TOAMOD1 Overview of Accounting and Introduction To IFRS No Answer

THEORY OF ACCOUNTS
Module 1 Overview of Accounting and Introduction to IFRS
1.1 Overview of Accounting ............................................................................................. 1
1.2 The Accounting Process ............................................................................................. 5
1.3 The Conceptual Framework for Financial Reporting ..................................12
1.4 Preface to International Financial Reporting Standards ............................22

TOAMOD1.1 OVERVIEW OF ACCOUNTING
Definition of Accounting
Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgment and decisions by users of information.
IDENTIFYING MEASURING COMMUNICATING
Identifying is the process of Measuring is the process of Communicating is the process of
analyzing events and transactions assigning numbers, normally in transforming economic data into
to determine whether or not they monetary terms, to the economic useful accounting information
will be recognized in the books. transactions and events. such as financial statements and
other accounting reports for
Accountable events – recognized Measurement bases: dissemination to users.
in the books through a journal From the Conceptual Framework:
entry made in the books. 1. Historical cost Aspects of the communication
2. Current cost process:
Non-accountable events – not 3. Realizable (settlement) value 1. Recording
recognized but disclosed in the 4. Present value 2. Classifying
notes to financial statements or From the Standards: 3. Summarizing
recorded through a 5. Fair value
memorandum entry when such 6. Fair value less costs to sell Interpreting processed
events have accounting 7. Revalued amount information involves the
relevance. 8. Inflation-adjusted costs computation of financial
statement ratios.
Types of events or transactions: Valuation by fact – items
1. External events measured are unaffected by NOTE: Bookkeeping refers to the
a. Exchange estimates. process of recording the accounts
b. Non-reciprocal transfer or transactions of an entity.
c. Other than transfer Valuation by opinion – items Unlike accounting, it does not
2. Internal events measured are affected by require interpretation of the
a. Production estimates. significance of processed
b. Casualty information.
Basic Purpose of Accounting

The basic purpose of accounting is to provide quantitative financial information about economic activities
intended to be useful in making economic decisions.
Economic entities use accounting Types of information provided by Types of accounting information
to record economic activities, accounting: classified as to users’ needs:
process data, and disseminate 1. Quantitative information – 1. General purpose – designed to
information intended to be useful expressed in numbers, quantities meet the common needs of most
in making economic decisions. or units. financial statement users. It is
2. Qualitative information – governed by GAAP represented
Economic entity – separately expressed in words or descriptive by the IFRSs.
identifiable combination of form. 2. Special purpose – designed to
persons and property that uses or 3. Financial information – meet the specific needs of
controls economic resources to expressed in money. It is also particular financial statement
achieve certain goals or considered a quantitative users. This is provided by other
objectives. Either not-for-profit information. types of accounting other than
or business. financial accounting.
NOTE: To be useful, accounting
Economic activity – affects the information should be stated in a Sources of information in
economic resources and common denominator. For financial statements:
obligations, and consequently, the example, currencies denominated Not obtained exclusively from the
equity of an economic entity. in foreign currencies should be entity’s accounting records. Some
Includes production, exchange, translated to the presentation are obtained from external
consumption, income currency. sources.
distribution, savings and
investment.
Common Branches of Accounting

1. Financial accounting – focuses on general purpose reports of financial position and operating
results known as financial statements.
2. Management accounting – accumulation and communication of information for use by internal
parties or management.
3. Cost accounting – systematic recording and analysis of the costs of materials, labor and overhead
incident to production.
TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS 1

4. Auditing – a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between
these assertions and established criteria and communicating the results to interested users.
5. Tax accounting – preparation of tax returns and rendering of tax advice, such as determination of
tax consequences of certain proposed business endeavors.
6. Government accounting – accounting for the national government and its instrumentalities,
focusing attention on the custody of public funds and the purpose or purposes to which such funds
are committed.
7. Fiduciary accounting – handling of accounts managed by a person entrusted with the custody and
management of property for the benefit of another.
8. Estate accounting – handling of accounts for fiduciaries who wind up the affairs of a deceased
person.
9. Social accounting – process of communicating the social and environmental effects of
organizations’ economic actions to particular interest groups within society and to society at large.
10. Institutional accounting – accounting for not-for-profit entities other than the government.
11. Accounting systems – installation of accounting procedures for the accumulation of financial data
and designing of accounting forms to be used in data gathering.
Accounting assumptions are the fundamental concepts or principles and basic notions that provide the
foundation of the accounting process.
I. Underlying assumptions – explicitly provided in the Conceptual Framework
1. Going concern assumption – entity is assumed to carry on its operations for an indefinite period
of time
II. Implicit assumptions – not expressly provided in the Conceptual Framework

1. Separate entity – entity is treated separately from its owners
2. Stable monetary unit – items should be stated in terms of a unit of measure (pesos in the
Philippines) and its purchasing power is regarded as stable or constant
3. Time Period – life of the business is divided into series of reporting periods
III. Pervasive – affects all items in the financial statements

1. Materiality concept – information is material if its omission or misstatement could influence
economic decisions, a matter of professional judgment based on information’s size and nature
2. Cost-benefit – cost of processing and communicating information should not exceed the benefits
to be derived from it
IV. Other concepts

1. Accrual basis of accounting – effects of transactions and events are recognized when they occur
2. Concept of articulation – all the components of a complete set of financial statements are
interrelated
3. Full disclosure principle – the nature and amount of information included in financial reports
reflect a series of judgmental trade-offs (sufficient detail vs. sufficient condensation)
4. Consistency concept – financial statements should be prepared on the basis of accounting
principles which are followed consistently from one period to the next
5. Matching – costs are recognized as expenses when the related revenue is recognized
6. Entity theory – accounting objective is geared towards proper income determination (A = L + C)
7. Proprietary theory – accounting objective is geared toward proper valuation of assets (A – L = C)
8. Residual equity theory – applicable where there are two classes of shares issued, ordinary and
preferred (A – L – PSHE = OSHE)
9. Fund theory – accounting objective is neither proper income determination nor proper valuation
of assets but the custody and administration of funds (Cash inflows – Cash outflows = Fund)
10. Realization – process of converting non-cash assets into cash or claims to cash
11. Prudence or Conservatism – inclusion of a degree of caution in the exercise of the judgments
needed in making the estimates required under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses are not understated (least effect on equity)
Accountancy refers to the profession or practice of accounting. The practice of accounting can be broadly
subdivided into two – public practice and private practice.
Practice of Public Practice in Commerce Practice in Practice in the
Accountancy and Industry Education/Academe Government
Involves the rendering Refers to employment in Employment in an Employment or
of audit or accounting the private sector in a educational institution appointment to a
related services to more position which involves which involves teaching position in an
than one client on a fee decision making of accounting, auditing, accounting professional
basis. requiring professional management advisory group in government or
knowledge in the services, finance, in a GOCC
science of accounting. business law, taxation.
2 TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS

Accounting standards Accounting standard setting bodies and other
The Generally Accepted Accounting Principles relevant organizations
(GAAP) in the Philippines are represented by the
Philippine Financial Reporting Standards (PFRSs).
PFRSs are Standards and Interpretations adopted by 1. Financial Reporting Standards Council (FRSC)
the Financial Reporting Standards Council (FRSC). - formerly known as Accounting Standards
They comprise: Council (ASC), the official accounting standard
a. Philippine Financial Reporting Standards setting body in the Philippines created under RA
b. Philippine Accounting Standards 9298 by the PRC upon recommendation of BOA
c. Interpretations - composed of 15 individuals – 1 chairperson and
14 members
PFRSs are accompanied by guidance to assist 2. Philippine Interpretations Committee (PIC)
entities in applying their requirements. Guidance - committee formed by the ASC, the predecessor
that is an integral part of the PFRSs is mandatory of FRSC, with the role of reviewing interpretations
while guidance that is not an integral part of the prepared by IFRIC for approval and adoption of
PFRSs does not contain requirements for financial FRSC
statements. 3. Board of Accountancy (BOA)
- professional regulatory board created under RA
Hierarchy of Reporting Standards 9298 to supervise the registration, licensure and
1. PFRSs practice of accountancy in the Philippines
2. In the absence of a Standard or - composed of a chairperson and 6 members
Interpretation that specifically applies to a appointed by the President of the Philippines
transaction, management must use its 4. Securities and Exchange Commission (SEC)
judgment in developing and applying an 5. International Organization of Securities
accounting policy that results in Commission (IOSCO)
information that is relevant and reliable 6. Bureau of Internal Revenue (BIR)
a. Requirements and guidance in 7. Bangko Sentral ng Pilipinas (BSP)
PFRSs dealing with similar and 8. Cooperative Development Authority (CDA)
related issues
b. Conceptual Framework NOTE: Financial reporting standards continuously
c. Most recent pronouncements of change primarily in response to users’ needs.
other standard-setting bodies Changes in financial reporting standards are also
d. Other accounting literature and influenced by legal, political, business and social
accepted industry practices environments.
International Accounting Standards

1. International Accounting Standards Board (IASB) – established in April 2001 as part of the
International Accounting Standards Committee (IASC) Foundation with the responsibility of approving
IFRSs and related documents, such as the Conceptual Framework, exposure drafts and other discussion
documents. The financial reporting standards in the Philippines are adopted from the IASB standards.
NOTE: IFRSs are standards issued by the IASB while IASs are standards issued by the IASC which were
adopted by the IASB.
2. International Financial Reporting Interpretations Committee (IFRIC) – a committee that prepares

interpretations of how specific issues should be accounted for under the application of IFRS where (1) the
standards do not include specific authoritative guidance and (2) there is a risk of divergent and
unacceptable accounting practices. In 2002, IFRIC replaced the former Standing Interpretations Committee
(SIC) which had been created by the IASC.
3. Standards Advisory Council (SAC) – group of organizations and individuals with an interest in
international financial reporting, a body set up to participate in the standard-setting process. Members are
appointed by the IASC Foundation.
4. International Federation of Accountants (IFAC) – a non-profit, non-governmental, non-political

organization of accountancy bodies that represents the worldwide accountancy profession.
Move to IFRSs
Prior to full adoption of the IFRSs in 2005, GAAP in the Philippines were previously based on the
Statements of Financial Accounting Standards (SFAS) issued by Federal Accounting Standards Board
(FASB). The move to IFRSs was primarily brought about by the increasing acceptance of IFRSs worldwide
and increasing internationalization of businesses thereby increasing the need for a common financial
reporting standards that minimizes, if not eliminate, inconsistencies of financial reporting among nations.
The future of IFRSs

In October 2002, FASB and IASB entered into a Memorandum of Understanding (the Norwalk
Agreement), whereby they formalized their commitment to the convergence of US GAAP and IFRSs.

1. It refers to the process of incorporating the effects of an accountable event in the statement of financial
position or the statement of profit or loss and other comprehensive income through a journal entry.
a. realization b. recognition c. derecognition d. posting
2. These are events involving an entity and an external party.

a. external events b. internal events c. life events d. transactions
3. These are events which do not involve an external party.

a. external events b. internal events c. life events d. transactions
4. It is the accounting process of assigning numbers, commonly in monetary terms, to the economic
transactions and events.
a. analyzing b. measuring c. classifying d. interpreting
5. What is the basic purpose of accounting?

a. To provide quantitative financial information about economic activities.
b. To provide all information that users need in making economic decisions.
c. To provide qualitative financial information about economic activities intended to be useful in
making economic decisions.
d. To provide quantitative financial information about economic activities intended to be useful in
making economic decisions.
6. Accounting provides which type of information?

a. quantitative b. qualitative c. financial information d. all of these
7. It is the branch of accounting that focuses on the general purpose reports of financial position and
operating results known as financial statements.
a. financial accounting b. managerial accounting c. auditing d. taxation
8. General purpose financial statements are

a. Those statements that cater to the common and specific needs of a wide range of external users.
b. Those statements that cater to the common needs of a wide range of external users and internal
users.
c. Those statements that cater to the common needs of a limited range of external users.
d. Those statements that cater to the common needs of a wide range of external users.
9. External users are those

a. Who do have the authority to demand financial reports tailored to their specific needs.
b. Who do not have the authority to demand financial reports tailored to their common needs.
c. Who do not have the authority to demand financial reports tailored to their specific needs.
d. Who belong to countries other than the domicile country of the reporting entity.
10. The primary objective of financial reporting

a. To provide information about economic resources, claims to these resources, and changes in them.
b. To provide information useful for investment and credit decisions.
c. To provide information useful in predicting future cash flows.
d. All of these
11. The practice of accountancy in the Philippines is regulated under

a. RA 9892 b. RA 9298 c. RA 8992 d. RH Bill
12. Philippine Financial Reporting Standards (PFRSs) consist of

a. PFRSs b. PASs c. Interpretations d. all of these
13. It is the official accounting standard setting body in the Philippines. It is composed of a chairperson and
14 members.
a. Financial Reporting Standards Committee (FRSC)
b. Financial Reporting Standards Council (FRSC)
c. Accounting Standards Committee (ASC)
d. Accounting Standards Council (ASC)
14. PFRSs are adopted from the standards issued by

a. IASC b. IASCF c. IASB d. FASB
15. Financial reporting standards continuously change primarily in response to

a. user needs c. political influence
b. government regulations d. changes in social environments

TOAMOD1.2 THE ACCOUNTING PROCESS
Accounting process comprises the activities of identifying, measuring and communicating economic
information that is useful for decision making purposes.
Accounting information system (accounting Management information system is a set of data
system) is the system of collecting and processing gathering, analyzing and reporting functions
transaction data and disseminating financial designed to provide management with the
information to interested parties. It is a subsystem information it needs to carry out its functions.
of MIS. Components are: Components are:
a. Personnel a. Accounting Information System
b. Relevant accounting policies and standards b. Personnel Information System
c. Procedures c. Logistics Information System
d. Equipment and devices
e. Records and reports
Accounting cycle represents the steps or accounting procedures normally used by entities to record
transactions and prepare financial statements. It implements the accounting process.
1. Identifying and analyzing
The accountant gathers information from source documents and determines the impact of the transactions
on the financial position as represented by the basic equation A = L + E.
Accounting records: (1) Source documents, (2) Books of original entry, (3) Books of final entry
Systems of recording transactions: (1) Double-entry system, (2) Single-entry system
2. Journalizing
The process of recording transactions in the journal by means of journal entries.
Journal – a formal record where transactions are initially recorded chronologically through journal entries.
a. General journal – used to record transactions other than those recorded in special journals
b. Special journal – used to record transactions of a similar nature (e.g. Sales journal, Purchase
journal, Cash receipts book, Cash disbursements book)
Type of journal entries:

a. Simple journal entry – single debit and single credit
b. Compound journal entry – two or more debits or credits
c. Adjusting entries – made prior to the preparation of financial statements to update certain
accounts so that they reflect correct balances as at the designated time
d. Closing entries – made at the end of the accounting period after all adjustments have been made to
zero-out the balances of nominal accounts and to update the retained earnings account
e. Reversing entries – entries usually made in the next accounting period to reverse certain adjusting
entries made in the previous accounting period in order to facilitate recording of cash receipts and
disbursements in the next accounting period
f. Correcting entries – made to correct accounting errors committed
g. Reclassification entries – made to transfer an item from one account to another account that better
describes the nature of the item transferred
3. Posting
The process of transferring data from the journal to the appropriate accounts in the ledger. It serves to
classify the effects of transactions on specific asset, liability, equity, income and expense accounts.
Ledger – systematic compilation of a group of accounts.
Kinds of ledger:
a. General ledger – contains all accounts appearing in the financial statements
b. Subsidiary ledger – a supporting ledger consisting of a group of accounts with similar nature, the
total of which is in agreement with the balance of the related controlling account in the general
ledger
Account is the basic storage of information in accounting. Accounts in the ledger follow the format of a T-
account, wherein the left side is called debit and the right side is called credit. Chart of accounts is a list of
all the accounts used by the entity.
a. Real or permanent accounts – not closed at the end of the accounting period
b. Nominal or temporary accounts – closed at the end of the accounting period
c. Mixed accounts – having both statement of financial position and income statement components
d. Contra accounts – offset accounts or accounts which are deducted from the related account
e. Adjunct account – accounts which are added to the related account

4. Unadjusted trial balance (optional)
An internal control as adjusting entries and consequently, financial statements, cannot be prepared unless
the total debits and credits agree.
Trial balance – list of accounts with their balances prepared for the purpose of proving the mathematical
accuracy of the monetary totals of debits and credits in the ledger.
a. Unadjusted trial balance – prepared before the preparation of adjusting entries, contains real,
nominal, and mixed accounts
b. Adjusted trial balance – prepared after the adjusting entries, contains real and nominal accounts
c. Post-closing trial balance – prepared after the closing process, contains real accounts only
Errors revealed by a trial balance:

a. Journalizing or posting one-half of an entry (a debit without credit or vice versa)
b. Recording one part of an entry for a different amount than the other part
c. Errors of transplacement (slide error) on one side of an entry
d. Errors of transposition on one side of an entry
Errors not revealed by a trial balance:

a. Omitting entirely the entry for a transaction
b. Journalizing or posting an entry twice
c. Using wrong account with the same normal balance as the correct account
d. Wrong computation with same erroneous amounts posted to debit and credit sides
5. Adjusting entries
These are made prior to the preparation of the financial statements to update certain asset, liability,
income or expense accounts in order to bring them to their adjusted balances. Involve at least one
statement of financial position account and one statement of profit or loss and other comprehensive
account. All adjusting entries affect the comprehensive income for the period.
a. Accrued expense – expense incurred but not yet paid
b. Accrued income – income earned but not yet received or collected
c. Prepaid expense – expense paid or acquired in advance
d. Unearned income – income already collected but not yet earned
e. Depreciation – systematic allocation of the depreciable amount of an item of property, plant and
equipment over its useful life
f. Uncollectible accounts – customers’ accounts that may no longer be collected or that may possibly
become bad debts
6. Adjusted trial balance (optional)
Worksheet – an analytical device used in accounting to facilitate the gathering of data for adjustments, the
preparation of financial statements, and closing entries. This is optional but usually prepared in practice
using spreadsheet application.
7. Financial statements
These are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users. These are the end products of the accounting process.
(See Module 2 for a more in-depth discussion)
8. Closing the books
This is the process of preparing closing entries for nominal accounts and ruling and balancing real
accounts. This is an application of the periodicity concept.
Closing entries – prepared at the end of accounting period to “zero out” all temporary or nominal accounts
in the ledger. This is done so that the transactions in a period will not co-mingle with the next period’s
transactions.
9. Post-closing trial balance (optional)
This is prepared after closing the books and contains only statement of financial position accounts since all
income statement accounts would have been closed. This serves as an internal control to ensure the
equality of the debits and credits in the ledger after the closing process.
10. Reversing entries (optional)
Reversing entries – usually made (but not always) on the first day of the next accounting period to reverse
certain adjusting entries made in the immediately preceding period.
Purposes:
a. To facilitate recording of cash receipts and disbursements in the next accounting period
b. For convenience in recording next period’s year-end adjustments for accruals
c. For consistency of accounting procedures
What may be reversed?

a. All accruals, whether for income or expense
b. Prepayments initially recorded using the expense method
c. Unearned income initially recorded using the income method

1. It represents the steps or accounting procedures normally used by entities to record transactions and
prepare financial statements. It implements the accounting process.
a. accounting cycle b. accounting process c. accounting evolution d. accounting system
2. Which of the following statements is true?

a. Journals are used under both the double-entry system and single-entry system.
b. The accrual basis of accounting cannot be applied when using the single-entry system.
c. The cash basis and accrual basis of accounting can both be used under double-entry systems but not
under single-entry systems.
d. Subsidiary ledgers are used under both double and single-entry systems.
3. It is a formal record where transactions are initially recorded.

a. journal entries b. ledger c. master file d. journal
4. Transactions are posted to the

a. book of original entry b. book of final entry c. log book d. facebook
5. It is the basic storage of information in accounting.

a. journal entry b. T-account c. debit or credit d. account
6. It is a systematic compilation of a group of accounts.

a. chart of accounts b. trial balance c. ledger d. journal
7. It is a list of accounts and their balances.

a. chart of accounts b. trial balance c. ledger d. journal
8. The purpose of preparing a trial balance is

a. to ensure that there were no errors committed
b. to prove that all journal entries were posted correctly
c. to prove the equality of the monetary totals of debits and credits
d. all of these
9. Errors revealed by a trial balance are

a. those errors which are caused by transposition errors but not transplacement errors
b. those errors which are caused by either transposition errors or transplacement errors
c. transplacement and transposition errors on only one side of a journal entry
d. those errors which have caused the total debits and total credits to be unequal
10. Which of the following errors may be revealed by a trial balance?

a. A debit to salaries expense was posted in the ledger as debit to insurance expense.
b. Expense already incurred was not recorded.
c. The debit and credit posting of a credit sale were omitted.
d. The credit posting of a payment of account payable was omitted.
11. Which of the following is incorrect regarding adjusting entries?

a. All adjusting entries involve at least one statement of financial position account and one statement of
profit or loss and other comprehensive income account.
b. Adjusting entries are used to update the balances of accounts prior to the preparation of the financial
statements.
c. Adjusting entries always affect the comprehensive income for the year.
d. Adjusting entries always affect the profit or loss for the year but not the comprehensive income.
12. These are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users. They are the end products of the accounting process.
a. financial statements c. notes to financial statements
b. financial reporting standards d. all of these
13. If an entity uses the income method of initial recording of income, the year-end adjusting entry involves
a. crediting an income account for the earned portion of the advance payment received
b. debiting a liability account for the earned portion of the advance payment received
c. debiting an income account for the earned portion of the advance payment received
d. crediting a liability account for the unearned portion of the advance payment received

14. If an entity uses the expense method of initial recording of expenses, the year-end adjusting entry
involves
a. debiting a prepaid asset account for the expired portion of the advance payment made
b. debiting an expense account for the expired portion of the advance payment made
c. crediting an expense account for the unexpired portion of the advance payment made
d. crediting a prepaid asset account for the unexpired portion of the advance payment made
15. Reversing entries may not be made on adjusting entries for

a. the accrual of income or expense
b. the unexpired portion of prepayments
c. the unearned portion of advances received
d. the expired portion of prepayments
16. Which of the following is not among the first five steps in the accounting cycle?
a. Record transactions in journals c. Adjust the general ledger accounts
b. Record closing entries d. Post entries to general ledger accounts
17. Which is the correct sequence for recording transactions and preparing financial statements?
a. Journal, ledger, trial balance, financial statements
b. Ledger, trial balance, journal, financial statements
c. Financial statements, trial balance, ledger, journal
d. Ledger, journal, trial balance, financial statements
18. The accounting equation must remain in balance

a. throughout each step in the accounting cycle
b. only when journal entries are recorded
c. only at the time the trial balance is prepared
d. only when formal financial statements are prepared
19. How would net income most likely affect the accounting equation?
a. Increase assets and increase shareholders’ equity c. Increase assets and increase liabilities
b. Increase liabilities and decrease shareholders’ equity d. Decrease assets and decrease liabilities
20. Which financial statement covers a period of time?

a. statement of financial position c. statement of cash flows
b. income statement d. both income statement and statement of cash flows
21. It is the basic summary device of accounting that is used to store the recorded monetary information
from the entity's transactions and events.
a. account b. journal c. ledger d. source document
22. A chart of accounts is

a. a subsidiary ledger c. a general ledger
b. a listing of all account titles d. a general journal
23. Accumulated depreciation is an example of

a. Nominal and adjunct account c. Nominal and contra account
b. Real and adjunct account d. Real and contra account
24. Which is an example of a nominal and contra account?

a. Freight in b. Sales discount c. Purchases d. Allowance for doubtful accounts
25. The normal balance of an account is on the

a. Debit side of the account c. Side represented by increase in the account balance
b. Credit side of the account d. Side represented by decrease in the account balance
26. The debit and credit analysis of a transaction normally takes place
a. Before an entry is recorded in a journal. c. When the trial balance is prepared.
b. When the entry is posted to the ledger. d. At some other point in the accounting cycle.
27. Double entry system means

a. Only two accounts are affected by each transaction recording.
b. A transaction is recorded twice, once in the journal and the other in the ledger.
c. For every asset increased, a revenue or liability must also be increased.
d. At least two accounts are affected by each transaction recording.

28. Debits
a. Increase assets and decrease expenses, liabilities, revenue and equity.
b. Increase assets 'and equity, and decrease liabilities, expenses and revenue.
c. Decrease assets and expenses, and increase liabilities, revenue and equity.
d. Increase assets and expenses, and decrease liabilities, equity and revenue.
29. Which of the following is not considered a book of original entry?

a. General Journal b. General Ledger c. Sales Journal d. Purchases Journal
30. An accounting record where an entity initially records transactions and other events is called
a. Ledger b. Account c. Trial balance d. Journal
31. What function do accounting journals serve in the accounting process?

a. Recording b. Classifying c. Summarizing d. Interpreting
32. A simple journal entry

a. Consists of one debit and one credit c. Consists of one debit and two credits
b. Consists of two debits and one credit d. Is only a memorandum entry
33. A journal entry that contains more than two accounts is called
a. An adjusting entry c. An incorrect journal entry
b. Compound journal entry d. A correcting entry
34. Which of the following is not a possible combination of a journal entry?

a. Increase in asset and increase in liability. c. Decrease in liability and decrease in asset.
b. Decrease in equity and increase in liability. d. Increase in asset and decrease in equity.
35. When special journals are used, which of the following is true?
a. A general journal is not used.
b. All sales transactions should be recorded in the sales journal.
c. All cash receipts should be recorded in the cash receipts journal.
d. All purchase transactions should be recorded in the purchase journal.
36. When special journals are used, adjusting and closing entries are recorded in the
a. Cash disbursements journal c. General journal
b. Cash receipts journal d. Purchases journal
37. It is defined as the entire group of accounts for an entity.

a. General ledger b. Subsidiary ledger c. Trial balance d. Financial statements
38. Posting refers to the process of transferring information from

a. Journals to general ledger accounts c. Source documents to journals
b. General ledger accounts to journals d. Journals to source documents
39. What function do general ledgers serve in the accounting process?

a. Reporting b. Summarizing c. Classifying d. Recording
40. It is a working paper that lists all the entity’s general ledger accounts and their account balances.
a. Trial balance b. General ledger c. Worksheet d. Chart of accounts
41. Which of the following is not a principal purpose of an unadjusted trial balance?
a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger accounts.
42. Transposition is an
a. Error of interchanging the figures
b. Error of placing the decimal point
c. Error of not recording the transaction
d. Error, which if not detected is automatically compensated or corrected in the next accounting period.
43. The error of posting P100,000 as P1,000,000 can be detected by

a. Dividing the out-of-balance amount by 2.
b. Totaling each account's balance in the ledger.
c. Dividing the out-of-balance amount by 9.
d. Examining the chart of accounts.

44. A control device that helps minimize and localize accounting errors is known as
a. Subsidiary ledger b. Worksheet c. Trial balance d. Chart of accounts
45. What is the normal order of accounts in the unadjusted trial balance?
a. Asset, equity, income, expense and liability
b. All accounts with debit balances and then all accounts with credit balances
c. Asset, liability and equity
d. Asset, liability, equity, income and expense
46. Paid but not yet incurred

a. Income b. Accrued Income c. Deferred expense d. Cash outflow
47. Adjusting entries affect

a. One nominal account and one real account c. Two real accounts
b. Two nominal accounts d. No particular combination of nominal and real accounts
48. Which of the following would not be a correct form for an adjusting entry?
a. A debit to revenue and a credit to liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
49. An adjusting entry that debits an expense and credits a liability is which type?
a. Accrued expense b. Depreciation expense c. Prepaid expense d. Cash expense
50. An adjusting entry in which revenue is recognized before the related cash receipt occurs is
a. Deferral b. Nominal c. Accrual d. Special item
51. Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for
a. An unearned revenue b. A prepaid expense c. An accrued revenue d. An accrued expense
52. Which of the following best defines an accrual?

a. Adjusting entries where cash flow precedes revenue or expense recognition
b. Adjusting entries where revenue or expense recognition precedes cash flow
c. Adjusting entries where cash flow and revenue or expense recognition are simultaneous
d. Adjusting entries where revenue and expenses are recognized in the absence of cash flow
53. The purpose of adjusting entries is to

a. Prepare revenue and expense accounts for recording the transactions of the next period.
b. Apply the realization principle and the matching principle to transactions affecting two or more
accounting periods.
c. Adjust daily the balances in asset, liability, revenue and expense accounts for the effects of business
transactions.
d. Adjust the capital account for the revenue, expense and withdrawal transactions which occurred
during the year.
54. An accrued expense can best be described as an amount

a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and not currently matched with earnings
d. Not paid and currently matched with earnings
55. A prepaid expense can best be described as an amount

a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and currently matched with earnings
d. Not paid and not currently matched with earnings.
56. An accrued income can best be described as an amount

a. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses

57. An unearned income can best be described as an amount
a. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses
58. The adjusting entry for income collected in advance which was credited originally to income will
a. Decrease liability b. Increase asset c. Decrease an income account d. Increase equity
59. The adjusting entry for income earned but not yet collected will
a. Increase liability b. Increase asset c. Decrease asset d. Decrease liability
60. Which of the following is not true of a worksheet?

a. The worksheet is included as part of the published financial statements.
b. The worksheet provides a place where adjusting entries can be made informally before they are
journalized and posted.
c. The worksheet provides a balancing mechanism that helps to uncover accounting errors.
d. The worksheet helps facilitate the preparation of financial statements.
61. Closing entries

a. Are optional step in the accounting cycle.
b. Affect only real accounts.
c. Permit an entity to analyze routine and repetitive transactions the same way all the time.
c. Remove the balances from the entity’s temporary accounts.
62. After the accounts have been closed

a. All the accounts have zero balances.
b. The asset, liability and equity accounts have zero balances.
c. The revenue, expense, income summary and retained earnings accounts have zero balances.
d. The revenue, expense and income summary accounts have zero balances.
63. Which of the following accounts is not closed out?

a. Accumulated depreciation b. Depreciation expense c. Dividends d. Interest revenue
64. The dividends declared account is a nominal account and

a. Carried forward to the next accounting period c. Closed directly to income summary
b. Closed directly to retained earnings d. Closed directly to share capital
65. If income is greater than expenses of a corporation, the income summary account will be closed by
a. Debiting retained earnings and crediting income summary
b. Debiting cash and crediting income summary
c. Debiting income summary and crediting retained earnings
d. Debiting income summary and crediting cash
66. The post-closing trial balance

a. Provides a convenient listing of account balances that can be used to prepare the financial statements.
b. Does not include nominal accounts.
c. Is identical to the statement of financial position.
d. Proves that accounts have been closed properly.
67. Reversing entries

a. Are normally prepared for accrued, prepaid and estimated items.
b. Are necessary to achieve a proper matching of revenue and expense.
c. Are desirable to exercise consistency and establish standardized procedures,
d. Must be made at year-end.
68. Reversing entries should be made for

a. Adjusting entries that create accrued income or accrued expenses to be collected or paid in the-next
accounting period.
b. Adjusting entries related to prepayments of costs initially recorded as expenses or receipts in advance
initially recorded as income.
c. Both a and b
d. None of these

69. An entity initially records prepayments in real accounts and makes reversing entries when appropriate.
Which of the following year-end adjusting entries should be reversed?
a. The entry to record depreciation expense for the period
b. The entry to record the portion of service fees received in advance that is earned by year-end
c. The entry to record supplies used during the period
d. The entry to record service fees earned by year end but not billed
70. Reversing entries apply to

a. All adjusting entries c. All accruals
b. All deferrals d. All closing
TOAMOD1.3 THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

History of the Framework
Framework for the Preparation and Presentation of Financial Statements (the
1989 April
Framework) was approved by the IASC Board.
1989 July Framework was published.
2001 April Framework adopted by the IASB.
Conceptual Framework for Financial Reporting 2010 (the IFRS Framework) approved
2010 September
by the IASB.
Introduction
A conceptual framework is a coherent system of interrelated basic concepts and propositions that
prescribe objectives, limits, and other fundamentals of financial accounting and serves as a basis for
developing and evaluating accounting principles and resolving accounting and reporting controversies.
Purpose: Authoritative status:
a. Assist the FRSC in developing accounting standards that 1. The Conceptual Framework is not a
represent generally accepted accounting principles in the PFRS and hence does not define
Philippines. standards for any particular
b. Assist the FRSC in its review and adoption of existing measurement or disclosure issue.
international financial reporting standards. 2. In the Conceptual Framework,
c. Assist preparers of financial statements in applying FRSC nothing overrides any specific PFRS.
financial reporting standards and in dealing with topics that 3. If there is a conflict between a
have yet to form the subject of an FRSC statement. requirement of a PFRS and a provision
d. Assist auditors in forming an opinion as to whether financial of the Conceptual Framework, the
statements conform with Philippine generally accepted requirement of the PFRS will prevail.
accounting principles. 4. Hierarchy of guidance:
e. Assist users of financial statements in interpreting the a. PFRSs
information contained in financial statements prepared in b. Similar and related PFRSs
conformity with Philippine generally accepted accounting c. Conceptual Framework
principles. d. Most recent pronouncements of
f. Provide those who are interested in the work of FRSC with other standard-setting bodies
information about its approach to the formation of financial e. Other accounting literature and
reporting standards. accepted industry practices
Scope of the Framework

The framework deals with:
a. The objective of financial reporting
b. The qualitative characteristics of useful information
c. The definition, recognition and measurement of the elements from which financial statements are
constructed
d. Concepts of capital and capital maintenance
Objective of financial reporting
The objective of general purpose financial reporting 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.
Primary users – cannot require reporting entities to provide information directly to them
a. Existing and potential investors
b. Lenders and other creditors
The Framework notes that general purpose financial reports cannot provide all the information that users
may need to make economic decisions. They will need to consider pertinent information from other
sources as well.

Information on economic resources, claims and changes in them
a. Financial position – information on economic resources (assets) and claims against the
reporting entity (liabilities and equity). Assists users to
i. assess that entity's financial strengths and weaknesses
ii. assess liquidity and solvency
iii. assess its need and ability to obtain financing
iv. predict how future cash flows will be distributed among those with a claim on the reporting
entity (information about claims and payment requirements)
b. Changes in economic resources and claims – information on financial performance and other
transactions and events that lead to changes in financial position
i. Financial performance reflected by accrual accounting (statement of comprehensive income)
ii. Financial performance reflected by past cash flows (statement of cash flows)
iii. Changes in economic resources and claims not resulting from financial performance
(statement of changes in equity)
NOTE: To assess future cash flows, all information regarding an entity’s financial position, financial
performance, cash flows, and other changes in financial position must be considered.
Qualitative characteristics of useful information
These identify the types of information that are likely to be most useful to the primary users for making
decisions about the reporting entity on the basis of information in its financial report.
a. Fundamental (Relevance, Faithful representation)
b. Enhancing (Comparability, Verifiability, Timeliness, Understandability)
Fundamental qualitative characteristics

1. Relevance – capability of making a difference in the decisions made by users. Ingredients are:
a. Predictive value – can be used as an input in predicting or forecasting future outcomes.
b. Confirmatory (feedback) value –provides feedback about previous evaluations.
c. Materiality – its omission or misstatement could influence decisions that users make. It is an
entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which
the information relates in the context of an individual entity's financial report.
2. Faithful representation – financial reports represent economic phenomena in words and in numbers that
it purports to represent. Ingredients are:
a. Completeness – all information necessary for the understanding of the phenomenon being
depicted shall be provided.
b. Neutrality – financial information are selected or presented without bias.
c. Free from error – does not mean accurate in all respects, there are no errors or omissions in the
description of the phenomenon and the process used to produce the reported information has been
selected and applied with no errors in the process.
NOTE: Information must be both relevant and faithfully represented if it is to be useful.
Enhancing qualitative characteristics

1. Comparability – can be compared with similar information about other entities (inter-comparability)
and with similar information about the same entity for another period or another date (intra-
comparability). It enables users to identify and understand similarities in, and differences among, items.
2. Verifiability - different knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful representation. Verification can be
done through direct observation (direct) or checking inputs to a model, formula and other technique and
recalculating the outputs using the same methodology (indirect).
3. Timeliness - information is available to decision-makers in time to be capable of influencing their

decisions.
4. Understandability – information is classified, characterized and presented clearly and concisely. While
some phenomena are inherently complex and cannot be made easy to understand, to exclude such
information would make financial reports incomplete and potentially misleading. Financial reports are
prepared for users who have a reasonable knowledge of business and economic activities and who
review and analyze the information with diligence.
NOTE: Enhancing qualitative characteristics should be maximized to the extent necessary. However,
enhancing qualitative characteristics (either individually or collectively) cannot make information useful if
that information is irrelevant or not represented faithfully.

The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general purpose financial
reporting. Reporting such information imposes costs and those costs should be justified by the benefits
of reporting that information. The IASB assesses costs and benefits in relation to financial reporting
generally, and not solely in relation to individual reporting entities. The IASB will consider whether
different sizes of entities and other factors justify different reporting requirements in certain situations.
Underlying assumption
The IFRS Framework states that the going concern assumption is an underlying assumption. Thus, the
financial statements presume that an entity will continue in operation indefinitely or, if that presumption is
not valid, disclosure and a different basis of reporting are required.
Elements of financial statements
1. Elements directly related to financial position (balance sheet):
a. Asset - 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.
b. Liability - a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
c. Equity - the residual interest in the assets of the entity after deducting all its liabilities.
2. Elements directly related to performance (income statement):

a. Income - increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.
i. Revenue – arises in the course of the ordinary activities of an entity and is referred to by a
variety of different names including sales, fees, interest, dividends, royalties and rent.
ii. Gain – other items that meet the definition of income and may, or may not, arise in the course
of the ordinary activities of an entity.
b. Expense - decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
i. Expense – arise in the course of the ordinary activities of the entity include, for example, cost
of sales, wages and depreciation.
ii. Loss – other items that meet the definition of expenses and may, or may not, arise in the
course of the ordinary activities of the entity.
Recognition of the elements of financial statements

Recognition is the process of incorporating in the balance sheet or income statement an item that meets
the definition of an element and satisfies the following criteria for recognition:
a. It is probable that any future economic benefit associated with the item will flow to or from the
entity; and
b. The item's cost or value can be measured with reliability
Based on these general criteria:

1. An asset is recognized in the balance sheet when it is probable that the future economic benefits will
flow to the entity and the asset has a cost or value that can be measured reliably.
2. A liability is recognized in the balance sheet when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present obligation and the amount at
which the settlement will take place can be measured reliably.
3. Income is recognized in the income statement when an increase in future economic benefits related to
an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means,
in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or
the decrease in liabilities arising from the waiver of a debt payable).
4. Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset
or an increase of a liability has arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a
decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).
a. Direct association - costs are recognized as expenses when the related revenue is recognized
b. Systematic and rational allocation – applied when economic benefits are expected to arise over
several accounting periods
c. Immediate recognition
Measurement of the elements of financial statements

Measurement involves assigning monetary amounts at which the elements of the financial statements are
to be recognized and reported. (historical cost, current cost, realizable (settlement) value, present value)

NOTE: Historical cost is the measurement basis most commonly used today, but it is usually combined
with other measurement bases. The IFRS Framework does not include concepts or principles for
selecting which measurement basis should be used for particular elements of financial statements or in
particular circumstances. Individual standards and interpretations do provide this guidance,
however.
Concepts of capital and capital maintenance
1. Concepts of capital
a. Financial concept of capital – capital is synonymous with the net assets or equity of the entity.
b. Physical concept of capital – capital is regarded as the productive capacity of the entity based on,
for example, units of output per day.
2. Concepts of capital maintenance

a. Financial capital maintenance – 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 the net assets at the
beginning of the period, after excluding any distributions to, and contributions from, owners during
the period. Does not require the use of a particular basis of measurement.
b. Physical capital maintenance – 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. Requires the
adoption of the current cost basis of measurement.
NOTE: 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.
1. The Conceptual Framework (choose the incorrect statement)

a. is not a PFRS
b. in the absence of a Standard, shall be considered by management when making its judgment in
developing and applying an accounting policy that result in information that is relevant and reliable
c. is concerned with general purpose financial statements only
d. prevails over the PFRSs in case of conflicts
2. The objective of general purpose financial reporting is

a. to provide information regarding the economic resources of an entity
b. to provide users with relevant and reliable information needed to oversee the day-to-day operations
of an entity
c. 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
d. all of these
3. A secondary objective of financial statements

a. is to show information regarding assets and liabilities of an entity
b. is to show information regarding an entity’s financial position, performance and changes in financial
position
c. is to show the results of the stewardship of management
d. b and c
4. Which of the following are the primary users of general purpose financial reports?
a. existing and potential investors c. government and public
b. lenders and other creditors d. a and b
5. According to the Conceptual Framework, the needs of primary users that are met by financial statements
are
a. all of their needs c. majority of their common needs only
b. all of their common needs only d. majority of their common and specific needs only
6. Which of the following is one of the fundamental qualitative characteristics?

a. Relevance b. Reliability c. Comparability d. Unfaithful representation
7. According to the Conceptual Framework, the correct classifications of Relevance and Reliability,
respectively, are
a. Fundamental, Enhancing c. Fundamental, Fundamental
b. Enhancing, Fundamental d. Fundamental, None
8. The qualitative characteristics that enhance the usefulness of financial information includes all of the
following, except
a. Comparability b. Verifiability c. Timeliness d. Materiality

9. This element is essential so that users may find fundamentally prepared financial information to be
useful.
a. fundamental qualitative characteristics c. comparability
b. relevance d. understandability
10. The elements of relevance do not include

a. predictive value b. feedback value c. materiality d. timeliness
11. Which of the following statements is incorrect concerning materiality?

a. Materiality can be assessed quantitatively or qualitatively.
b. There are no specific materiality thresholds provided under the PFRSs.
c. Materiality is a matter of judgment.
d. Materiality is a quantitative matter. Thus, it should not be assessed qualitatively.
12. The elements of faithful representation do not include

a. comparability b. completeness c. neutrality d. free from error
13. The ability through consensus among measurers to ensure that information represents what it purports
to represent is an example of the concept of
a. relevance b. verifiability c. comparability d. feedback value
14. Which of the following statements regarding comparability is incorrect?

a. The usefulness of financial information is greatly enhanced if it can be compared with information
produced by another entity or with similar information prepared in previous periods.
b. Comparability and consistency are interrelated but they are not the same. Comparability is the means
while consistency is the goal.
c. Information is comparable if it is prepared and presented consistently.
d. Comparability and consistency are interrelated but they are not the same. Comparability is the goal
while consistency is the means.
15. According to the Conceptual Framework, it is a pervasive constraint on the information that can be
provided by financial reporting
a. materiality b. historical c. cost d. going concern
16. The elements directly related to the measurement of financial position in the balance sheet
a. assets b. liabilities c. equity d. all of these
17. The elements directly related to the measurement of performance

a. income b. expenses c. a and b d. neither a nor b
18. Assets and liabilities are recognized if

a. they meet the definition of an element
b. they have probable future economic benefits and have cost or value that are measured reliably
c. a and b
d. neither a nor b
19. Which of the following statements is correct?

a. An item that has probable economic consequence but has no value that can be measured reliably is
not recognized in the financial statements but is always disclosed in the notes.
b. An item that has probable economic consequence and can be measured reliably is always recognized
in the financial statements and disclosed in the notes if disclosure provides relevant information to
users.
c. An item that has probable economic consequence and can be measured reliably may not be
recognized in the financial statements.
d. All of these
20. The cost of purchases of inventory is recognized as expense

a. immediately c. by systematic allocation
b. using the matching concept d. any of these as a matter of accounting policy choice
21. It is the accounting standard setting body created by the Professional Regulation Commission upon
recommendation of the Board of Accountancy to assist the BOA in carrying out its powers and functions
under R.A. 9298, otherwise known as the Philippine Accountancy Act of 2004.
a. Financial Reporting Standards Council c. Education Technical Council
b. Accounting Standards Council d. Auditing and Assurance Standards Council

22. Philippine Financial Reporting Standards include which of the following?
I. Philippine Financial Reporting Standards corresponding to IFRS issued by IASB.
II. Philippine Accounting Standards corresponding to IAS issued by IASC.
III. Philippine Interpretations corresponding to IFRIC and SIC Interpretations, and Interpretations
developed by PIC.
a. I only b. I and II only c. I and III only d. I, II and III
23. Which statement is true concerning the Conceptual Framework for Financial Reporting?
I. The Conceptual Framework is not a reporting standard and therefore does not define standard for
any particular measurement or disclosure issue.
II. The Conceptual Framework is concerned with general purpose financial statements including
consolidated financial statements.
III. In cases of conflict, the requirements of the Conceptual Framework prevail over those of the relevant
PFRS.
a. I only b. I and II only c. II and III only d. I, II and III
24. Which is not a basic purpose of the Conceptual Framework?

a. To assist FRSC in developing accounting standards that represents GAAP in the Philippines.
b. To assist FRSC in reviewing and adopting existing international accounting standards.
c. To promulgate rules and regulations affecting the practice of the accountancy profession in the
Philippines.
d. To assist auditors in forming an opinion as to whether financial statements conform to accounting
standards.
25. The Conceptual Framework for Financial Reporting deals with

I. Objectives of financial reporting
II. Qualitative characteristics of useful financial information
III. Definition, recognition and measurement of elements from which financial statements are
constructed
IV. Concepts of capital and capital maintenance
a. I and II only b. I and III only c. I, II and III only d. I, II, III and IV
26. The “primary users” of financial information include

I. Existing and potential investors
II. Existing and potential lenders and other creditors
III. User group such as employees, customers, governments and their agencies, and the public
27. Which statement is true in relation to information needs?

I. Information that meets the needs of primary users is likely to meet the needs of other users, such as
employees, customers, governments and their agencies, and the public.
II. The management is also interested in financial information but it need not rely on general purpose
financial reports because it can access additional information internally.
a. I only b. II only c. Both I and II d. Neither I nor II
28. What is the objective of financial reporting according to the Conceptual Framework?
a. To prepare financial statements in accordance with applicable Standards and Interpretations.
b. To provide information about the financial position, financial performance and cash flows of an entity.
c. To prepare and present relevant information to all users.
d. To provide financial information about an entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity.
29. Which of the following is not normally an objective of financial reporting?

a. To provide information about an entity’s assets, claims against those assets and changes in them.
b. To provide information that is useful in assessing an entity’s sources and uses of cash.
c. To provide information that is useful in lending and investing decisions.
d. To provide information about an entity’s liquidation value.
30. Which statement in relation to financial reporting is incorrect?

a. General purpose financial reports do not and cannot provide all of the information needs of primary
users.
b. General purpose financial reports are designed to show the value of the entity.
c. General purpose financial reports an intended to provide common information to users.
d. General financial reports are largely based on estimate and judgment rather than exact depiction.

31. Which of the following statements best describes the term “financial position”?
a. The income, expenses and profit or loss of an entity c. The monetary assets less monetary liabilities
b. The financial assets less liabilities of an entity d. The assets, liabilities and equity of an entity
32. Which of the following is not an underlying assumption of financial statements?

a. Going concern b. Accounting entity c. Time period d. Accrual
33. Which of the following terms best describes financial statements whose basis of accounting recognizes
transactions and other events when they occur?
a. Accrual basis b. Going concern basis c. Cash basis d. Invoice basis
34. Which of the following statements best describes the term “going concern”?
a. When current liabilities exceed current assets.
b. The financial statements are normally prepared on the assumption that an entity will 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 exceed income.
35. When a parent and subsidiary relationship exists, consolidated financial statements are prepared in
recognition of
a. Legal entity b. Economic entity c. Stable monetary unit d. Time period
36. During the lifetime of an entity, accountants prepare financial statements at arbitrary points in time.
a. Accrual b. Time period c. Unit of measure d. Continuity
37. Which of the following is not an important characteristic of the financial statements that accountants
currently prepare?
a. The information in financial statements is expressed in units of money adjusted for changing
purchasing power.
b. Financial statements articulate with one another because measuring financial position is related to
measuring changes in financial position.
c. The information in financial statements is summarized and classified to help meet needs of users.
d. Financial statements can be justified only if the benefits exceed the cost.
38. What are '‘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 the financial effects of transactions and other events.
c. Qualitative characteristics are non-qualitative aspects of an entity’s financial position, performance
and changes in financial position.
d. Qualitative characteristics measure the extent to which an entity has complied with all relevant PFRS.
39. The “fundamental” qualitative characteristics are

a. Relevance and reliability c. Relevance, faithful representation and materiality
b. Relevance and materiality d. Relevance and faithful representation
40. Which statement is true in relation to relevance?

I. Relevant financial information is capable of making a difference in the decision made by users.
II. Financial information is capable of making a difference in decisions if it has predictive value or
confirmatory value or both.
41. Which statement is incorrect in relation to materiality?

a. Information is material if its omission or misstatement could influence decisions that users make on
the basis of financial information about an entity.
b. The Conceptual Framework cannot specify a uniform qualitative threshold for materiality or
predetermine what could be material in a particular situation.
c. Materiality depends on the absolute size of the item or error judged in the particular circumstances of
its omission or misstatement.
d. Materiality is a sub-quality or an aspect of relevance because immaterial information does not affect
the decision of users.
42. What are the ingredients of faithful representation?

a. Completeness and neutrality
b. Completeness, free from error and substance over form
c. Completeness, neutrality, free from error and prudence
d. Completeness, neutrality and free from error

43. Which of the following is the best description of “faithful representation” in relation to information in
financial statements?
a. Influence on the economic decisions of users c. Freedom from material error
b. Inclusion of a degree of caution d. Comprehensibility
44. Which of the following terms best describes information in financial statements that is neutral?
a. Understandable b. Reliable c. Relevant d. Unbiased
45. This means that the financial reports should include all information necessary for a user to understand
the phenomenon being depicted including all necessary description and explanations.
a. Completeness b. Neutrality c. Free from error d. Substance over form
46. The financial information represents the substance of an economic phenomenon rather than merely
representing merely its legal form.
a. Substance over form b. Form over substance c. Reliability d. Relevance
47. It is the inclusion of a degree of caution in the exercise of judgment needed in making estimates under
conditions of uncertainty such that assets and income are not overstated, or liabilities and expenses are
not understated.
a. Prudence b. Materiality c. Objectivity d. Relevance
48. The “enhancing” qualitative characteristics are

a. Comparability and understandability
b. Verifiability and timeliness
c. Comparability understandability and verifiability
d. Comparability, understandability, verifiability and timeliness
49. It is the enhancing qualitative characteristic that enables users to identify and understand similarities
and differences among items.
a. Comparability b. Consistency c. Verifiability d. Timeliness
50. When information about two different entities has been prepared and presented in a similar manner, the
information exhibits the characteristic of
a. Relevance b. Reliability c. Consistency d. Comparability
51. Financial information exhibits the characteristic of consistency when

a. Expenses are reported as charges against revenue in the period in which they are paid.
b. Accounting entities give accountable events the same accounting treatment from period to period.
c. Gains and losses are not included on the income statement.
d. Accounting procedures are adopted which give a consistent rate of net income.
52. Users are assumed to have a reasonable knowledge of business and economic activities and a willingness
to study the information with reasonable diligence.
a. Relevance b. Reliability c. Understandability d. Comparability
53. Classifying, characterizing and presenting information clearly and concisely makes it
a. Comparable b. Understandable c. Verifiable d. Timely
54. This enhancing qualitative characteristic is demonstrated when a high degree of consensus can be
secured among independent measurers using the same measurement method.
a. Comparability b. Understandability c. Verifiability d. Timeliness
55. This means having information available to decision-makers in time to be able of influencing their
decisions.
a. Comparability b. Understandability c. Verifiability d. Timeliness
56. It is the pervasive constraint on the information that can be provided by financial reporting.
a. Cost constraint b. Materiality c. Timeliness d. Substance over form
57. Financial statements portray the financial effects of transactions and other events by grouping them into
broad classes according to their economic characteristics. These broad classes are termed as
a. Elements of financial statements c. Accounting constraints
b. Features of accounting d. Concepts of capital and capital maintenance

58. Which statement is true concerning the elements of the financial statements?
I. The elements directly related to the measurement of financial position are assets, liabilities and
equity.
II. The elements directly related to the measurement of financial performance are income and expenses.
59. It is the process of incorporating or reporting in the statement of financial position or statement of
comprehensive income an item that meets the definition of an element of financial statements.
a. Recognition b. Allocation c. Realization d. Summarization
60. An item that meets the definition of an element should be recognized when
I. It is probable that any future economic benefit associated with the item will flow to or from the
entity.
II. The item has a cost or value that can be measured with reliability.
a. I only b. II only c. Either I or II d. Both I and II
61. An asset is
a. 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.
b. A present obligation of the entity arising from past events the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits.
c. The residual interest in the assets of the entity after deducting all of its liabilities.
d. Equivalent to comprehensive income of the entity.
62. Which of the following statements best describes the term ’liability'?
a. An excess of equity over current assets.
b. Resources to meet financial commitments as they fall due.
c. The residual interest in the assets of the entity after deducting all of its liabilities.
d. A present obligation of the entity arising from past events.
63. It is an increase in economic benefit during an accounting period in the form of an inflow or increase in
asset or decrease in liability that results in increase in equity, other than contribution from owners in
their capacity as owners.
a. Income b. Revenue c. Profit d. Gain
64. Technically, this arises in the course of the ordinary regular activities of an entity and is referred to by a
variety of different names including sales, interest, dividends, royalties and rent.
a. Income b. Gain c. Profit d. Revenue
65. Which of the following statements is true?

a. Income encompasses both revenue and gain c. Gain encompasses both income and revenue
b. Revenue encompasses both income and gain d. Income encompasses revenue only
66. It is a decrease in economic benefit in the form of decrease in asset or increase in liability that results in
decrease in equity, other than distribution to owners in their capacity as owners.
a. Cost b. Expense c. Loss d. Impairment
67. It is the process that involves the simultaneous or combined recognition of revenue and expense that
result directly and jointly from the same transactions and other events.
a. Matching of cost with revenue c. Systematic and rational allocation
b. Matching of revenue with cost d. Immediate recognition
68. When economic benefits are expected to arise over several accounting periods and the association with
income can only be broadly or indirectly determined, expenses are recognized on the basis of
a. Strict matching c. Immediate recognition
b. Systematic and rational allocation d. Realization
69. An expense is recognized immediately in the income statement

I. When an expenditure produces no future economic benefits.
II. When cost incurred ceases to qualify for recognition as an asset in the statement of financial position.
III. When a liability is incurred without recognition of an asset as when a liability under a product
warranty arises.
70. Which of the following is an example of expense recognition principle of associating cause and effect?
a. Allocation of insurance cost c. Depreciation
b. Sales commission d. Officers’ salaries

71. Which of the following is an application of the principle of systematic and rational allocation?
a. Amortization of intangible asset c. Research and development cost
b. Cost of goods sold d. Salesmen’s salaries
72. The write-off of worthless patent is an example of which expense recognition principle?
a. Cause and effect association c. Systematic and rational allocation
b. Immediate recognition d. Objectivity
73. The recognition of bad debt expense is an example of

a. Direct matching c. Immediate recognition
b. Systematic and rational allocation d. None of these
74. Which category of expenses is subject to immediate recognition?

a. Utility expense for production line of a manufacturer
b. Repair and maintenance on production equipment
c. Salary of the production foreman
d. Salary of the president
75. Which of the following is not an acceptable basis for the recognition of expense?
a. Systematic and rational allocation c. Immediate recognition
b. Direct matching d. Cash disbursement
76. It is the process of determining the monetary amounts at which the elements are to be recognized and
carried in the financial statements.
a. Measurement b. Recognition c. Reporting d. Interpreting
77. Historical cost is the

a. Amount of cash or cash equivalent paid or the fair value of the consideration given at the time of
acquisition.
b. Amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently.
c. Amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly
disposal.
d. Discounted value of the future net cash inflows that an item is expected to generate in the normal
course of business.
78. Which of the following terms best describes assets recorded at the amount that represents the immediate
purchase cost of an equivalent asset?
a. Historical cost b. Realizable value c. Present value d. Current cost
79. Under the financial capital concept, which of the following statements is true in relation to the term
“profit”?
I. Profit is any amount over and above that required to maintain the capital at the beginning of the
period.
II. Profit is the residual amount that remains after expenses have been deducted from income.
80. The physical capital concept requires the adoption of which measurement basis?
a. Historical cost b. Current cost c. Realizable value d. Present value

TOAMOD1.4 PREFACE TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
History of the Preface to International Financial Reporting Standards
1975 January Preface to International Accounting Standards adopted by IASC
1982 November Preface to International Accounting Standards amended by IASC
2001 July Project to replace the old Preface with a new one was placed on IASB agenda
2001 July Exposure Draft of Preface to International Financial Reporting Standards published
by IASB
2002 May Final Preface to International Financial Reporting Standards published by IASB
2007 December Amendments to Preface approved by the IASB reflecting increase in size of IFRIC to
14 members
Objective of the Preface to IFRS

The objective of the Preface to International Financial Reporting Standards is to set out:
a. the International Accounting Standards Board's (IASB's) mission and objectives
b. the scope of International Financial Reporting Standards (IFRSs)
c. due process for developing IFRSs and Interpretations
d. policies on effective dates, format, and language for IFRSs
Objectives of the IASB
a. to develop, in the public interest, a single set of high quality, understandable, enforceable and
globally accepted financial reporting standards based upon clearly articulated principles. These
standards should require high quality, transparent and comparable information in financial
statements and other financial reporting to help investors, other participants in the world’s capital
markets and other users of financial information make economic decisions;
b. to promote the use and rigorous application of those standards;
c. in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the needs
of a range of sizes and types of entities in diverse economic settings; and
d. to promote and facilitate adoption of IFRSs, being the standards and interpretations issued by the
IASB, through the convergence of national accounting standards and IFRSs.
Scope of IFRSs
 IASB Standards are known as International Financial Reporting Standards.
 All International Accounting Standards (IASs) and Interpretations issued by the former IASC and SIC
continue to be applicable unless and until they are amended or withdrawn.
 IFRSs apply to the general purpose financial statements and other financial reporting by profit-
oriented entities – those engaged in commercial, industrial, financial, and similar activities, regardless of
their legal form.
 Entities other than profit-oriented business entities may also find IFRSs appropriate.
 General purpose financial statements are intended to meet the common needs of shareholders,
creditors, employees, and the public at large for information about an entity's financial position,
performance, and cash flows.
 Other financial reporting includes information provided outside financial statements that assists in the
interpretation of a complete set of financial statements or improves users' ability to make efficient
economic decisions.
 IFRS apply to individual company and consolidated financial statements.
 A complete set of financial statements includes:
a. a statement of financial position
b. a statement of comprehensive income
c. a statement of cash flows
d. a statement of changes in equity
e. a summary of accounting policies, and explanatory notes
 When a separate income statement is presented in accordance with IAS 1(2007), it is part of that
complete set.
 In developing Standards, IASB intends not to permit choices in accounting treatment. Further, IASB
intends to reconsider the choices in existing IASs with a view to reducing the number of those choices.
 IFRS will present fundamental principles in bold face type and other guidance in non-bold type (the
'black-letter'/'grey-letter' distinction). Paragraphs of both types have equal authority.
 The provision of IAS 1 Presentation of Financial Statements that conformity with IAS requires compliance
with every applicable IAS and Interpretation requires compliance with all IFRSs as well.
Due process for IFRS
 Due process steps for a Standard will normally include the following: (* means required by IFRS
Foundation’s Constitution)
a. staff work to identify and study the issues
b. study of existing national standards and practices
c. IASB consults with Trustees and the Advisory Council about the advisability of adding the project to
the IASB's agenda*
d. IASB normally forms an advisory group

e. IASB publishes a discussion document for comment
f. IASB considers comments received on the discussion document
g. IASB publishes an exposure draft with at least 9 affirmative votes if there are fewer than 16
members, or 10 if there are 16 members* (the exposure draft will include dissenting opinions and
basis for conclusions)
h. IASB considers comments received on the exposure draft*
i. IASB considers the desirability of holding a public hearing and of conducting field tests*
j. IASB approves the final Standard with at least 9 affirmative votes if there are fewer than 16
members, or 10 if there are 16 members* (the Standard will include dissenting opinions and basis
for conclusions)
k. IASB publishes a standard with (i) a basis for conclusions, explaining, among other things, the steps
in the IASB's due process and how the IASB dealt with public comments on the exposure draft, and
(ii) the dissenting opinion of any IASB member*
 IASB deliberates in meetings open to public observation
Due process for Interpretations

 Interpretations of IFRS will be developed by the IFRS Interpretations Committee for approval by IASB
 Due process steps for an Interpretation will normally include: (* means required by IFRS Foundation's
Constitution)
a. staff work to identify and study the issues and existing national standards and practices
b. The IFRS Interpretations Committee studies national standards and practices
c. The IFRS Interpretations Committee publishes a draft Interpretation for comment if no more than 4
Committee members have voted against the proposal*
d. The IFRS Interpretations Committee considers comments received on the draft Interpretation
within a reasonable period of time
e. The IFRS Interpretations Committee approves the final Interpretation if no more than 4
Interpretations Committee members have voted against the proposal and submits it to IASB*
f. IASB approves the final Interpretation by at least 9 affirmative votes of IASB if there are fewer than
16 members, or by 10 of its members if there are 16 members*
 The IFRS Interpretations Committee deliberates in meetings open to public observation
Effective dates
Each IFRS and Interpretation will set out its own effective date and transition provisions. New or revised
IFRSs set out transitional provisions to be applied on their initial application.
Language
English is the official language of IASB discussion documents, exposure drafts, IFRSs, and Interpretations.
IASB may approve translations if the process assures the quality of the translation, and IASB may license
other translations.

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THEORY OF ACCOUNTS

Module 1 Overview of Accounting and Introduction to IFRS

1.1 Overview of Accounting ............................................................................................. 1

1.2 The Accounting Process ............................................................................................. 5

1.3 The Conceptual Framework for Financial Reporting ..................................12

1.4 Preface to International Financial Reporting Standards ............................22

Basic Purpose of Accounting

Common Branches of Accounting

TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS 1

II. Implicit assumptions – not expressly provided in the Conceptual Framework

III. Pervasive – affects all items in the financial statements

IV. Other concepts

2 TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS

International Accounting Standards

2. International Financial Reporting Interpretations Committee (IFRIC) – a committee that prepares

4. International Federation of Accountants (IFAC) – a non-profit, non-governmental, non-political

The future of IFRSs

TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS 3

2. These are events involving an entity and an external party.

3. These are events which do not involve an external party.

5. What is the basic purpose of accounting?

6. Accounting provides which type of information?

8. General purpose financial statements are

9. External users are those

10. The primary objective of financial reporting

11. The practice of accountancy in the Philippines is regulated under

12. Philippine Financial Reporting Standards (PFRSs) consist of

14. PFRSs are adopted from the standards issued by

15. Financial reporting standards continuously change primarily in response to

4 TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS

Systems of recording transactions: (1) Double-entry system, (2) Single-entry system

Type of journal entries:

Ledger – systematic compilation of a group of accounts.

TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS 5

Errors revealed by a trial balance:

Errors not revealed by a trial balance:

What may be reversed?

6 TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS

2. Which of the following statements is true?

3. It is a formal record where transactions are initially recorded.

4. Transactions are posted to the

5. It is the basic storage of information in accounting.

6. It is a systematic compilation of a group of accounts.

7. It is a list of accounts and their balances.

8. The purpose of preparing a trial balance is

9. Errors revealed by a trial balance are

10. Which of the following errors may be revealed by a trial balance?

11. Which of the following is incorrect regarding adjusting entries?

TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS 7

15. Reversing entries may not be made on adjusting entries for

18. The accounting equation must remain in balance

20. Which financial statement covers a period of time?

22. A chart of accounts is

23. Accumulated depreciation is an example of

24. Which is an example of a nominal and contra account?

25. The normal balance of an account is on the

27. Double entry system means

8 TOAMOD1 OVERVIEW OF ACCOUNTING AND INTRODUCTION TO IFRS