INCOME STATEMENT

1. Which of the following approaches to income measurement

underlies financial accounting and reporting?
a. Transaction approach
b. Physical capital maintenance approach
c. Economic approach
d. Valuation approach

2. The concept of “earnings”

a. Includes changes in market value of available for sale
securities.
b. Includes foreign currency translation adjustments
c. Includes gains resulting from the sale of a productive asset in
an arm’s length transaction
d. Same as comprehensive income.

3. Limitations of the income statement include all of the following

except
a. Items that cannot be measured reliably are not reported.
b. Only actual amounts are reported in determining net income.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting methods
employed.

4. On a multiple-step income statement, gains or losses on sale of

equipment would be shown
a. Before gross profit on sales.
b. After gross profit on sales but before income from continuing
operations.
c. After income from continuing operations but before income
from extraordinary items.
d. After income before extraordinary items but before net income.

5. Costs that can be reasonably associated with specific revenues

but not with specific products should be
a. Charged to expense in the period incurred.

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 b. Allocated to specific products based on the best estimate of
the production processing time.
c. Expensed in the period in which the related revenue is
recognized.
d. Capitalized and then amortized over a period not to exceed 60
months.

6. An income statement format where the expenses are classified

using cost of sales, selling activities, administrative activities and
other operating activities.
a. Nature of expense method.
b. Function of expense method.
c. Classification of expense method.
d. Appropriate grouping of expense method.

7. Which statements is incorrect concerning the presentation of the

income statement?
a. The nature of expense method means that expenses are
aggregated according to their nature and are not reallocated
among various functions within the entity.
b. The cost of sales method means that expenses are classified
according to their function as cost of sales, distribution or
administrative activities.
c. PAS 1 requires the use of the cost of sales method than the
nature of expense method.
d. The choice between the functional and natural presentation
depends on historical and industry factors and the nature of
the entity.

8. The term "comprehensive income" is most closely associated to

a. Must be reported on the face of the income statement.
b. Includes all changes in equity during a period except those
resulting from investments by and distributions to owners.
c. is the net change in owners' equity for the period.
d. is synonymous with the term "net income."

9. Other comprehensive income shall include all of the following,

except

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 a. Net unrealized loss on available for sale securities
b. Foreign currency translation gain
c. Revaluation surplus
d. Dividends paid to stockholders

10. Which of the following is not a component of comprehensive

income?
a. Foreign currency translation adjustment.
b. Unrealized gains and losses on trading securities.
c. Deferred gains and losses on derivative financial instruments.
d. Change in the minimum pension liability.

11. Under which of the following will revenue be normally recognized?

a. When the customer’s order is received.
b. When cash is received by the customer.
c. When the goods are received by the customer.
d. When the title to the goods is transferred to the customer.

12. Which of the following best describes the conditions that must be
present for the recognition of revenue?
a. The revenue must be earned, measurable and collected.
b. The revenue must be measurable and collectible.
c. The revenue must be earned and collectible.
d. The revenue must be earned, measurable and collectible.

13. The term used for gains and losses on assets that are unsold is
a. Unrecorded gains and losses.
b. Holding gains and losses.
c. Unallocated gains and losses.
d. Unrecognized gains and losses.

14. The notes to the financial statements of an entity shall

I. Present information about the basis of preparation of the
financial statements and the specific accounting policies used.
II. Disclose the information required by Philippine Financial
Reporting Standards that is not presented on the face of the
financial statements.

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 III. Provide additional information, which is not presented on the
face of the financial statements but is not relevant to
understanding of the financial statements.
a. I, II and III c. I and III only
b. I and II only d. I only

15. The notes to financial statements should be presented in what

order?
I. Summary of significant accounting policies
II. Supporting computations for items
presented on the face of the statements.
III. Other disclosures, including contingent
liabilities, unrecognized contractual commitments and
nonfinancial disclosures.
IV. Statement of compliance with PFRS
a. I, II, III and IV c. IV, I, II and III
b. II, III, IV and I d. No specific order

16. Which of the following information is not specifically a required

disclosure of PAS 1?
a. Name of the reporting entity or other means of identification,
and any change in that information from the previous year.
b. Names of major shareholders of the entity.
c. Level of rounding used in presenting the financial statements.
d. Whether the financial statements cover the individual entity or
a group of entities.

17. Nonfinancial disclosures include all of the following except

a. Contingencies and commitments
b. Domicile and legal form of the entity, its country of
incorporation and address of the registered office.
c. Description of the nature of the entity’s operations or principal
activities.
d. Name of the parent and the ultimate parent of the group.

18. The disclosure of accounting policies

a. May describe policies that are peculiar to the reporting
company’s industry.

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 b. Should not appear in the notes to the financial statements
c. Should not describe unusual or innovative applications of
GAAP.
d. Is encouraged but not required

19. An entity shall disclose of all the following, except

a. The domicile and legal form of the entity, its country of
incorporation and the address of the registered office.
b. A description of the nature of the entity’s operations and its
principal activities.
c. The amount of noncumulative preference share dividends not
declared.
d. Contingent liabilities and unrecognized contractual
commitments.

20. In the absence of an accounting standard that applies specifically

to a transaction, what is the most authoritative source in
developing and applying an accounting policy?
a. The requirement and guidance in the standard or interpretation
dealing with similar and related issue.
b. The definition, recognition criteria and measurement of asset,
liability, income and expense in the conceptual framework.
c. Most recent pronouncement of other standard-setting body.
d. Accounting literature and accepted industry practice.

21. Accounting policies are

a. Concepts that underlie the preparation and presentation of
financial statements for external users.
b. Attributes that make the information provided in financial
statements useful to users.
c. Fundamental premises on which the accounting process is
based
d. Specific principles, bases, conventions, rules and practices
adopted by an enterprise in preparing and presenting financial
statements.

22. Changes in accounting policy are generally reported as

a. Adjustments to prior period statements

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 b. Extraordinary items
c. Adjustments to current period statements only.
d. Adjustments to current and prior period statements.

23. The summary of significant accounting policies shall describe

I. The measurement basis used in preparing the financial
statements.
II. The accounting policies used that are relevant to an
understanding of the financial statements.
a. I only c. Both I or II
b. II only d. Neither I nor II

24. Which is incorrect concerning accounting changes?

a. The effect of a change in accounting estimate shall be treated
currently and prospectively, if necessary.
b. The effect of a change in the expected pattern of consumption
of economic benefits of a depreciable asset should be
included in the determination of income or loss of the period of
change and future periods.
c. A change in accounting policy shall be accounted for
retrospectively.
d. If it is difficult to distinguish between a change in accounting
policy and a change in accounting estimate, the change is
treated as a change in accounting policy.

25. A change in accounting policy shall be made when

I. Required by a Standard or an interpretation of the Standard.
II. The change will result in more relevant or reliable information
about financial position, performance and cash flows.
a. I only c. Both I or II
b. II only d. Neither I nor II

26. This means, “applying a new accounting policy to transactions,

other events and conditions as if that policy had always been
applied”.
a. Retrospective application
b. Retrospective restatement
c. Prospective application

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 d. Prospective restatement

27. This means “correcting the recognition, measurement and

disclosure of amounts of elements of the financial statements as if
a prior period error had never occurred”
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prior period adjustment

28. A change in the periods benefited by a deferred cost because

additional information has been obtained is a
a. Change in accounting policy
b. Prior period error
c. Change in accounting estimate
d. Event after the balance sheet date.

29. When an entity changes an accounting policy voluntarily, it has to

a. Inform shareholders prior to taking the decision.
b. Account for it retrospectively
c. Treat the effect of the change as an extraordinary item
d. Treat it prospectively and adjust the effect of the change in the
current period and future periods.
30. Prior errors are omissions from and misstatements in the financial
statements for one or more periods arising from a failure or
misuse of reliable information that
I. Was available when financial statements for those periods
were authorized for issue.
II. Could reasonably be expected to have been obtained and
taken into account in the preparation and presentation of those
financial statements.
a. I only c. Both I or II
b. II only d. Neither I nor II

31. The effect of a change in the expected pattern of consumption of

economic benefits of a depreciable asset should be
a. Included in the determination of income or loss in the period of
change only.

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 b. Included in the determination of income or loss in the period of
change and future periods.
c. Included in the statement of retained earnings as an
adjustment of the beginning balance.
d. Included in the statement of recognized gains and losses of
the current and future periods.

32. Where financial statements for a single year are being presented,
a prior period error recognized in the current year ordinarily would
a. Be shown as an adjustment of the balance of retained
earnings at the start of the current year
b. Affect net income of the current year
c. Be shown as an extraordinary item on the current year’s
income statement
d. Be included in the statement of recognized gains and losses

33. When an entity changes an accounting policy voluntarily, it has to

a. Inform shareholders prior to taking the decision.
b. Account for it retrospectively
c. Treat the effect of the change as an extraordinary item
d. Treat it prospectively and adjust the effect of the change in the
current period and future periods.

34. A company has included in its consolidated financial statements

this year a subsidiary acquired several years ago that was
appropriately excluded from consolidation last year. This results in
a. Accounting change that should be reported prospectively
b. Accounting change that should be reported by restating the
financial statements of all periods presented.
c. A correction of an error
d. Neither an accounting change nor a correction of an error.

35. The following items were among those that were reported on
Canberra Company’s income statement for the year ended
December 31, 2009.
Legal and audit fees 2,000,000
Rent for office space 4,000,000
Interest on acceptances payable 800,000

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 Officer’s salaries 1,000,000
Loss on abandoned data processing equipment 500,000
Insurance 300,000
Interest expense 600,000

The sale and accounting departments use the office space equally.
What amount should be classified as general and administrative
expenses?
a. 5,900,000 c. 7,800,000
b. 7,000,000 d. 5,300,000

36. Stallion Corporation separates operating expenses in two

categories: selling, and general and administrative expenses. The
adjusted trial balance at December 31, 2008, included the
following expenses and loss accounts:
Interest 1,400,000
Accounting and audit Fees 500,000
Advertising 800,000
Freight-out 1,600,000
Product development 350,000
Loss on sale of long-term investment 100,000
Officers' salaries 900,000
Depreciation on delivery equipment 400,000
Rent for office space 1,200,000
Sales salaries and commissions 750,000
One-half of the rented premises is occupied by the sales
department. The entity’s total selling expenses for 2008 are
a. 4,750,000 c. 5,100,000
b. 3,950,000 d. 4,150,000

37. The general ledger trial balance of Michael Company includes the
following accounts on December 31, 2009:

Sales revenue 9,750,000

Interest income 200,000
Share of profit of associate 150,000
Other income 50,000
Decrease in inventory of finished goods 250,000

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 Raw materials and consumables used 3,500,000
Employee benefit expense 1,500,000
Translation loss of foreign operations 300,000
Depreciation 450,000
Impairment loss on property 800,000
Finance costs 350,000
Other expenses 450,000
Income tax expense 750,000

What is the profit for the year ended December 31, 2009?
a. 2,100,000 c. 2,600,000
b. 1,800,000 d. 6,000,000

38. The expenses other than interest expense of Sydney Company for
the current year is 40% of cost of sales but only 20% of sales.
Interest expense is 5% of sales. The amount of purchases is
120% of cost of sales. Ending inventory is twice as much as the
beginning inventory. The income after tax of 35% for the current
year is P325,000. What is the amount of sales for the current
year?
a. 1,625,000 c. 2,000,000
b. 1,300,000 d. 2,500,000

39. New Zealand Company’s stockholders’ equity on January 1, 2008

was at P40,000,000. New Zealand Company did not issue any
shares nor acquired any treasury shares during the year. The
company reported a net income of P10,000,000 for the year
ended December 31, 2008. The auditor raised questions about the
following amounts that had been included in the net income:

Loss from expropriation of property, net 1,500,000

Unrealized gain on the increase in value of 500,000
Available for Sale Securities
Adjustment of profit of prior year, net- debit 4,500,000
Accumulated translation loss 2,000,000
Revaluation surplus realization 1,000,000
Loss on write-off of inventory due to a 3,500,000
government prohibition, net

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 The loss from expropriation was unusual in occurrence in New
Zealand’s line of business. New Zealand Company’s 2008 income
statement should report net income at
a. 15,000,000 c. 15,500,000
b. 13,000,000 d. 16,000,000

40. Cotswolds, Inc., is a retail store operating in a state with a 5%

retail sales tax. The city law provides that the retail sales tax
collected during the month must be remitted to the city
government during the following month. If the amount collected is
remitted to the city government on or before the twentieth of the
following month, the retailer may keep 3% of the sales tax
collected. On April 10, 2009, Cotswolds remitted P61,110 tax to
the city tax division for March 2009 retail sales. What was
Cotswolds’ March 2009 retail sale subject to sales tax?
a. 1,222,200 c. 1,260,000
b. 1,197,000 d. 1,233,750

Questions 41 through 44:

The income statement accounts of Melbourne Company for the year
2009 included the following:
Net sales 9,500,000
Cost of goods sold 4,000,000
Selling expenses 600,000
Administrative expenses 1,200,000
Interest expense 700,000
Other expense 400,000
Interest income 200,000
Gain from expropriation 100,000
Investment income 200,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on available for sale securities 1,100,000
Foreign currency translation adjustment loss 200,000
Revaluation surplus 2,500,000
Dividends declared 1,000,000
Investments by stockholders 400,000
Correction of an error-debit 3,000,000

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41. The 2009 statement of comprehensive income should report
income before income taxes at what amount?
a. 3,000,000 c. 2,300,000
b. 3,100,000 d. 3,500,000
42. The 2009 statement of comprehensive income should report
income from continuing operations at what amount?
a. 3,200,000 c. 2,300,000
b. 3,100,000 d. 2,900,000
43. The 2009 statement of comprehensive income should report net
income at what amount?
a. 3,400,000 c. 2,300,000
b. 3,100,000 d. 2,900,000
44. What is the 2009 comprehensive income?
a. 5,700,000 c. 5,900,000
b. 6,300,000 d. 6,500,000

45. Narda Company’s earnings for the year and transactions occurred
during 2009:
Net income 5,000,000
Gain on debt restructuring 2,000,000
Foreign currency translation reserve – debit 2,300,000
Contra equity reserve – credit 1,500,000
Revaluation increment on land 1,800,000
Dividends to preference share holders 1,000,000

What should Narda report as comprehensive income?

a. 6,000,000 c. 7,000,000
b. 8,000,000 d. 5,000,000

46. Hanson Company had the following gains during 2009 which was
considered to be unusual and infrequent in Hanson’s line of
business:
Gain on the extinguishments of long-term bonds 500,000
payable
Foreign currency transaction gain due to major 600,000
devaluation
Gain from the expropriation of asset 800,000

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 Loss from the disposal of assets of discontinued
operation 1,000,000

What total amount of gains should Hanson include as component of

income from continuing operations?
a. 1,400,000 c. 900,000
b. 1,900,000 d. 2,100,000

47. The following is a statement of retained earnings for the year

ended December 31, 2008 provided by Warsaw Company (in
millions):
Balance at the beginning of the year 85,000
Additions:
Change in estimate of 2008 2,500
amortization expense
Gain on sale of land 18,000
Interest revenue 4,500
Profit and loss for 2008 13,000
Total additions 38,000
Total 123,000
Deductions
Increased depreciation due to 5,000
change in useful life
Dividends declared and paid 11,000
Loss on sale of equipment 3,000
Loss from major casualty 7,000
Total deductions 26,000
Balance at yearend 97,000
What amount of net income should have been reported in the
income statement for the year 2008?
a. 23,000 c. 12,000
b. 13,000 d. 25,500

48. Bentley Company’s comprehensive insurance policy allows its

assets to be replaced at current value. The policy has a
P2,000,000 minimum participation clause. During 2009, one of
Bentley’s waterfront buildings was destroyed by a storm. Such
storms occur frequently in Bentley’s vicinity. Bentley incurred

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 P300,000 of costs in dismantling the building, clean up costs and
plans to replace it. The following data relate to the building:

Current carrying amount 6,000,000

Replacement cost 10,000,000
What amount of gain should Bentley report as part of its 2009
income?
a. 1,700,000 c. 3,700,000
b. 2,300,000 d. 2,000,000

49. The following information was taken from January Company’s

accounting records for the year ended December 31, 2009:

Increase in goods in process inventory 400,000

Increase in raw materials inventory 150,000
Decrease in finished goods inventory 450,000
Raw materials purchased 4,100,000
Direct labor payroll 2,000,000
Factory overhead 3,000,000
Freight out 450,000
Freight in 200,000
January’s cost of goods sold was
a. 9,200,000 c. 9,450,000
b. 9,100,000 d. 9,000,000

50. The following information was taken from Australia Company’s

accounting records for the year ended December 31, 2008:
Sales 10,000,000
Decrease in goods in process inventory 200,000
Decrease in raw materials inventory 350,000
Increase in finished goods inventory 500,000
Raw materials purchased 2,100,000
Direct labor payroll 1,000,000
Factory overhead 800,000
Freight in 300,000
Freight out 900,000
General and administrative expenses 1,600,000

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 How much is Australia Company’s income before tax?
a. 4,150,000 c. 3,250,000
b. 4,000,000 d. 3,750,000

51. The following information with regard to Brisbane Company’s

inventory for 2009 is available:

January 1 December 31
Raw materials 2,000,000 2,500,000
Work in process 5,100,000 4,300,000
Finished goods 6,000,000 4,000,000
The gross profit margin historically approximated 30% of sales.
The sales for the year amounted to P25,000,000. Direct labor
costs for the year were P6,000,000, and manufacturing overhead
has been applied at 60% of direct labor. What was Brisbane’s raw
material purchases in 2009?
a. 5,600,000 c. 7,100,000
b. 5,100,000 d. 7,600,000

52. The total debits and credits in selected accounts of Brewers

Company, after closing entries were posted on December 31,
2009 are given below:
Debits Credits
Materials 1,000,000 300,000
Material purchases 4,000,000 4,000,000
Purchase discount 100,000 100,000
Transportation in 300,000 300,000
Direct labor 3,000,000 3,000,000
Manufacturing overhead 2,000,000 2,000,000
Goods in process 800,000 500,000
Finished goods 800,000 200,000
The cost of goods sold was
a. 8,800,000
b. 9,000,000
c. 8,600,000
d. 9,200,000

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53. Angola Company was organized on January 1, 2008, 25,000
shares of P100 par value common stock being issued in exchange
for property, plant and equipment valued at P3,000,000 and cash
of P1,000,000. The following data summarize activities for 2008:

 Net income for the period ending December 31, 2008

was P1,000,000.
 Raw materials on hand on December 31, were equal
to 25% of raw materials purchased.
 Manufacturing costs were distributed as follows:
Materials used 50%
Direct labor 30%
Factory overhead 20% (includes depreciation of
200,000)
 Goods in process remaining in the factory on December 31
were equal to 33 1/3% of the goods finished and transferred
to stock.
 Finished goods remaining in stock were equal to 25% of the
cost of goods sold.
 Operating expenses were 30% of sales
 Cost of goods sold was 150% of total operating expenses.
 Ninety percent of sales were collected. The balance was
considered to be collectible.
 Seventy five percent of the raw materials purchased were
paid for. There were no expense accruals or prepayments at
the end of the year.
Raw materials purchases for the year amounted to
a. 1,500,000
b. 1,750,000
c. 2,000,000
d. 2,250,000

54. On January 1, 2006, Auckland Company purchased for

P6,000,000 a machine with a useful life of 5 years and a residual
value of P600,000. The machine was depreciated by the double
declining balance method and the accumulated depreciation of the
machine was P3,840,000 on December 31, 2007. Auckland

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 changed to the straight-line method on January 1, 2008 and the
residual value did not change. In its 2008 income statement, what
amount should Auckland report as accumulated depreciation for
this machine?
a. 4,360,000 c. 4,704,000
b. 4,560,000 d. 3,840,000

55. On January 1, 2006, Khartoum Company purchased for

P10,000,000 a machine with a useful life of 5 years and residual
value of P600,000. The machine was depreciated by the double
declining balance method and the accumulated depreciation of the
machine was P6,400,000 on December 31, 2008. Khartoum
changed to the straight-line method on January 1, 2008 and the
residual value did not change. In its 2008 statement of retained
earnings, what amount should Khartoum report as an adjustment
to the beginning balance of its retained earnings as result of this
change in depreciation policy?
a. 760,000 c. 1,000,000
b. 3,400,000 d. 0

56. During 2008, Barbados Company decided to change from the

FIFO method of inventory valuation to the weighted average
method. Inventory balances under each method were:

FIFO Average
December 31, 2006 9,000,000 8,500,000
December 31, 2007 8,000,000 8,600,000
December 31, 2008 7,000,000 6,400,000

Ignoring income tax, in its 2008 statement of owners equity, what

amount should Barbados report as the reflect of this accounting
change?
a. 100,000 increase c. 600,000 increase
b. 100,000 decrease d. 600,000 decrease

57. Australia Company began operations on January 1, 2007 and

uses the FIFO method of costing inventory. Management is
contemplating a change to the Average method to be consistent

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 with Australia’s parent company. The following information has
been developed:
2007 2008
Ending inventory:
FIFO 1,500,000 2,000,000
Average 1,000,000 1,800,000
Income under FIFO 6,000,000 8,000,000

What will the 2008 income be after a change to the Average

method?
a. 8,700,000 c. 8,300,000
b. 7,800,000 d. 7,700,000

58. Derek Construction Company has used the completed contract

method of revenue recognition since the inception of its operations
in 2006. In 2009, management decided to adopt the percentage
of completion method. The following data, reporting income for the
past three years has been prepared by the company:

2006 2007 2008

Construction Revenue 20,000,000 50,000,000 58,000,000
Less: Cost of Construction 10,000,000 30,000,000 36,000,000
Income from operations 10,000,000 20,000,000 22,000,000
Gain on sale of investments 3,000,000 1,000,000
Interest expense 0 ( 1,000,000) ( 2,000,000)
Net income 13,000,000 19,000,000 21,000,000
An analysis of the accounting records disclosed the following
income by contracts, earned in the first three years of operations
using percentage of completion:
2006 2007 2008
Contract 1 8,000,000
Contract 2 7,000,000 10,000,000
Contract 3 8,000,000 6,000,000 6,000,000
Contract 4 5,000,000 9,000,000
Contract 5 4,000,000

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 What should be the cumulative effect of the accounting change
that should be reported in the 2009 statement of retained
earnings? (Ignore income tax effect)
a. 11,000,000 c. 7,000,000
b. 10,000,000 d. 0

59. Rubio Company failed to accrue warranty costs of P200,000 in its

December 31, 2008 financial statements. In addition, a change
from straight-line to accelerated depreciation made at the
beginning of 2009 resulted in a cumulative effect of P400,000.
Both the P200,000 and the P400,000 are before cumulative effect
of taxes amounts. What amount before tax should Rubio report
as prior period error in the 2009 statement of retained earnings?
a. 200,000 c. 400,000
b. 600,000 d. 0

60. While preparing its financial statements for 2008, Sierra Company
discovered computational errors in its 2007 and 2006 depreciation
expense. These errors resulted in overstatement of each year’s income
by P25,000, net of income taxes. The following amounts were reported
in the previously issued financial statements:
2007 2006
Retained earnings, January 1 700,000 500,000
Net income 150,000 200,000
Retained earnings, December 31 850,000 700,000

Sierra’s net income for the year 2008 is correctly reported at

P500,000 and dividends of P100,000 were declared. What is the
balance of retained earnings on December 31, 2008?
a. 1,200,000 c. 1,300,000
b. 1,250,000 d. 1,225,000

61. After the issuance of its 2008 financial statements, Mara Company
discovered a computational error of P500,000 as an
overstatement in the calculation of its December 31, 2007
inventory. The error resulted in a P500,000 understatement in the
cost of goods sold for the year ended December 31, 2007. In
October 2008, Mara paid the amount of P800,000 in settlement of
litigation instituted against it during 2007, no accrual was made for

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this obligation in 2007 because it was to be only a possible
obligation at the time the 2007 financial statements were issued.
Ignore income tax, in the 2008 financial statements, the January
1, 2008 retained earnings balance, as previously reported, should
be adjusted by a
a. 500,000 credit c. 500,000 debit
b. 300,000 debit d. 1,300,000 debit

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