do your duties.

Allow this parable on the pencil to encourage you to know that you are a special person and only you can fulfil the purpose to which you were born
to accomplish. Never allow yourself to get discouraged and think that your life is insignificant and cannot make a change.

"Don't wait until everything is just right. It will never be perfect. There will always be challenges, obstacles and less than perfect
conditions. So what. Get started now. With each step you take, you will grow stronger and stronger, more and more skilled, more and
more self-confident and more and more successful."
"The important thing is not being afraid to take a chance. Remember, the greatest failure is to not try.
If a negative thought creeps its way into your mind, conquer it immediately. Charge ahead in a persistent manner towards whatever
it is you may be trying to accomplishand you will.
If you have made mistakes, there is always another chance for you. You may have a fresh start any moment you choose, for this
thing we call 'failure' is not the falling down, but the staying down.
Each choice we make causes a ripple effect in our lives. When things happen to us, it is the reaction we choose that can create the
difference between the sorrows of our past and the joy in our future.

MULTIPLE CHOICES (USE CAPITAL LETTERS ONLY)

1. The basic purpose of accounting is
a. To provide the information that the managers of an economic entity need to control its
operations.
b. To provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about an entity that is useful in making
rational economic decision.
2. Accountants employed in entities in various capacity as accounting staff, chief accountant or
controller are said to be engaged in
a. Public accounting
b. Private accounting

c. Government accounting
d. Financial accounting

3. Financial accounting can be broadly defined as the area of accounting that prepares
a. General purpose financial statements to be used by parties internal to the entity only.
b. Financial statements to be used by investors only.
c. General purpose financial statements to be used by parties both internal and external to
the entity.
d. Financial statements to be used primarily by management.
4. Managerial accounting is the area of accounting that emphasizes
a. Reporting financial information to external users
b. Reporting to the Securities and Exchange Commission
c. Combining accounting knowledge with an expertise in data processing
d. Developing accounting information for use within an entity
5. Generally accepted accounting principles
a. Are accounting adaptations based on the laws of economic science
b. Derive their credibility and authority from legal rulings and court precedents.
c. Derive their credibility and authority from the national government through the Securities
and Exchange Commission.
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NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

d. Derive their credibility and authority from general recognition and acceptance by the
accountancy profession.
6. Proper application of accounting principles is most dependent upon the
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function

d. Professional
accountant

judgement

of

the

7. The purpose of the International Financial Reporting Standards is to

a. Issue enforceable standards which regulate the financial accounting and reporting of
multinational entities.
b. Develop a uniform currency in which the financial transactions of entities throughout the
world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.
8. Which of the following statements best describes the term going concern?
a. When current liabilities of an entity exceed current assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The expenses of an entity exceed its income
9. Continuation of an accounting entity in the absence of evidence to the contrary is an example
of the business concept of
a. Accounting entity
b. Time period

c. Going concern
d. Accrual

10.Which underlying concept serves as the basis for preparing financial statements at regular
intervals?
a. Accounting entity
b. Going concern

c. Accounting period
d. Stable monetary unit

11.Revenue is expressed as the number of pesos received or the peso equivalent of the goods or
services received. Cost is expressed as the number of pesos paid out or the peso equivalent
of the items given up. Fluctuations in value of the peso are ignored. What is the applicable
accounting assumption?
a. Going concern
b. Unit of measure

c. Historical cost
d. Realization

12. The accounting concept justifies the usage of accruals and deferrals.
a. Going concern
b. Materiality

c. Consistency
d. Stable monetary unit

13.The old framework of the preparation and presentation of financial statements is now
replaced by complete comprehensive and single document called
a. Conceptual Framework for Financial Reporting
b. Conceptual Framework for Financial Statement
c. Conceptual Framework for Business Entities
d. Conceptual Framework
14.Which of the following is not a purpose of the Conceptual Framework?
a. To provide definitions of key terms and fundamental concepts.
b. To provide specific guidelines for resolving situations not covered by existing accounting
standards.
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NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

c. To assist accountants and others in selecting among alternative accounting and reporting
methods.
d. To assist the Financial Reporting Standards Council in the standard-setting process.
15.The Conceptual Framework is intended to establish
a. Generally accepted accounting principles in financial reporting by entities.
b. The meaning of present fairly in accordance with GAAP.
c. The objectives and concepts for use in developing standards of financial accounting and
reporting.
d. The hierarchy of sources of GAAP.
16.Which of the following is an internal user of financial information?
a. Board of Directors
b. Shareholders in the entity
c. Holder of the entitys bonds

d. Creditor with long-term contract with

the entity

17.These users are interested in information about the profitability and stability of an entity in
order to assess the ability of the entity to provide remuneration, retirement benefits and
employment opportunities.
a. Customers
b. The public

c. Governments and their agencies

d. Employees

18.These users are interested in information about the continuance of an entity, especially when
they have a long term involvement with or are dependent on the entity.
a. Customers
b. Employees

c. Trade unions
d. Suppliers

19.These users need information on trends and recent developments where an entity makes a
substantial contribution to the local economy providing employment and using local suppliers.
a. The public
b. Governments and their agencies

c. Finance entities
d. Private entities

20.The overall objective of financial reporting is to provide information

a. That is useful for decision making
b. About an entitys assets, liabilities and owners equity
c. About an entitys financial performance during a period
d. That allows owners to assess managements performance
21.Which of the following statements best describes the term financial position?
a. The net income and expenses of an entity
b. The net of financial assets less liabilities of an entity
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The assets, liabilities and equity of an entity
22.Which of the following statements is true in relation to financial position?
I.
Information about financial position can help users to assess the entitys liquidity, solvency
and its need for additional financing.
II.
Information about priorities and payment, requirements of existing claims can help users
to predict how future cash flows will be distributed among those with a claim against the
entity.
a. I only
b. II only

c. Both I and II
d. Neither I nor II

23.Which of the following statements in relation to financial reporting is true?

a. The statement of financial position reflects the current value of an entity.
b. The statement of financial position reflects the instability of the peso
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NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

c. The financial statement formats and classifications do not vary to reflect industry
differences.
d. Due to measurement problems, some entity resources and obligations are not reported in
the statement of financial position.
24.The objectives of financial reporting for entities are based on
a. The need for conservatism
b. Reporting
on
managements
stewardship

c. Generally
principles
d. The needs
information

accepted
of

the

accounting
users

of

the

25.During a period when an entity is under the direction of a particular management, financial
reporting will directly provide information about
a. Both entity performance and management performance
b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance
26.Which of the following statements is not normally an objective of financial reporting?
a. To provide information about an entitys assets and claims against those assets
b. To provide information that is useful in assessing an entitys sources and uses of cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about an entitys liquidation value.
27.Under generally accepted accounting principles
a. Income and expenses, assets and liabilities are measured based on the occurrence of
changes in the economic resources and obligations.
b. Assets and liabilities are measured on the basis of their liquidation value.
c. Income and expenses are recognized on the basis of cash receipts and payments,
including depreciation of property, plant and equipment
d. Financial position and financial performance are measured on the basis of cash received
and cash paid.
28.Four types of money prices are used in measuring resources in financial accounting. The
measurement which uses such concepts are present value, discounted cash flow and value in
use is known as
a. Price in a current purchase exchange
b. Price in past purchase exchange

c. Price based on future exchange

d. Price in a current sale exchange

29.What are the qualitative characteristics of financial statements?

a. Qualitative characteristics are the attributes that make the information provided in the
financial statements useful to users.
b. Qualitative characteristics are broad classes of financial effects of transactions and other
events.
c. Qualitative characteristics are non-qualitative aspects of an entitys position and
performance and changes in financial position.
d. Qualitative characteristics measure the extent to which an entity has complied with all
relevant standards and interpretations.
30.The ingredients of relevant financial information are
a. Predictive value and confirmatory value
b. Predictive value, confirmatory value and timeliness
c. Predictive value, confirmatory value and materiality
d. Predictive value, confirmatory value, timeliness and materiality
31.Which of the following is the best description of faithful representation in relation to
information in financial statements?
a. Influence in the economic decisions of
users
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b. Inclusion of a degree of caution

c. Freedom from material error

NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

d. Comprehensibility to users
32.In the event of conflict between the economic substance of a transaction and its legal form,
the economic substance shall prevail. This concept is known as
a. Form over substance
b. Substance over form

c. Faithful representation
d. Completeness

33.It is the exercise of care and caution in dealing with uncertainties in measurement so as not
to overstate assets and income or not to understate liabilities and expenses.
a. Completeness
b. Prudence

c. Faithful representation
d. Neutrality

34.Financial information exhibits consistency when

a. Accounting procedures are adopted which smoothen net income and make results
consistent between years.
b. Gains and losses are shown separately in the income statement.
c. Accounting entities give similar events the same accounting treatment each period.
d. Expenditures are reported as expenses and netted against revenue in the period in which
they are paid.
35.Which of the following enhances the usefulness of financial information?
a. Accounting entity
b. Going concern

c. Verifiability
d. Time period

36.The characteristic that is demonstrated when a high degree of consensus can be secured
among independent measures using the same measurement method is
a. Relevance
b. Understandability

c. Verifiability
d. Neutrality

37.Allowing entities to estimate rather than physically count inventory at interim periods is an
example of a trade-off between
a. Verifiability and comparability
b. Timeliness and comparability

c. Timeliness and verifiability

d. Neutrality and consistency

38.Under the Conceptual Framework, neutrality is an ingredient of

a. Relevance only
b. Faithful representation
c. Both
relevance
and
representation

faithful

d. Neither
relevance
representation

nor

faithful

39.Which of the following qualitative characteristics of financial information requires that

information should not be biased in favour of one group of users to the detriment of others?
a. Relevance
b. Reliability

c. Verifiability
d. Neutrality

40.An item would be considered material and therefore would be disclosed in the financial
statements if
a. The expected benefits of disclosure exceed the additional cost
b. The impact on earnings is greater than 10 %
c. The standard definition of materiality is met
d. The omission or misstatement of the amount would make a difference to the users
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NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

41.Which of the following accounting concepts states that an accounting transaction shall be
supported by sufficient evidence to allow two or more qualified individuals to arrive at
essentially similar conclusions?
a. Conservatism
b. Objectivity

c. Periodicity
d. Stable monetary unit

42.The principle of objectivity includes the concept of

a. Summarization
b. Classification

c. Conservatism
d. Verifiability

43.Which of the following situations violates the concept of faithful representation?

a. Financial statements were issued nine months late.
b. Data on segments having the same expected risks and growth rates are reported to
analysts estimating future profits.
c. Financial statements included an item of property, plant and equipment with carrying
amount increased to managements estimate to market value.
d. Managements reports to shareholders regularly refer to new projects undertaken, but the
financial statements never report project results.
44.According to the Conceptual Framework, the usefulness of providing information in financial
statements is subject to the constraint of
a. Consistency
b. Cost- benefit

c. Reliability
d. Representational faithfulness

45.Which of the following statements is incorrect concerning the qualitative characteristic of

relevance?
a. The relevance of information is affected by its nature and materiality.
b. To be useful, information must be relevant to the decision- making needs of users.
c. The predictive and confirmatory roles of information are not interrelated.
d. Relevance is the capacity of the information to influence an economic decision.
46.Which of the following statements is incorrect in relation to the enhancing qualitative
characteristics?
a. Financial information must exclude complex matters in order to achieve understandability.
b. To be most useful, the financial information shall be compared with similar information of
previous periods, or with information produced by other entities.
c. Verifiable financial information implies consensus.
d. Financial information shall be made available to users in time to influence their decisions.
47.It is the ability to bring together for the purpose of noting similarities and dissimilarities.
a. Relevance
c. Understandability
b. Reliability
d. Comparability
48.Statement 1: Financial accounting is the accumulation and preparation of financial reports for
internal users only.
49.Statement 2: Financial performance pertains to the economic resources, liquidity,
solvency, financial structure and capacity for adaptation of an entity.
a. True; True
c. False; True
b. False; False
d. True; False
50.Statement 1: An item would be considered material and therefore would be disclosed in the
financial statements if the omission or misstatement of the amount would make a difference
to the users.
51.Statement 2: According to Conceptual Framework, the cost of obtaining information should
exceed the benefits derived from the information.
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NAME: _____________________________________________________
DATE:
________________________
ACCOUNTING 3
CONCEPTUAL
FRAMEWORK
PSBA MANILA
Ms. MA M. ARABIT, CPA, MBA

a. True; True
b. False; False

c. True; False
d. False; True

52.Statement 1: Expense is a decrease in economic benefit that increases equity other than
distribution or dividend paid to owners.
53.Statement 2: Matching Principle is an accounting principle that is being observed when an
accountant charges to expense a cost that contributed to revenue during the period.
a. True; True
c. False; True
b. False; False
d. True; False

8 | Page

e.
f.

g. Now we see things imperfectly as in a cloudy mirror, but then we

will see everything with perfect clarity. All that I know now is
partial and incomplete, but then I will know everything completely,
just as God now knows me completely.
h. ---1 Corinthians 13:12
i.