DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
Theory of Accounts - Review

COVERAGE:
Philippine Financial Reporting Standards for Small and Medium Enterprises
New Conceptual Framework for Reporting

Direction: Read and select the best answer for the following questions.

1. The following are the components of the New Conceptual Framework, except
a. Objective of financial reporting
b. Qualitative characteristics of useful financial information
c. The reporting entity
d. The definition, recognition and measurement of the elements from which financial statements
are constructed
e. Concepts of capital and capital maintenance
f. Quantitative characteristics of financial information

2. Who are the primary users of general purpose financial statements?

a. Present and potential customers
b. Present and potential investors, lenders and creditors
c. Present and potential employees
d. Present and potential suppliers

3. The following statements pertain to the objective of financial reporting are correct, except
a. The primary users need information about the resources of the entity not only to assess an
entity’s prospects for future net cash inflows but also how effectively and efficiently
management has discharged their responsibilities to use the entity’s existing resources.
b. The IFRS Framework notes that general purpose financial reports cannot provide all the
information that users may need to make economic decisions and they will need to consider
pertinent information from other sources as well.
c. The IFRS Framework notes that other parties, including prudential and market regulators, may
find general purpose financial reports useful.
d. Regulators are considered a primary user and general purpose financial reports are primarily
directed to regulators or other parties.

4. These are characteristics that make financial information most useful to users in making decisions
about the reporting entity on the basis of information in its financial report.
a. Qualitative characteristics
b. Quantitative characteristics
c. Both qualitative and quantitative characteristics
d. Neither qualitative nor quantitative characteristics

5. What are the fundamental qualitative characteristics of useful financial information under the New
Conceptual Framework?
a. Reliability and relevance
b. Comparability and understandability
c. Relevance and faithful representation
d. Reliability and faithful representation

6. This fundamental qualitative characteristic makes a financial information capable of making a

difference in decisions of users.
a. Reliability
b. Relevance
c. Comparability
d. Faithful representation

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7. Which of the following statements is/are true?
I. Financial information is capable of making a difference in decisions if it has predictive value,
confirmatory value, or both.
II. The predictive value and confirmatory value of financial information are interrelated.
III. Information must be both relevant and faithfully represented if it is to be useful.
a. I and II only
b. II and III only
c. I – II and III
d. None of the above

8. 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.
a. Materiality
b. Information
c. Prudence
d. Completeness

9. This fundamental characteristic provides that general purpose financial reports represent economic
phenomena in words and numbers and it seeks to maximise the underlying characteristics of
completeness, neutrality and freedom from error.
a. Reliability
b. Relevance
c. Comparability
d. Faithful representation

10. The following are the enhancing qualitative characteristics of a useful information that is relevant and
faithfully represented.
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability
e. Neutrality

11. Which of the following statements pertain to the enhancing qualitative characteristic comparability?
a. It enables the users to identify and understand similarities in, and differences among, items.
b. It means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful
representation.
c. It means that information is available to decision-makers in time to be capable of influencing
their decisions.
d. It means financial reports are prepared for users who have a reasonable knowledge of business
and economic activities and who review and analyse the information with diligence.

12. What is the remaining underlying assumption expressed in the New Conceptual Framework which
provides that 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?
a. Accrual basis
b. Going concern
c. Monetary unit
d. Periodicity

13. PFRS for SMEs is intended for use by small and medium-sized entities. Section 1.2 of PFRS for SMEs
provides that SMEs are entities that
I. Do not have public accountability.
II. Publish general purpose financial statement for external users.
a. I only
b. II only
c. Neither I nor II
d. Both I and II

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14. Paragraph 1.3 of PFRS for SMEs provides that an entity has public accountability if:
I. Its debt or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in a public market.
II. It holds assets in fiduciary capacity for a broad group of outsiders as one of its primary business
such as banks, credit unions, insurance companies, securities brokers, mutual funds and
investment banks.
a. I only
b. II only
c. Either I or II
d. Neither I nor II

15. PFRS for SMEs provides that the regulatory agency in each jurisdiction determines which entities are
considered SMEs. In the Philippines, the SEC considered an entity as an SME when any of the
following is present, except
a. It has total assets between 3 million to 350 million.
b. It has total liabilities between 3 million to 150 million.
c. It is not required to file financial statements under SRC Rule 68.1.
d. It is not in the process of filing their financial statements for the purpose of issuing any class of
instrument in the stock market.
e. It is not a holder of secondary license issued by a regulatory agency.
f. It is not a public utility.

16. The following topics are omitted in the PFRS for SMEs, except
a. Earnings per share
b. Interim financial reporting and segment reporting
c. Insurance
d. Inventory
e. Special accounting for held for sale

17. Which of the following statements is/are incorrect according to provisions of PFRS for SMEs?
I. If a publicly accountable entity uses this PFRS, its financial statements shall be described as
conforming to the PFRS for SMEs if the law or regulation in its jurisdiction permits or requires this
PFRS to be used by publicly accountable entities.
II. A subsidiary whose parent uses full PFRS, or that is part of a consolidated group that uses full
PFRS, is not prohibited from using this PFRS in its own financial statements if that subsidiary by
itself does not have public accountability.
III. If its financial statements are described as conforming to the PFRS for SMEs, it must comply with
all the provisions of this PFRS.
a. I and II only
b. II and IIIonly
c. 1, II and III only
d. I only

18. What is/are the objectives of the financial statements of SMEs?

I. To provide information about the financial position, performance and cash flows of the entity that
is useful for economic decisions of users.
II. To show the results the stewardship of management – the accountability of management for the
resources entrusted to it.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

19. The following are the qualitative characteristics of information in financial statements of SMEs, except
a. Accrual and going concern
b. Relevance and reliability
c. Understandability and comparability
d. Materiality and substance over form
e. Prudence and completeness

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 f. Timeliness and balance between benefit and cost
20. PFRS for SMEs provides that an entity shall prepare its financial statements, except for cash flow
information, using the
a. Cash basis of accounting
b. Accrual basis of accounting
c. Tax basis of accounting
d. Management basis of accounting

21. What are the two common measurement bases in PFRS for SMEs?
a. Fair value and present value
b. Amortized cost and historical cost
c. Fair value and historical cost
d. Amortized cost and current cost

22. Paragraph 3.17 of PFRS for SMEs enumerated the components of a complete set of financial
statements of an entity which include the following, except
a. Statement of Financial Position
b. A single statement of comprehensive income or two statements consisting statement of
comprehensive income and income statement
c. Statement of retained earnings
d. Statement of cash flows
e. Statement of changes in equity
f. Notes to financial statements

23. This statement presents an entity’s profit or loss and changes in retained earnings for a reporting
period.
a. Statement of comprehensive income
b. Statement of changes in equity
c. Income statement
d. Statement of income and retained earnings

24. In case the only changes to its equity during the periods for which financial statements are presented
arise from profit or loss, payment of dividends, correction of prior period errors and changes in
accounting policy, paragraph 3.18 provides that an SME
a. Shall both present income statement and statement of changes in equity.
b. May present statement of comprehensive income only.
c. Shall present statement of changes in equity only.
d. May present statement of income and retained earnings in place of statement of comprehensive
income and statement of changes in equity.

25. Paragraph 6.5 provides that an entity shall present in the statement of income and retained earnings
the following items, except
a. Retained earnings at the beginning of the reporting period.
b. Changes in share premium and capital accounts for the period.
c. Dividends declared and paid or payable during the period.
d. Restatements of retained earnings for corrections of prior period errors.
e. Restatements of retained earnings for change in accounting policy.
f. Retained earnings at the end of the reporting period.

26. Paragraph 9.10 defines it as an entity that may be created to accomplish a narrow objective such as to
effect a lease, undertake research and development activities or securitize financial assets.
a. Special purpose entity
b. Common purpose entity
c. Ordinary entity
d. Simple entity

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27. The following statements pertaining to consolidation of SMEs are correct, except
a. Paragraph 9.2 requires a parent to present consolidated financial statements.
b. PFRS for SMEs requires presentation of separate financial statements for parent entity or for
the individual subsidiaries.
c. The financial statements of an entity that does not have a subsidiary are not separate financial
statements.
d. PFRS for SME does not require combined financial statements to be prepared.

28. Paragraph 9.28 defines them as a single set of financial statements of two or more entities controlled
by a single investor.
a. Consolidated financial statements
b. Combined financial statements
c. Separate financial statements
d. Group financial statements

29. Paragraph 9.26 provides that when a parent, an investor in an associate, or a venturer with an
interest in a jointly controlled entity prepares separate financial statements and describes them as
conforming to the PFRS for SMEs, the entity shall adopt a policy for accounting for its investment in
subsidiaries, associates and jointly controlled entities using
a. Cost less impairment
b. Fair value with changes in fair value recognized in profit or loss
c. Either I or II
d. Neither I nor II

30. Section 11 applies to basic financial instruments and is relevant to all SMEs while Section 12 applies
to other, more complex financial instruments and transactions. As regards to financial instrument,
paragraph 11.2 provides that an entity shall apply
a. The provisions of both Section 11 and Section 12 in full.
b. The recognition and measurement provisions of PAS 39 Financial Instruments: Recognition
and Measurement and the disclosure requirements of Sections 11 and 12.
c. Either I or II
d. Neither I nor II

31. Section 11: Basic Financial Instruments requires what model for all basic financial instruments,
except for investments in non-convertible and nonputtable preference shares and nonputtable shares
that are publicly traded or whose fair value can otherwise be measured reliably.
a. Historical cost model
b. Amortized cost model
c. Fair value model
d. Current cost model

32. The following are the basic financial instruments within the scope of Section 11, except
a. Cash
b. Demand and fixed-term deposits when the entity is the depositor
c. Commercial paper and commercial bills held
d. Accounts, notes and loans receivable and payable
e. Bonds and similar debt instruments
f. Investment in nonconvertible preference shares and nonputtable ordinary and preference
shares
g. Commitments to receive a loan if the commitment can be settled in cash

33. The following are examples of financial instruments that are within the scope of Section 12, except
a. Asset-backed securities, such as collateralized mortgage obligations, repurchase agreements
and securitized packages of receivables
b. Options, rights, warrants, futures contracts, forward contracts and interest rate swaps that
can be settled in cash or by exchanging another financial instrument.
c. Financial instruments that qualify and are designated as hedging instruments.
d. Commitments to make a loan to another entity.
e. Commitments ton receive a loan if the commitment cannot be settled in cash.
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34. Paragraph 11.7 provides that all financial instruments meeting the conditions of Section 11 shall be
accounted for using the amortized cost model, including which of the following
a. Investment in subsidiaries, associates and joint ventures that are accounted for using other
sections.
b. Financial instruments that meet the definition of an entity’s own equity.
c. Leases
d. Employer’s rights and obligations under employee benefit plans
e. Cash

35. Paragraph 11.9 provides that a debt instrument shall be accounted for accounted for under Amortized
Cost model when it complies with the following conditions, except
a. The returns to the holder are fixed amount; fixed rate of return over the life of the instrument;
variable return that, throughout the life of the instrument, is equal to a single referenced
quoted or observable interest or some combination of such fixed rate and variable rates
provided that both the fixed and variable rates are positive.
b. There is a contractual provision that could, by its terms, result in the holder losing the
principal amount or any interest attributable to the current period or prior periods.
c. Contractual provisions that permit the issuer to prepay a debt instrument or permit the holder
to put it back to the issuer before maturity are not contingent on future events.
d. There are no contractual returns or repayment provisions except for the variable rate return
described in (a) and prepayment provisions described in (c)

36. The following are examples of financial instruments that would normally satisfy the conditions in
paragraph 11.9, except
a. Trade accounts and notes receivable and payable, and loans from banks or other third parties
b. Accounts payable in a foreign currency with any change because of change in exchange rate to
be recognized in profit or loss.
c. A debt instrument that would become immediately receivable if the issuer defaults on the
interest or principal payment.
d. Options and forward contracts wherein the returns to the holder are not fixed.

37. The following are examples of financial instruments that do not satisfy the condition in paragraph 11.9
and are within the scope of Section 12, except
a. An investment in another entity’s equity instruments other than nonconvertible preference
shares and nonputtable ordinary and preference shares
b. An interest rate swap that returns a cash flow that is positive or negative or a forward
commitment to purchase a commodity or financial instrument that is capable of being cash-
settled and that on settlement could have positive or negative cash flows
c. Investment in convertible debt wherein the return to the holder can vary with the price of the
issuer’s equity shares rather than just with market interest rates.
d. A loan receivable from a third party that gives the third party the right or obligation to prepay if
the applicable taxation or accounting requirements change
e. Loans to or from subsidiaries or associates that are due on demand

38. Under Section 11: Basic Financial Instruments, a financial asset or a financial liability shall be
measured initially at
a. Fair value
b. Amortized cost
c. Transaction price plus transaction cost
d. Current cost

39. Under Section 11: Basic Financial Instruments, In case of financial assets or financial instruments
wherein the payments are deferred beyond normal business terms because the transaction constitutes
a financing transaction, the entity shall measure the financial asset or financial liability at
a. Fair value
b. Transaction price plus transaction cost
c. Face value
d. Present value of future payments discounted at a prevailing market rate for similar debt

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40. Under Section 11: Basic Financial Instruments, debt instruments shall be measured subsequently at
a. Fair value
b. Amortized cost using straight line method
c. Amortized cost using effective interest method
d. Face value

41. Under Section 11: Basic Financial Instruments, commitments to receive a loan shall be measured
subsequently at
a. Fair value
b. Amortized cost using straight line method
c. Amortized cost using effective interest method
d. Cost less impairment

42. Under Section 11: Basic Financial Instruments, investments in nonconvertible preference shares and
nonputtable ordinary share or preference shares shall be subsequently measured at
a. Cost less impairment
b. Fair value in case the shares are publicly traded or the fair value can be determined
c. A or B
d. Neither A nor B

43. Under Section 11: Basic Financial Instruments, at the end of each reporting period, an entity shall
asses whether there is objective evidence of impairment of any financial assets that are measured at
cost or amortized cost. If these is objective evidence of impairment, the entity shall recognized an
impairment loss in
a. Profit or loss immediately
b. Other comprehensive income immediately
c. Profit or loss but deferred
d. Other comprehensive income but deferred

44. Under Section 11: Basic Financial Instruments, which of the following statements concerning the
computation of impairment loss is correct?
a. For an instrument measured at amortized cost, the impairment loss is the difference between
the asset’s carrying amount and the present value of estimated cash flows discounted at the
asset’s original effective interest rate.
b. For an instrument measured at cost less impairment, the impairment loss is the difference
between the asset’s carrying amount that the entity would receive for the asset if it were to be
sold at the reporting period.
c. Both A and B
d. Neither A nor B

45. Under Section 12: Complex Financial Instruments, when a financial asset or financial liability shall be
measured initially at
a. Amortized cost
b. Present value
c. Historical cost
d. Fair value which is normally the transaction price

46. Under Section 12: Complex Financial Instruments, an entity shall measure all financial instruments
subsequently at
a. Amortized cost
b. Cost less impairment
c. Historical cost
d. Fair value

47. Under Section 12: Complex Financial Instruments, changes in fair value of financial instruments shall
be recognized in
a. Other comprehensive income immediately
b. Profit or loss immediately
c. Other comprehensive income but deferred
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 d. Profit or loss but deferred
48. Under Section 12: Complex Financial Instruments, in case the fair value of an equity instrument that
is not publicly traded but is measured at fair value through profit or loss, its fair value at the last date
the instrument was reliably measurable is treated as the cost of the instrument. The entity shall
subsequently measure this instrument at
a. Amortized cost
b. Present value
c. Current cost
d. Cost less impairment

49. Under Section 12: Complex Financial Instruments, a financial instrument shall to be classified as
financial asset at fair value through profit or loss shall be initially measured at
a. Fair value
b. Fair value plus transaction cost
c. Amortized cost
d. Historical cost plus transaction cost

50. Paragraph 14.4 provides that an investor shall account for all of its investments in associate using:
a. The cost model
b. The equity method
c. The fair value model
d. Either A or B or C

51. Under the cost model, paragraph 14.5 provides that an investor shall subsequently measure its
investments in associates, other than those for which there is a published quotation at
a. Cost less any accumulated impairment loss
b. Fair value
c. Amortized cost
d. Current cost

52. Under the cost model, paragraph 14.6 provides that the investor shall recognize dividends and other
contributions received from investment as
a. Return of investment
b. Deduction from investment account
c. Dividend income in the profit or loss
d. Dividend income in the other comprehensive income

53. Under the equity method, paragraph 14.8 provides that an investment in associate is initially
measured at
a. Fair value
b. Transaction price excluding transaction cost
c. Transaction price including transaction cost
d. Present value

54. Under the equity method, paragraph 14.8 provides that an investment in associate is subsequently
measured at
a. Fair value
b. Transaction price adjusted to reflect the investor’s share of the profit or loss
c. Transaction price adjusted to reflect the investor’s share of the other comprehensive income
d. Transaction price adjusted to reflect the investor’s share of the profit or loss and other
comprehensive income and the distribution of dividends

55. Under the equity method, paragraph 14.8(a) provides that dividends received shall be treated as
a. Dividend income
b. Deduction in investment income
c. Addition in investment account
d. Deduction in investment account

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56. Under the fair value model, paragraph 14.9 provides that when an investment in an associate is
recognized initially, an investor shall measure it at the
a. Transaction price excluding transaction costs
b. Transaction price including transaction costs
c. Fair value
d. Amortized cost

57. Under the fair value model, paragraph 14.10 provides that an investor shall measure subsequently its
investment in associate at
a. Fair value
b. Amortized cost
c. Transaction price
d. Historical cost

58. Under the fair value model, paragraph 14.10 provides that any changes in fair value of investment in
associate shall be presented in
a. Profit or loss immediately
b. Other comprehensive income immediately
c. Profit or loss but deferred
d. Other comprehensive income but deferred

59. Paragraph 15.9 provides that an investor shall account for all of its investment in jointly controlled
entities using:
a. The cost model
b. The equity method
c. The fair value model
d. Either A or B or C

60. Under the cost model, paragraph 15.10 provides that an investor shall subsequently measure its
investment in jointly controlled entity, other than those for which there is a published quotation at
a. Cost less any accumulated impairment loss
b. Fair value
c. Amortized cost
d. Current cost

61. Under the cost model, paragraph 15.11 provides that the investor shall recognize dividends and other
contributions received from investment in jointly controlled entity as
a. Return of investment
b. Deduction from investment account
c. Dividend income in the profit or loss
d. Dividend income in the other comprehensive income

62. Under the equity method, paragraph 14.8 provides that an investment in jointly controlled entity is
initially measured at
a. Fair value
b. Transaction price excluding transaction cost
c. Transaction price including transaction cost
d. Present value

63. Under the equity method, paragraph 14.8 provides that an investment in jointly controlled entity is
subsequently measured at
a. Fair value
b. Transaction price adjusted to reflect the investor’s share of the profit or loss
c. Transaction price adjusted to reflect the investor’s share of the other comprehensive income
d. Transaction price adjusted to reflect the investor’s share of the profit or loss and other
comprehensive income and the distribution of dividends

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64. Under the equity method, paragraph 14.8(a) provides that dividends received shall be treated as
a. Dividend income
b. Deduction in investment income
c. Addition in investment account
d. Deduction in investment account

65. Under the fair value model, paragraph 14.9 provides that when an investment in jointly controlled
entity is recognized initially, an investor shall measure it at the
a. Transaction price excluding transaction costs
b. Transaction price including transaction costs
c. Fair value
d. Amortized cost

66. Under the fair value model, paragraph 14.10 provides that an investor shall measure subsequently its
investment in jointly controlled entity at
a. Fair value
b. Amortized cost
c. Transaction price
d. Historical cost

67. Under the fair value model, paragraph 14.10 provides that any changes in fair value of investment in
jointly controlled entity shall be presented in
a. Profit or loss immediately
b. Other comprehensive income immediately
c. Profit or loss but deferred
d. Other comprehensive income but deferred

68. Paragraph 18.19 provides that for the purpose of PFRS for SMEs, all intangible assets shall be
considered to have a
a. Infinite useful life
b. Finite useful life
c. Either A or B
d. Neither A nor B

69. PFRS for SMEs provides that goodwill and intangible asset with an infinite life shall be amortized
a. Over 15 years
b. Over 10 years
c. Over 5 years
d. Over 20 years

70. Paragraph 19.11 provides that an acquirer shall measure the cost of the business combination as the
a. The fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued by the acquirer, in exchange for the control of the acquiree
b. Any costs directly attributable to the business combination
c. The total of A and B
d. Neither A nor B

71. Paragraph 19.23 provides that after initial recognition, the acquirer shall measure goodwill acquired in
a business combination at
a. Cost less accumulated impairment
b. Cost less accumulated amortization over ten yeas
c. Cost less accumulated amortization over ten years less accumulated impairment
d. Cost

72. Paragraph 25.2 provides that an entity shall recognize all borrowing costs as
a. Part of costs of qualifying asset
b. Expense in profit or loss in the period in which they are incurred
c. Expense in other comprehensive income in the period in which they are incurred
d. Part of costs of qualifying asset or expense in profit or loss
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73. Paragraph 17.23 provides that an entity shall review its present depreciation method, residual value
and useful life of an item of property, plant and equipment
a. Annually
b. Semi-annually
c. Quarterly
d. If there is an indication that there has been a significant change since the last annual reporting
date

74. Paragraph 18.14 provides that an entity shall treat research and development costs of intangible asset
as
a. Expense for research and capitalize for development costs if the criteria for capitalization are
met.
b. Both are expensed as incurred.
c. Both are capitalized if the criteria are met.
d. Expense for development cost and capitalize for research costs if the criteria for capitalization
are met.

75. PFRS for SMEs provides that past service cost for a defined benefit plan shall be
a. Amortized over the remaining service lives of employees
b. Recognized immediately in the profit or loss
c. Recognized immediately in the other comprehensive income
d. Recognized immediately in the retained earnings

76. PFRS for SMEs provides that actuarial gains or losses shall be
a. Amortized over the remaining service lives of employees and recognized in profit or loss using
corridor approach.
b. Recognized in profit or loss immediately.
c. Recognized in other comprehensive income immediately.
d. Either B or C.

77. Paragraph 28.18 provides that an entity shall use the project unit credit method to measure its
defined benefit obligation and the related expense
a. At all times.
b. At the option of the entity.
c. If it can be done without undue cost or effort.
d. When the entity is profitable.

78. PFRS for SMEs provides that held for sale asset shall
a. Be separately presented as current asset.
b. Be ignored.
c. Not be separately presented but holding an asset for sale is an impairment indicator
d. Be separately presented as equity component.

79. Paragraph 34.2 provides that en entity using PFRS for SMEs that is engaged in agricultural activity
shall determine is accounting policy for each class of biological assets as
a. The entity shall use the fair value model for those biological assets for which the fair value is
readily determinable without undue cost or effort.
b. The entity shall use the cose model for all other biological assets.
c. Either A or B
d. Neither A nor B

80. In case the observable market price is unavailable for the equity instruments and the most recent
transaction price cannot be determined with practicality, paragraph 26.11 provides than an entity’s
management
a. Can measure the equity settled share based payment using the best estimate of expected
volatility consistent with the valuation methodology used to determine the fair value of the
shares.
b. Should not make use of its own estimate.
c. Can hire an independent auditing firm to measure the fair value of the shares.
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d. Can hire CFAs to measure the fair value of the shares.

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