CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA

b. business industries, rather than to individual enterprises or an

CHAPTER 1 economy as a whole or to members of society as consumers.
c. individual business enterprises, industries, and an economy as a
TRUE-FALSE—Conceptual whole, rather than to members of society as consumers.
d. an economy as a whole and to members of society as consumers,
1. Financial accounting is the process of identifying, measuring, analyzing, and rather than to individual enterprises or industries.
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communicating financial information needed by management to plan, evaluate, 25. The process of identifying, measuring, analyzing, and communicating
and control an organiza-tion's operations. financial information needed by management to plan, evaluate, and control
2. Financial statements are the principal means through which financial an organization’s operations is called
information is communicated to those outside an enterprise. a. financial accounting.
b. managerial accounting.
3. Users of the financial information provided by a company use that information c. tax accounting.
to make capital allocation decisions. d. auditing.

4. An effective process of capital allocation promotes productivity and provides an 26. Whether a business is successful and thrives is determined by
efficient market for buying and selling securities and obtaining and granting a. markets.
credit. b. free enterprise.
c. competition.
5. Financial reports in the early 21st century did not provide any information d. all of these.
about a company’s soft assets.
27. An effective capital allocation process
6. Accounting standards are now less likely to require the recording or disclosure a. promotes productivity.
of fair value information due to its inherent subjectivity. b. encourages innovation.
c. provides an efficient market for buying and selling securities.
7. While objectives for financial reporting exist on an informal basis, no formal d. all of these.
objectives have been adopted.
28. Financial statements in the early 2000s provide information related to
8. One weakness of accrual accounting is that it does not provide a good a. non-financial measurements.
indication of the enterprise's present and continuing ability to generate b. forward-looking data.
favorable cash flows. c. hard assets (inventory and plant assets).
d. none of these.
9. Some generally accepted accounting principles have simply been accepted as
appropriate because of their universal application rather than due to the action 29. Which of the following statements is not an objective of financial reporting?
of an authoritative accounting rule-making body. a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those
10. Users of financial accounting statements have both coinciding and conflicting resources, and changes to them.
needs for information of various types. c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.
11. The Securities and Exchange Commission appointed the Committee on
Accounting Procedure. 30. Accrual accounting is used because
a. cash flows are considered less important.
12. The passage of a new FASB Standards Statement requires the support of five of b. it provides a better indication of ability to generate cash flows than
the seven board members. the cash basis.
c. it recognizes revenues when cash is received and expenses when cash
13. Financial Accounting Concepts set forth fundamental objectives and concepts is paid.
that are used in developing future standards of financial accounting and d. none of the above.
reporting.
31. One objective of financial reporting is to provide
14. The SEC relies on the AICPA and FASB to regulate the accounting profession and a. information about the investors in the business entity.
develop and enforce accounting standards. b. information about the liquidation values of the resources held by the
enterprise.
15. FASB Technical Bulletins are more authoritative than FASB Standards and c. information that is useful in assessing cash flow prospects.
Interpretations. d. information that will attract new investors.

16. The AICPA’s Code of Professional Conduct requires that members prepare 32. Accounting principles are "generally accepted" only when
financial statements in accordance with generally accepted accounting a. an authoritative accounting rule-making body has established it in an
principles. official pro-nouncement.
b. it has been accepted as appropriate because of its universal
17. Accounting standards are a product of careful logic or empirical findings and are application.
not influenced by political action. c. both a and b.
d. neither a nor b.
18. Currently, both U.S. GAAP and the International Financial Reporting Standards
are acceptable for international use. 33. A common set of accounting standards and procedures are called
a. financial accounting standards.
19. The expectations gap is caused by what the public thinks accountants should be b. generally accepted accounting principles.
doing and what accountants think they can do. c. objectives of financial reporting.
d. statements of financial accounting concepts.
20. Ethical issues in financial accounting are governed by the AICPA
34. The role of the Securities and Exchange Commission in the formulation of
accounting principles can be best described as
MULTIPLE CHOICE—Conceptual a. consistently primary.
b. consistently secondary.
21. General-purpose financial statements are the product of c. sometimes primary and sometimes secondary.
a. financial accounting. d. non-existent.
b. managerial accounting.
c. both financial and managerial accounting. 35. The body that has the power to prescribe the accounting practices and
d. neither financial nor managerial accounting. standards to be employed by companies that fall under its jurisdiction is the
a. FASB.
22. Users of financial reports include all of the following except b. AICPA.
a. creditors. c. SEC.
b. government agencies. d. APB.
c. unions.
d. All of these are users. 36. Companies that are listed on a stock exchange are required to submit their
financial statements to the
23. The financial statements most frequently provided include all of the a. AICPA.
following except the b. APB
a. balance sheet. c. FASB.
b. income statement. d. SEC.
c. statement of cash flows.
d. statement of retained earnings. 37. The Financial Accounting Standards Board (FASB) was proposed by the
a. American Institute of Certified Public Accountants.
24. The information provided by financial reporting pertains to b. Accounting Principles Board.
a. individual business enterprises, rather than to industries or an c. Study Group on the Objectives of Financial Statements.
economy as a whole or to members of society as consumers.
 CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA
d. Special Study Group on establishment of Accounting Principles (Wheat b. Securities and Exchange Commission.
Committee). c. Financial Accounting Standards Board.
d. All of these have published accounting standards.
38. The Financial Accounting Standards Board
a. has issued a series of pronouncements entitled Statements on 49. The purpose of Statements of Financial Accounting Concepts is to
Auditing Standards. a. establish GAAP.
b. was the forerunner of the current Accounting Principles Board. b. modify or extend the existing FASB Standards Statement.
c. is the arm of the Securities and Exchange Commission responsible for c. form a conceptual framework for solving existing and emerging
setting financial accounting standards. problems.
d. is appointed by the Financial Accounting Foundation. d. determine the need for FASB involvement in an emerging issue.

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39. The Financial Accounting Foundation 50. Members of the Financial Accounting Standards Board are
a. oversees the operations of the FASB. a. employed by the American Institute of Certified Public Accountants
b. oversees the operations of the AICPA. (AICPA).
c. provides information to interested parties on financial reporting b. part-time employees.
issues. c. required to hold a CPA certificate.
d. works with the Financial Accounting Standards Advisory Council to d. independent of any other organization.
provide informa-tion to interested parties on financial reporting
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issues. 51. The following published documents are part of the "due process" system
used by the FASB in the evolution of a typical FASB Statement of Financial
40. The major distinction between the Financial Accounting Standards Accounting Standards:
Board (FASB) and its predecessor, the Accounting Principles Board
(APB), is 1. Exposure Draft
a. the FASB issues exposure drafts of proposed standards. 2. Statement of Financial Accounting Standards
b. all members of the FASB are fully remunerated, serve full time, and 3. Discussion Memorandum
are independent of any companies or institutions.
The chronological order in which these items are released is as follows:
c. all members of the FASB possess extensive experience in financial a. 1, 2, 3.
reporting. b. 1, 3, 2.
d. a majority of the members of the FASB are CPAs drawn from public
c. 2, 3, 1.
practice. d. 3, 1, 2.

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41. The Financial Accounting Standards Board employs a "due process" system 52. In the House of GAAP, is the following on the highest level of authoritative
status (meaning among the most authoritative)?
which
a. is an efficient system for collecting dues from members. FASB
b. enables interested parties to express their views on issues under Statement
consideration. FASB of Financial
c. identifies the accounting issues that are the most important. Technical Accounting FASB
d. requires that all accountants must receive a copy of financial Bulletin Standards Interpretation
standards. a. Yes Yes Yes
b. Yes Yes Yes

c. No Yes No
42. Which of the following is not a publication of the FASB? d. No Yes Yes
a. Statements of Financial Accounting Concepts
b. Accounting Research Bulletins 53. Generally Accepted Accounting Principles include: 1) FASB Technical
c. Interpretations Bulletins, 2) APB Opinions, and 3) Widely-accepted industry practices. These
d. Technical Bulletins three items rank from most authoritative to least authoritative as follows:
a. 1, 2, 3.
b. 1, 3, 2.
43. FASB Technical Bulletins c. 2, 1, 3.
a. are similar to FASB Interpretations in that they establish enforceable d. 2, 3, 1.
standards under the AICPA's Code of Professional Ethics.
b. are issued monthly by the FASB to deal with current topics.
54. Generally accepted accounting principles
c. are not expected to have a significant impact on financial reporting in a. include detailed practices and procedures as well as broad guidelines
general and provide guidance when it does not conflict with any broad of general application.
fundamental accounting principle. b. are influenced by pronouncements of the SEC and IRS.
d. were recently discontinued by the FASB because they dealt with c. change over time as the nature of the business environment changes.
specialized topics having little impact on financial reporting in general.
d. all of these.

44. The purpose of the Emerging Issues Task Force is to 55. The most significant current source of generally accepted accounting
a. develop a conceptual framework as a frame of reference for the principles is the
solution of future problems. a. AICPA.
b. lobby the FASB on issues that affect a particular industry. b. SEC.
c. do research on issues that relate to long-term accounting problems. c. APB.
d. issue statements which reflect a consensus on how to account for new d. FASB.
and unusual financial transactions that need to be resolved quickly.
56. The most authoritative category of generally accepted accounting principles
includes all of the following except
45. The Governmental Accounting Standards Board a. Accounting Research Bulletins.
a. oversees the activities of the SEC. b. APB Opinions.
b. is a private-sector body, which addresses state and local governmental c. FASB Standards.
reporting issues. d. FASB Technical Bulletins.
c. is a division of the Securities and Exchange Commission, which
oversees the corpo-rate accounting in annual reports. 57. Which of the following is not a part of generally accepted accounting
d. was terminated when the Financial Accounting Standards Board was principles?
created. a. FASB Interpretations
b. CAP Accounting Research Bulletins

c. APB Opinions
46. The Governmental Accounting Standards Board's main purpose is to develop d. All of these are part of generally accepted accounting principles.
standards for
a. the General Accounting Office. 58. Which of the following publications does not qualify as a statement of
b. the Federal government. generally accepted accounting principles?
c. state and local government. a. Statements of financial standards issued by the FASB
d. the Internal Revenue Service. b. Accounting interpretations issued by the FASB
c. APB Opinions
47. Which of the following organizations has not been instrumental in the d. Accounting research studies issued by the AICPA
development of financial accounting standards in the United States?
a. AICPA 59. Financial accounting standard-setting in the United States
b. FASB a. can be described as a social process which reflects political actions of
c. IASB various interested user groups as well as a product of research and
d. SEC logic.
b. is based solely on research and empirical findings.
48. An organization that has not published accounting standards is the c. is a legalistic process based on rules promulgated by governmental
a. American Institute of Certified Public Accountants. agencies.
 CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA
d. is democratic in the sense that a majority of accountants must agree
with a standard before it becomes enforceable.
60. The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting
and reporting of multinational corporations.
b. develop a uniform currency in which the financial transactions of
companies through-out the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international
companies.




FINANCIAL ACCOUNTING AND
ACCOUNTING STANDARDS
CHAPTER 2

TRUE-FALSE—Conceptual TRUE-FALSE—Conceptual

Answer No. Description 1. The conceptual framework for accounting has been discovered through
F 1. Definition of financial accounting. empirical research.
T 2. Purpose of financial statements.
T 3. Definition of financial accounting. 2. A conceptual framework is a coherent system of interrelated objectives and
T 4. Capital allocation process. fundamentals that can lead to consistent standards.
F 5. Financial reports.
F 6. Fair value information. 3. The first level of the conceptual framework identifies the recognition and
F 7. Objectives of financial reporting. measurement concepts used in establishing accounting standards.
F 8. Accrual accounting.
T 9. Generally accepted accounting principles. 4. The IASB has issued a conceptual framework that is broadly consistent with that
T 10. Users of financial statements. of the United States.
F 11. Committee on Accounting Procedure.
F 12. Passage of FASB standards. 5. Although the FASB intends to develop a conceptual framework, no Statements
T 13. Financial Accounting Concepts. of Financial Accounting Concepts have been issued to date.
T 14. Role of the SEC.
F 15. Definition of financial accounting. 6. Decision Usefulness is the underlying theme of the conceptual framework.
T 16. Code of Professional Conduct.
F 17. Accounting standards. 7. Users of financial statements are assumed to have no knowledge of business
T 18. International standards. and financial accounting matters by financial statement preparers.
T 19. Expectations gap.
F 20. Ethical issues. 8. Relevance and reliability are the two primary qualities that make accounting
information useful for decision making.

MULTIPLE CHOICE—Conceptual 9. The idea of consistency does not mean that companies cannot switch from one
accounting method to another.
Answer No. Description

a 21. Financial accounting.
10. Timeliness and neutrality are two ingredients of relevance.
d 22. Users of financial reports.

d 23. Identify the major financial statements.
11. Verifiability and predictive value are two ingredients of reliability.
a 24. Financial reporting entity.
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b 25. Managerial accounting.
12. Revenues, gains, and distributions to owners all increase equity.
d 26. Efficient use of resources.

d 27. Capital allocation process.
13. Comprehensive income includes all changes in equity during a period except
c 28. Financial statement information.
those resulting from investments by owners and distributions to owners.
c 29. Objectives of financial reporting.

b 30. Accrual accounting.
P 14. The historical cost principle would be of limited usefulness if not for the going
c 31. Objectives of financial reporting.
concern assumption.
c 32. Meaning of “generally accepted.”

b 33. Common set of standards and procedures.
15. The economic entity assumption means that economic activity can be identified
c 34. Role of SEC.
with a particular legal entity.
c 35. Powers of the SEC.

Answer No. Description 16. The matching principle states that debits must equal credits in each transaction.
d 36. SEC enforcement.
d 37. Creation of FASB. 17. Revenues are realizable when assets received or held are readily convertible
d 38. Appointment of FASB members. into cash or claims to cash.
a 39. Purpose of the Financial Accounting Foundation.
b 40. Characteristics of FASB. 18. Supplementary information may include details or amounts that present a
b 41. FASB and "due process" system. different perspective from that adopted in the financial statements.
b 42. Publications of FASB.
c 43. Purpose of FASB Technical Bulletins. 19. Companies consider only quantitative factors in determining whether an item is
d 44. Purpose of Emerging Issues Task Force. material.
b 45. Purpose of GASB. 20. Conservatism in accounting means the accountant should attempt to
c 46. Domain of GASB. understate assets and income when possible.
c 47. Standard setting organizations.
d 48. Identification of standard setting organizations.
c 49. Statements of financial accounting concepts.
d
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50. FASB members.
d
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51. FASB statement process. MULTIPLE CHOICE—Conceptual
d
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52. House of GAAP.
c 53. Hierarchy of GAAP. 21. Generally accepted accounting principles
d 54. Nature of GAAP. a. are fundamental truths or axioms that can be derived from laws of
d 55. Body which promulgates GAAP. nature.
d 56. Authoritative category of GAAP. b. derive their authority from legal court proceedings.
d 57. Publications which are not GAAP. c. derive their credibility and authority from general recognition and
d 58. Publications which are not GAAP. acceptance by the accounting profession.
a 59. Political environment of standard setting. d. have been specified in detail in the FASB conceptual framework.
c 60. International Accounting Standards Committee.
22. A soundly developed conceptual framework of concepts and objectives
should
a. increase financial statement users' understanding of and confidence in
financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly
soluble.
 CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA
d. all of these. a. Materiality
b. Understandability
23. Which of the following (a-c) are not true concerning a conceptual framework c. Usefulness
in account-ing? d. All of these
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by 35. According to Statement of Financial Accounting Concepts No. 2, timeliness is
reference to it. an ingredient of the primary quality of
c. It should be based on fundamental truths that are derived from the Relevance Reliability
laws of nature. a. Yes Yes
d. All of the above (a-c) are true. b. No Yes
c. Yes No
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24. Which of the following is not a benefit associated with the FASB Conceptual d. No No
Framework Project?
a. A conceptual framework should increase financial statement users' 36. According to Statement of Financial Accounting Concepts No. 2, verifiability
understanding of and confidence in financial reporting. is an ingredient of the primary quality of
b. Practical problems should be more quickly solvable by reference to an Relevance Reliability
existing conceptual framework. a. Yes No
c. A coherent set of accounting standards and rules should result. b. Yes Yes
d. Business entities will need far less assistance from accountants c. No No
because the financial reporting process will be quite easy to apply. d. No Yes

25 In the conceptual framework for financial reporting, what provides "the why"--the 37. According to Statement of Financial Accounting Concepts No. 2, neutrality is
goals and purposes of accounting? an ingredient of the primary quality of
a. Measurement and recognition concepts such as assumptions, Relevance Reliability
principles, and constraints a. Yes Yes
b. Qualitative characteristics of accounting information b. No Yes
c. Elements of financial statements c. Yes No
d. Objectives of financial reporting d. No No

26. The underlying theme of the conceptual framework is 38. Information is neutral if it
a. decision usefulness. a. provides benefits which are at least equal to the costs of its
b. understandability. preparation.
c. reliability. b. can be compared with similar information about an enterprise at
d. comparability. other points in time.
c. would have no impact on a decision maker.
27. Which of the following is not an objective of financial reporting? d. is free from bias toward a predetermined result.
a. To provide information about economic resources, the claims to those
resources, and the changes in them. 39. The characteristic that is demonstrated when a high degree of consensus
b. To provide information that is helpful to investors and creditors and can be secured among independent measurers using the same
other users in assessing the amounts, timing, and uncertainty of measurement methods is
future cash flows. a. relevance.
c. To provide information that is useful to those making investment and b. reliability.
credit decisions. c. verifiability.
d. All of these are objectives of financial reporting. d. neutrality.

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28. The objectives of financial reporting include all of the following except to 40. According to Statement of Financial Accounting Concepts No. 2, predictive
provide information that value is an ingredient of the primary quality of
a. is useful to the Internal Revenue Service in allocating the tax burden Relevance Reliability
to the business community. a. Yes No
b. is useful to those making investment and credit decisions. b. Yes Yes
c. is helpful in assessing future cash flows. c. No No
d. identifies the economic resources (assets), the claims to those d. No Yes
resources (liabilities), and the changes in those resources and claims.
41. Under Statement of Financial Accounting Concepts No. 2, representational
29. Decision makers vary widely in the types of decisions they make, the faithfulness is an ingredient of the primary quality of
methods of decision making they employ, the information they already Reliability Relevance
possess or can obtain from other sources, and their ability to process a. Yes Yes
information. Consequently, for information to be useful there must be a b. No Yes
linkage between these users and the decisions they make. This link is c. Yes No
a. relevance. d. No No
b. reliability.
c. understandability. 42. Financial information does not demonstrate consistency when
d. materiality. a. firms in the same industry use different accounting methods to
account for the same type of transaction.
30. The overriding criterion by which accounting information can be judged is b. a company changes its estimate of the salvage value of a fixed asset.
that of c. a company fails to adjust its financial statements for changes in the
a. usefulness for decision making. value of the measuring unit.
b. freedom from bias. d. none of these.
c. timeliness.
d. comparability. 43. Financial information exhibits the characteristic of consistency when
a. expenses are reported as charges against revenue in the period in
31. The two primary qualities that make accounting information useful for which they are paid.
decision making are b. accounting entities give accountable events the same accounting
a. comparability and consistency. treatment from period to period.
b. materiality and timeliness. c. extraordinary gains and losses are not included on the income
c. relevance and reliability. statement.
d. reliability and comparability. d. accounting procedures are adopted which give a consistent rate of net
32. Accounting information is considered to be relevant when it income.
a. can be depended on to represent the economic conditions and events
that it is intended to represent. 44. Information about different entities and about different periods of the same
b. is capable of making a difference in a decision. entity can be prepared and presented in a similar manner. Comparability
c. is understandable by reasonably informed users of accounting and consistency are related to which of these objectives?
information.
Comparability Consistency
d. is verifiable and neutral.
a. Entities Entities

b. Entities Periods
33. The quality of information that gives assurance that it is reasonably free of
c. Periods Entities
error and bias and is a faithful representation is
d. Periods Periods
a. relevance.

b. reliability.
45. When information about two different enterprises has been prepared and presented
c. verifiability.
in a similar manner, the information exhibits the characteristic of
d. neutrality.
a. relevance.

b. reliability.
34. According to Statement of Financial Accounting Concepts No. 2, which of the
c. consistency.
following relates to both relevance and reliability?
 CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA
d. none of these.
58. Preparation of consolidated financial statements when a parent-subsidiary
46. The elements of financial statements include investments by owners. These relationship exists is an example of the
are increases in an entity's net assets resulting from owners' a. economic entity assumption.
a. transfers of assets to the entity. b. relevance characteristic.
b. rendering services to the entity. c. comparability characteristic.
c. satisfaction of liabilities of the entity. d. neutrality characteristic.
d. all of these.
59 During the lifetime of an entity, accountants produce financial statements at arbitrary
47. In classifying the elements of financial statements, the primary distinction points in time in accordance with which basic accounting concept?
between revenues and gains is a. Cost/benefit constraint
a. the materiality of the amounts involved. b. Periodicity assumption
b. the likelihood that the transactions involved will recur in the future. c. Conservatism constraint
c. the nature of the activities that gave rise to the transactions involved. d. Matching principle
d. the costs versus the benefits of the alternative methods of disclosing
the transactions involved. 60. What accounting concept justifies the usage of accruals and deferrals?
a. Going concern assumption
48. A decrease in net assets arising from peripheral or incidental transactions is b. Materiality constraint
called a(n) c. Consistency characteristic
a. capital expenditure. d. Monetary unit assumption
b. cost.
c. loss. 61. The assumption that a business enterprise will not be sold or liquidated in
d. expense. the near future is known as the
a. economic entity assumption.
49. One of the elements of financial statements is comprehensive income. As b. monetary unit assumption.
described in Statement of Financial Accounting Concepts No. 6, "Elements of c. conservatism assumption.
Financial Statements," comprehensive income is equal to d. none of these.
a. revenues minus expenses plus gains minus losses.
b. revenues minus expenses plus gains minus losses plus investments by 62. Which of the following is an implication of the going concern assumption?
owners minus distributions to owners. a. The historical cost principle is credible.
c. revenues minus expenses plus gains minus losses plus investments by b. Depreciation and amortization policies are justifiable and appropriate.
owners minus distributions to owners plus assets minus liabilities. c. The current-noncurrent classification of assets and liabilities is
d. none of these. justifiable and signify-cant.
d. All of these.
50. Which of the following elements of financial statements is not a component
of compre-hensive income? 63. Proponents of historical cost ordinarily maintain that in comparison with all
a. Revenues other valuation alternatives for general purpose financial reporting,
b. Distributions to owners statements prepared using historical costs are more
c. Losses a. reliable.
d. Expenses b. relevant.
c. indicative of the entity's purchasing power.
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51. Which of the following is false with regard to the element "comprehensive d. conservative.
income"?
a. It is more inclusive than the traditional notion of net income. 64. Valuing assets at their liquidation values rather than their cost is inconsistent
b. It includes net income and all other changes in equity exclusive of with the
owners' invest-ments and distributions to owners. a. periodicity assumption.
c. This concept is not yet being applied in practice. b. matching principle.
d. It excludes prior period adjustments (transactions that relate to c. materiality constraint.
previous periods, such as corrections of errors). d. historical cost principle.
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52. According to the FASB conceptual framework, earnings
a. are the same as comprehensive income. 65. Revenue is generally recognized when realized or realizable and earned.
b. exclude certain gains and losses that are included in comprehensive This statement describes the
income. a. consistency characteristic.
c. include certain gains and losses that are excluded from b. matching principle.
comprehensive income. c. revenue recognition principle.
d. include certain losses that are excluded from comprehensive income. d. relevance characteristic.

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53. According to the FASB Conceptual Framework, the elements⎯assets, 66. Generally, revenue from sales should be recognized at a point when
liabilities, and equity⎯describe amounts of resources and claims to a. management decides it is appropriate to do so.
resources at/during a b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer
Moment in Time Period of Time and there remains no further warranty liability.
a. Yes No d. none of these.
b. Yes Yes
c. No Yes 67. Revenue generally should be recognized
d. No No a. at the end of production.
b. at the time of cash collection.
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54. Which of the following basic accounting assumptions is threatened by the c. when realized.
existence of severe inflation in the economy? d. when realized or realizable and earned.
a. Monetary unit assumption.
b. Periodicity assumption. 68. Which of the following is not a time when revenue may be recognized?
c. Going-concern assumption. a. At time of sale
d. Economic entity assumption. b. At receipt of cash
c. During production
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55. During the lifetime of an entity accountants produce financial statements at d. All of these are possible times of revenue recognition.
artificial points in time in accordance with the concept of
69. Under Statement of Financial Accounting Concepts No. 5, which of the
Objectivity Periodicity
following, in the most precise sense, means the process of converting
a. No No
noncash resources and rights into cash or claims to cash?
b. Yes No
a. Recognition
c. No Yes
b. Measurement
d. Yes Yes
c. Realization

d. Allocation
56. Under current GAAP, inflation is ignored in accounting due to the

a. economic entity assumption.
70. "When products (goods or services), merchandise, or other assets are
b. going concern assumption.
exchanged for cash or claims to cash" is a definition of
c. monetary unit assumption.
a. allocated.
d. periodicity assumption.
b. realized.

c. realizable.
57. The economic entity assumption
d. earned.
a. is inapplicable to unincorporated businesses.

b. recognizes the legal aspects of business organizations.
71. The allowance for doubtful accounts, which appears as a deduction from
c. requires periodic income measurement.
accounts receivable on a balance sheet and which is based on an estimate of
d. is applicable to all forms of business organizations.
bad debts, is an application of the
 CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA
a. consistency characteristic. 83. Allowing firms to estimate rather than physically count inventory at interim
b. matching principle. (quarterly) periods is an example of a trade-off between
c. materiality constraint. a. verifiability and reliability.
d. revenue recognition principle. b. reliability and comparability.
c. timeliness and verifiability.
72. The accounting principle of matching is best demonstrated by d. neutrality and consistency.
a. not recognizing any expense unless some revenue is realized.
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b. associating effort (expense) with accomplishment (revenue). 84. In matters of doubt and great uncertainty, accounting issues should be
c. recognizing prepaid rent received as revenue. resolved by choosing the alternative that has the least favorable effect on
d. establishing an Appropriation for Contingencies account. net income, assets, and owners' equity. This guidance comes from the
a. materiality constraint.
73. Which of the following serves as the justification for the periodic recording of b. industry practices constraint.
depreciation expense? c. conservatism constraint.
a. Association of efforts (expense) with accomplishments (revenue) d. full disclosure principle.
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING

74. Application of the full disclosure principle
a. is theoretically desirable but not practical because the costs of TRUE-FALSE—Conceptual
complete disclosure exceed the benefits.
b. is violated when important financial information is buried in the notes Answer No. Description
to the financial statements. F 1. Nature of conceptual framework.
c. is demonstrated by the use of supplementary information presenting T 2. Conceptual framework definition.
the effects of changing prices. F 3. Levels of conceptual framework.
d. requires that the financial statements be consistent and comparable. T 4 International conceptual framework.
F 5. Statements of Financial Accounting Concepts.
75. Which of the following statements concerning the cost-benefit relationship T 6. Decision usefulness.
is not true? F 7. Financial statement users.
a. Business reporting should exclude information outside of T 8. Relevance and reliability.
management's expertise. T 9. Consistency.
b. Management should not be required to report information that would F 10. Relevance.
significantly harm the company's competitive position. F 11. Reliability.
c. Management should not be required to provide forecasted financial F 12. Basic elements.
information. T 13. Comprehensive income.
d. If needed by financial statement users, management should gather T 14. Going concern assumption.
information not included in the financial statements that F 15. Economic entity assumption.
would not otherwise be gathered for internal use. F 16. Matching principle.
T 17. Realizable revenues.
76. Under Statement of Financial Accounting Concepts No. 2, which of the T 18. Supplementary information.
following relates to both relevance and reliability? F 19. Materiality factors
a. Cost-benefit constraint F 20. Conservatism.
b. Predictive value
c. Verifiability MULTIPLE CHOICE—Conceptual
d. Representational faithfulness Answer No. Description

c 21. GAAP defined.
77. Charging off the cost of a wastebasket with an estimated useful life of 10 d 22. Purpose of conceptual framework.
years as an expense of the period when purchased is an example of the c 23. Conceptual framework.
application of the S
d 24. Conceptual framework benefits.
a. consistency characteristic. d 25. Objectives of financial reporting.
b. matching principle. a 26. Decision usefulness.
c. materiality constraint.
d 27. Objectives of financial reporting.
d. historical cost principle. a
P
28. Financial repoting objectives.

c 29. Purpose of understandable information.
78. Which of the following statements about materiality is not correct? a 30. Decision-usefulness criterion.
a. An item must make a difference or it need not be disclosed. c 31. Primary qualities of accounting information.
b. Materiality is a matter of relative size or importance.
b 32. Definition of relevance.
c. An item is material if its inclusion or omission would influence or b 33. Definition of reliability.
change the judgment of a reasonable person.
d 34. Relevance and reliability.
d. All of these are correct statements about materiality. c 35. Timeliness characteristic.

79. Which of the following are considered pervasive constraints by Statement of Answer No. Description
Financial Accounting Concepts No. 2? d 36. Verifiability characteristic.
a. Cost-benefit relationship and conservatism b 37. Neutrality characteristic.
b. Timeliness and feedback value d 38. Neutrality characteristic.
c. Conservatism and verifiability c 39. Definition of verifiability.
d. Materiality and cost-benefit relationship a 40. Quality of predictive value.
80. The basic accounting concept that refers to the tendency of accountants to c 41. Quality of representational faithfulness.
resolve uncertainty in favor of understating assets and revenues and d 42. Consistency.
overstating liabilities and expenses is known as the b 43. Consistency characteristic.
a. conservatism constraint. b 44. Comparability and consistency.
b. materiality constraint. d 45. Comparability.
c. substance over form principle. d 46. Elements of financial statements.
d. industry practices constraint. c 47. Distinction between revenues and gains.
c 48. Definition of a loss.
81. Which of the following best illustrates the accounting concept of d 49. Definition of comprehensive income.
conservatism? b 50. Components of comprehensive income.
P
a. Use of the allowance method to recognize bad debt losses from credit d 51. Comprehensive income.
S
sales b 52. Earnings vs. comprehensive income.
S
b. Use of the lower of cost or market approach in valuing inventories. a 53. Reporting financial statement elements.
S
c. Use of the same accounting method from one period to the next in a 54. Monetary unit assumption.
S
computing depreciation expense c 55. Periodicity assumption.
d. Utilization of a policy of deliberate understatement of asset values in c 56. Monetary unit assumption.
order to present a conservative net income figure d 57. Economic entity assumption.
a 58. Economic entity assumption.
82. Trade-offs between the characteristics that make information useful may be b 59. Periodicity assumption.
necessary or beneficial. Issuance of interim financial statements is an a 60. Going concern assumption.
example of a trade-off between d 61. Going concern assumption.
a. relevance and reliability. d 62. Implications of going concern assumption.
b. reliability and periodicity. a 63. Historical cost principle.
c. timeliness and materiality. d 64. Historical cost principle.
d. understandability and timeliness. c 65. Revenue recognition principle.
d 66. Revenue recognition principle.
d 67. Revenue recognition principle.
 CFAS SET 2 and 3 Reviewer Mark Angelo Enriquez, CPA
d 68. Timing of revenue recognition.
c 69. Realization concept.
b 70. Definition of realized.
b 71. Matching principle.
b 72. Matching principle.
b 73. Expense recognition.
c 74. Full-disclosure principle.
d 75. Constraints to limit the cost of reporting.
a 76. Cost-benefit constraint.
c 77. Materiality constraint.
d 78. Materiality.
d 79. Pervasive constraints.
a 80. Conservatism constraint.
b 81. Conservatism constraint.
a 82. Trade-offs between characteristics of accounting
information.
c 83. Trade-offs between characteristics of accounting
information.
P
c 84. Conservatism constraint.
MULTIPLE CHOICE—CPA Adapted

Answer No. Description

a 85. Quality of predictive value.
b 86. Consistency characteristic.
b 87. Classification of gains and losses.
b 88. Earnings concept.
a 89. Components of comprehensive income.
b 90. Components of comprehensive income.
d 91. Components of comprehensive income.
d 92. Components of comprehensive income.
a 93. Definition of recognition.