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THEORY OF ACCOUNTS Comprehensive Examination
STANDARD SETTING PROCESS D. Conceptual framework

Securities & Exchange Commission
2. The role of the Securities and Exchange Commission in the formulation of accounting
principles can be best described as
I. Consistently primary.
II. Consistently secondary.
III. Sometimes primary and sometimes secondary.
A. I only C. II and III only
B. I and II only D. I, II and III
CONCEPTUAL FRAMEWORK
Preface
1. The purpose of the International Accounting Standards Committee 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
throughout the world would be measured.
C. Promote uniform accounting standards among countries of the world.
D. Arbitrate accounting disputes between auditors and international companies.
1. Which of the following statements regarding international accounting standards is not

true?
A. The purpose of IASC is to reduce the diversity of practices in financial reporting
among countries.
B. Harmonization of international accounting standards will provide benefits to both
preparers and users of financial statements.
C. As international trade and ownership barriers are removed, the need for
harmonization of international accounting standards will decrease.
D. Since different countries use financial statements for different purposes, some
countries will likely not adopt the international accounting standards.
Introduction
Purpose & Status (Para. 1-4)
1. This represents the concepts that underlie the preparation and presentation of
financial statements.
A. Statement of Financial Accounting Standards
B. Statement of Auditing Standards
C. Note to financial statements
Chiang Kai Shek College Page 1 of 151
1. The ASC Framework A. Nothing in the framework overrides any specific Statement of Financial
A. Sets out the concepts that underlie the preparation and presentation of financial Accounting Standards.
statements for external users. B. The framework deals with the objectives of the financial statements, the
B. Provides information about the financial position, performance and changes in qualitative characteristics that determine the usefulness of the information in
financial position of an enterprise that is useful to a wide range of users in financial statements, the definition, recognition and measurement of the
making economic decisions. elements of the financial statements arid concepts of capital and capital
C. Represents the attributes that make the information provided in financial maintenance.
statements useful to users. C. The framework sets out the concepts that underlie the preparation and
D. Is directly related to the measurement of financial position and performance of an presentation of financial statements for internal and external users.
enterprise D. The framework is concerned with general purpose financial statements including
consolidated financial statements.
3. The ASC Framework is intended to establish
A. Generally accepted accounting principles in financial reporting by business
enterprises.
B. The meaning of “present fairly in accordance with GAAP”
C. The objectives and concepts for use in developing standards of financial
accounting and reporting
D. The hierarchy of sources of GAAP
2. The purposes of the ASC Framework do not include

I. To assist the ASC in its review and adoption of existing IAS.
II. To assist preparers of FS in applying ASC SFAS and in dealing with topics that
have yet to form the subject of ASC statement.
III. To assist the Board of Accountancy in promulgating rules and regulations
affecting the practice of the accountancy profession.
A. I only C. III only
B. II only D. II and III only
1. Which is incorrect concerning the ASC Framework?

A. The framework sets out the concepts that underlie the preparation and
presentation of financial statements.
B. The framework is a Statement of Financial Accounting Standards
C. The framework is concerned with general-purpose financial statements including
D. The framework applies to the financial statements of all commercial, industrial
and business enterprises, whether in the public or private sector
8. Which statement is incorrect concerning the ASC framework?

Scope (Para. 5 to 8) A. Nothing in the framework overrides any specific Statement of Financial
2. Financial statements (choose the statement that is not valid) Accounting Standards
A. Provide information about the financial position, financial performance and cash B. The framework deals with the objective of financial statements, the qualitative
flows of an enterprise that is useful to a wide range of users in making economic characteristics that determine the usefulness of information in financial
decisions. statements, the definition, recognition and measurement of the elements of the
B. Are the primary responsibility of the management of the enterprise. financial statements, and the concept of capital and capital maintenance
C. Also show the results of the stewardship of management for the resources C. The framework is concerned with general-purpose financial statements including
entrusted to it. consolidated financial statements
D. Are prepared and presented at least annually and are directed toward the D. The framework sets out the concepts that underlie the preparation and
specific information needs of a wide range of users. presentation of financial statements for internal and external users
5. A complete set of financial statements include the following components, except 1. Which is incorrect concerning the ASC framework?
A. Balance sheet, income statement and cash flow statement. A. Nothing in the framework overrides any specific Statement of Financial
B. A statement showing either all changes in equity or changes in equity other than Accounting Standards.
those arising from capital transactions with owners and distributions to owners. B. The framework deals with the objective of financial statements, the qualitative
C. Additional statements such as environmental reports and value added characteristics, the definition, recognition and measurement of the financial
statements. statement elements, and the concepts of capital and capital maintenance.
D. Accounting policies and explanatory notes. C. The framework is concerned with special-purpose financial statements including
2. Which statement is correct concerning the ASC framework? D. The framework applies the financial statements of all commercial, industrial and
I. The framework applies to the financial statements of all commercial, industrial business reporting enterprises, whether in the public or the private sector.
and business reporting enterprises, whether in the public and private sector
II. Special purpose financial reports, for example, prospectuses and computations 1. The following statements relate to the ASC Framework. Which statement is
prepared for taxation purposes, are beyond the scope of the framework incorrect?
A. Both I and II C. I only A. The framework is not a Statement of Financial Accounting Standards and hence
B. Neither I nor II D. II only does not define standards for any particular measurement or disclosure issue.
B. The framework is concerned with general-purpose financial statements including
3. Which is true concerning the ASC framework? consolidated financial statements.
I. The framework sets out the concepts that underlie the preparation and C. Special purpose financial reports, for example, prospectuses and computations
presentation of financial statements for external users. prepared for taxation purposes are within the scope of the framework.
II. The framework is not a Statement of Financial Accounting Standards and hence D. The framework applies to the financial statements of all commercial, industrial
does not define standards for any particular measurement or disclosure issue. and business reporting enterprises, whether in the public and private sector.
III. The framework is concerned with general-purpose financial statements excluding
consolidated financial statements. 2. Which is an incorrect statement concerning the ASC Framework?
A. I only C. I and III A. The framework deals with the objective of financial statements, qualitative
B. I and II D. I, II and III characteristics, definition, recognition and measurement of elements of financial
statements and concepts of capital
1. Which statement is incorrect concerning the ASC framework? B. Special purpose financial reports, for example, prospectuses and computations
prepared for taxation purposes are within the scope of the ASC Framework 5. The primary focus of financial accounting has been on meeting the needs of which of
C. In case of conflict between the framework and Statement of Financial Accounting the following groups?
Standards, the SFAS shall prevail over the framework A. Managers of an enterprise
D. The framework applies to the financial statements of all commercial, industrial B. Present and potential creditors of an enterprise
and business reporting enterprises, whether in the public or private sector C. National, and local taxing authorities
D. Independent auditors
Users and their Information Needs (Para. 9 to 11)
Investors Employees
2. These users are concerned with the risk inherent in and return provided by their Lenders
investments. Suppliers & other trade creditors
A. Providers of risk capital and their advisers (Investors) 2. Which statement is incorrect concerning the users and their information needs?
B. Employees A. Enterprises affect members of the public in a variety of ways, including the
C. Lenders number of people they employ and their patronage of local suppliers
D. Customers B. Government and their agencies are interested in the allocation of resources and
therefore the activities of the enterprise
2. The providers of risk capital and their advisers C. Employees and their representative groups are interested in information about
A. Are concerned with the risk inherent in and return provided by their investments the stability and profitability of the enterprise
and need information to help determine whether they should buy or sell. D. Suppliers and trade creditors have an interest in information about the
B. Are interested in information about the stability and profitability of the employers. continuance of an enterprise, especially when they have a long-term involvement
C. Are interested in information that enables them to determine whether their moans with or are dependent on the enterprise.
and the interest attaching to them will be aid when due.
D. Have an interest in information about the continuance of an enterprise, especially Customers
when they have a long-term involvement with or are dependent on the Government and their agencies
enterprise. 3. Users of financial accounting information may be broadly classified into those with
direct interests in business enterprises and those with indirect interests. Which
4. Investors (providers of risk capital) among the following are users with direct interests?
A. Have an interest in information about the continuance of an enterprise, especially A. Taxing authorities C. Stock exchange
when they have a long-term involvement with or are dependent on the B. Labor unions D. Regulatory or registration
enterprise. authorities
B. Require financial information in order to regulate the activities of an enterprise,
determine taxation policies and as a basis for national income and similar Public
statistics 5. Which among the following is an indirect user of financial accounting information?
C. Are interested in information about the stability and profitability of the enterprise A. A bank which intends to grant loan to the enterprise
to assess the ability of the enterprise to provide renumeration, retirement benefits B. A stockholder of the corporation
and employment opportunities. C. A potential supplier of the enterprise
D. Are concerned with risk inherent in and return provided by their investments and D. The trade association to which the enterprise belongs as a member
need information to help them determine whether they should buy, hold or sell.
Comprehensive
7. Which of the following is most likely to prepare the most accurate financial forecast A. Both enterprise performance and management performance
for a corporate enterprise based on empirical evidence? B. Management performance but not enterprise performance
A. Investors using statistical models to generate forecasts C. Enterprise performance but not management performance
B. Corporate management D. Neither enterprise nor management performance
C. Financial analysts
D. Independent certified public accountants 13. Which one of the following items is not listed as a major objective of financial
reporting?
The Objective of Financial Statements (Para. 12 to 14) A. Financial reporting should provide information about enterprise resources, claims
1. What is the objective of financial reporting? to those resources, and changes in them.
A. To provide the necessary information for the management of an enterprise to B. Financial reporting should provide information useful in evaluating management’s
managers of that enterprise stewardship.
B. To provide information that the creditors of an enterprise can use in deciding C. Financial reporting should provide information useful in investment, credit, and
whether to make additional loans to the enterprise similar decisions.
C. To measure the periodic net income of an enterprise D. Financial reporting should provide information useful in assessing cash flow
D. To provide external users with financial information that is useful in making projects.
rational investment, credit and similar decision
3. Financial accounting is concerned with
2. The objectives of financial reporting for business enterprises are based on A. General-purpose reports on financial position and results of operations.
A. The need for conservatism B. Specialized reports for inventory management and control.
B. Reporting on management's stewardship C. Specialized reports for income tax computation and recognition.
C. Generally accepted accounting principles D. General-purpose reports on changes in stock prices and future estimates of
D. The needs of the users of the information market position.
8. The overall objective of financial reporting is to provide information 4. Financial accounting can be broadly defined as the area of accounting that prepares
A. that is useful for decision making by external users A. General purpose financial statements to be used by parties internal to the
B. for income tax preparation and payment business enterprise only.
C. only for stockholders B. Financial statements to be used by investors only.
D. for management to make decision for controlling the operations C. General purpose financial statements to be used by parties both internal and
external to the business enterprise.
10. Providing information about enterprise resources, claims to those resources, and D. Financial statements to be used primarily by management.
changes in them
A. Is an objective of financial reporting. 1. Which statement is incorrect concerning financial statements?
B. Is the purpose of the balance sheet. A. Financial statements do not show the results of management's stewardship of
C. Helps users to evaluate profitability but not solvency. resources entrusted to it.
D. Helps users to evaluate solvency but not profitability. B. Financial statements are prepared at least annually and are directed toward the
common information needs of a wide range of users.
6. During a period when an enterprise is under the direction of a particular management, C. The objective of general-purpose financial statements is to provide information
financial statements will directly provide information about about the financial position, performance and cash flows of an enterprise that is
useful to a wide range of users in making economic decisions. A. Ability of the enterprise to generate cash and cash equivalent in the future
D. The management of an enterprise has the primary responsibility for the B. Future borrowing needs and how future profits and cash flows will be distributed
preparation and presentation of financial statements. among those with an interest in the enterprise
C. Availability of cash for unexpected requirements and investment opportunities
Financial Position, Performance & Changes in Financial Position (Para. 15 to 20) D. Ability of the enterprise to meet its financial commitments as they fall due
21. In analyzing a company’s financial statements which financial statement would a
potential investor primarily use to assess the company’s liquidity and financial 8. Liquidity is defined as the
flexibility? A. Ability of the enterprise to pay currently maturing obligations
A. Balance sheet C. Statement of retained earnings B. Ability of the enterprise to meet obligations over a longer term
B. Income statement D. Cash flow statement C. Invested capital of the enterprise
D. Borrowed capital of the enterprise
7. The ability of the enterprise to generate cash and cash equivalents in the future can
be predicted by information about 2. Solvency is defined as
A. Financial structure A. Ability of the enterprise to meet obligations over a longer term
B. Liquidity B. Invested capital of an enterprise
C. Solvency C. Ability of the enterprise to pay currently maturing obligations
D. Economic resources controlled by the enterprise and its capacity to modify these D. Borrowed capital of the enterprise
resources
4. The following statements relate to financial position of an enterprise. Which statement
4. Information about economic resources controlled by the enterprise and its capacity to is incorrect?
modify these resources is useful in predicting A. Information about financial structure is useful in predicting future borrowing
A. The ability of the enterprise to generate cash and cash equivalent in the future. needs and how future profits and cash flows will be distributed among these with
B. The future borrowing needs and how future profits and cash flows will be an interest in the enterprise.
distributed among those with an interest in the enterprise. B. Information about liquidity and solvency is useful in predicting the ability of the
C. The ability of the enterprise to meet is financial commitments as they fall due in enterprise to meet its financial commitments when they fall due.
the near future. C. Information about financial position is primarily provided in an income statement.
D. The ability of the enterprise to meet is financial commitments as they fall due D. Information about the economic resources controlled by the enterprise and its
over a longer-term capacity in the past to modify these resources is useful in predicting the ability of
the enterprise to generate cash and cash equivalent in the future.
7. Information about financial structure is useful in
I. Predicting future borrowing needs and how future profits and cash flows will be 6. Information about the performance of an enterprise is required in order to assess
distributed among those with an interest in the enterprise. potential changes in the economic resources that it is likely to control in the future.
II. Predicting the ability of the enterprise to meet its financial commitments as they This information is primarily provided in the
fall due. A. Balance sheet. C. Cash flow statement.
A. Both I and II C. II only B. Income statement. D. Statement of changes in equity.
B. I only D. Neither I nor II
6. The most useful information to investors in predicting future cash flows is
3. Information about liquidity and solvency is useful in predicting the A. Information about current cash flows
B. Current earnings based on accrual basis accounting A. I only. C. I and II.

C. Information regarding the accounting policies and principles used by B. II only. D. Neither I nor II.
management
D. Information regarding the results obtained by using a wide variety of accounting 5. The accrual basis of accounting is based primarily on
policies and principles A. Conservatism and revenue realization C. Consistency and matching
B. Conservatism and matching D. Revenue realization and
42. Which of the following financial statements reflects certain measurements as of a matching
particular moment in time?
A. Statement of retained earnings C. Cash flow statement 4. Under the accrual basis of accounting, cash receipts and disbursements may
B. Income statement D. Balance sheet A. Precede, coincide with, or follow the period in which revenue and expenses are
recognized.
4. Information about financial position is primarily provided in the B. Precede or coincide with, but never follow the period in which revenues and
A. Balance sheet, income statement and cash flow statement expenses are recognized.
B. Balance sheet and income statement C. Coincide with or follow, but never precede the period in which revenue and
C. Income statement expenses are recognized.
D. Balance sheet D. Only coincide with the period in which revenues and expenses are recognized.
23. Events that cause changes in a company’s financial position during a period do not Going Concern (Para. 23)
include 6. Continuation of an accounting entity in the absence of evidence to the contrary is an
A. Losses C. Owners’ equity example of the basic concept of
B. Investing activities D. Revenues A. Accounting entity C. Going concern
B. Time period D. Accrual
Notes and Supplementary Schedules (Para. 21)
Underlying Assumptions 6. The going concern assumption means that
Accrual Basis (Para. 22) I. The enterprise has neither intention nor the need to liquidate or curtail materially
8. The effects of transactions and other events are recognized when they occur and not the scale of its operations.
as cash or its equivalent is received or paid, and they are recorded and reported in II. The effects of transactions and other events are recognized when they occur and
the financial statements of the periods to which they relate. not as cash or its equivalent is received or paid, and they are recorded in the
A. Accrual C. Time period accounting records and reported in the financial statements of the periods to
B. Going concern D. Accounting entity which they relate.
A. Both I and II C. I only
9. Under the accrual basis of accounting B. Neither I nor II D. II only
I. The effect of transactions and other events are recognized when they occur and
not as cash or its equivalent is received or paid, and they are recorded in the 6. Which of the following is an implication of the going concern assumption?
accounting records and reported in the financial statements of the periods to I. The historical cost principle is credible.
which they relate. II. Depreciation and amortization policies are justifiable and appropriate.
II. The financial statements are normally prepared on the assumption that an Ill. The current-noncurrent classification of assets and liabilities is justifiable and
enterprise will continue in operation for the foreseeable future. significant.
A. I, Il and III C. II and III only decisions they make. This link is
B. I and lI only D. I only A. Relevance C. Understandability
B. Reliability D. Materiality
6. The relatively stable economic, political, and social environment supports
A. Conservatism C. Matching 11. An essential quality of the information provided in the financial statements is that it is
B. Materiality D. Going Concern readily understandable by users. For this purpose
I. Users are assumed to have a reasonable knowledge of business and economic
10. The valuation of a promise to receive cash in the future at present value on the activities and accounting and a willingness to study the information with
financial statement of a business entity is valid because of the accounting concept of reasonable diligence.
A. Entity C. Going concern II. Users are informed of the accounting policies employed in the preparation of the
B. Time period D. Monetary unit statements, any changes in those policies and the effects of such changes.
A. I and II. C. I only.
Qualitative Characteristics of Financial Statements (Para. 24) B. Neither I nor II. D. II only.
10. These are the attributes that make the information provided in financial statement
useful to users 6. An essential quality of the information provided in the financial statements is that it is
A. Qualitative characteristics. C. Accounting constraints. readily understandable by users. For this purpose
B. Underlying assumptions. D. Accounting concepts. I. The information should be presented in a form and expressed in terminology that
users understand.
5. The overriding criterion by which accounting information can be judged is that of II. Users are assumed to have a reasonable knowledge of business and economic
A. Usefulness for decision making C. Timeliness activities and accounting and a willingness to study the information with
B. Freedom from bias D. Comparability reasonable diligence.
A. I only C. Both I and II
Primary Qualities B. II only D. Neither I nor II
7. The two primary qualities of useful accounting information are
A. Relevance and understandability C. Understandability and Relevance (Para. 26 to 28)
comparability 10. The financial information has this quality if it influences the economic decision of
B. Reliability and comparability D. Relevance and reliability users by helping them evaluate past, present and future events, or confirming and
correcting their past evaluations
3. Accounting constraints are factors that affect the balance between the qualitative A. Relevance C. Understandability
characteristics of B. Reliability D. Comparability
A. Understandability and comparability C. Reliability and understandability
B. Relevance and comparability D. Reliability and relevance 13. Information has the quality of relevance when
I. It influences the economic decisions of users by helping them evaluate past,
Understandability (Para. 25) present, or future events or confirming, or correcting their past evaluations.
7. Decision makers vary widely in the types of decisions they make, the methods of II. It is free from material error and bias and can be depended upon by users to
decision making they employ, the information they already possess or can obtain represent faithfully that which it purports to represent or could reasonably be
from other sources, and their ability to process information. Consequently, for expected to represent.
information to be useful there must be a linkage between these users and the A. I only. C. I and II.
B. II only. D. Neither I nor II. C. An item may be inherently material because by its very nature it affects economic
decision
10. Accounting information is considered to be relevant when D. Materiality is a primary qualitative characteristic that provides a threshold or cut-
A. It can be depended on to represent the economic conditions and events that it is off point which information must be reported to be useful to the users
intended to represent.
B. It is capable of making a difference in a decision 3. Which statement is incorrect concerning materiality?
C. It is understandable by reasonably informed users of accounting information. A. Information is material if its omission or misstatement could influence the
D. Users are informed of the accounting policies employed in the preparation of the economic decisions of users taken on the basis of the financial statement.
statements, any changes in those policies and the effects of such changes. B. Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement.
7. The following statements pertain to relevance. Which statement is incorrect? C. Materiality is a primary qualitative characteristic rather than a threshold or cut off
I. The predictive and confirmatory roles of relevant information are not interrelated. point In determining useful information.
II. The relevance of information is affected by its nature and materiality. D. Materiality is dependent on professional judgment because no threshold limit is
A. Neither I nor II C. I only defined in the ASC framework or accounting standard
B. Both I and II D. II only
8. Which of the following statements about materiality is not correct?
12. The following statements relate to relevance. Which statement is incorrect? A. An item must make a difference or it need not be disclosed.
A. To be useful, information must be relevant to the decision-making needs of B. Materiality is a matter of relative size or importance.
users. C. An item is material if its inclusion or omission would influence or change the
B. The predictive and confirmatory roles of information are not interrelated. judgment of a reasonable person.
C. Information about financial position and past performance is frequently used as D. All of these are correct statements about materiality.
basis for predicting future financial position and performance and other matters
such as dividend and wage payments, security price movements and the ability 6. Materiality (choose the incorrect one)
of the enterprise to meet its commitments when they fall due. A. Depends on the size and nature of an item judged in the particular circumstances
D. The relevance of information is affected by its nature and materiality. of its omission.
B. Provides that the specific disclosure requirements of the ASC standards must be
Materiality (Para. 29 to 30) met even if the resulting information is not material.
8. A decision to expense rather than capitalize the cost of a new trash can could be C. Means that an information is material if its nondisclosure could influence the
defended based on economic decisions of users taken on the basis of the financial statements.
A. Reliability C. Monetary unit D. Requires that immaterial amounts should be aggregated with amounts of a
B. Materiality D. Substance over form similar nature or function and need not be presented separately.
5. The relevance of information is affected by its nature and materiality. Which is not Reliability (Para. 31 to 32)
valid concerning materiality? Faithful Representation (Para. 33 to 34)
A. Information is material if its omission or misstatement could influence the Substance over Form (Para. 35)
economic decision of users 6. If information is to represent faithfully the transactions and other events that it
B. Materiality depends on the size of the item or error judged in the particular purports to represent, it is necessary that they are accounted for and presented in
circumstances of its omission or misstatement accordance with their substance and economic reality and not merely their legal form
A. Faithful representation C. Completeness 17. The conservative approach in the measurement of financial position is best illustrated
B. Neutrality D. Substance over form in which of the following?
A. Arbitrary reduction of property items to report a conservative asset position.
40. Estimating and recording interest for a long-term note that has no stated interest rate B. Recognition of fictitious liabilities
is an example of C. Inventories valued at cost or market, whichever is lower
A. Substance over form C. Conservatism D. Intangible assets are valued at nominal amounts.
B. Verifiability D. Industry practices
7. Under the concept of conservatism, uncertainties that surround the preparation of
Neutrality Para. 36) financial statements are reflected in a general tendency toward early recognition of
17. Which of the following concepts means that there should be no attempt on the part of unfavorable events and the minimization of the amounts of net assets and net
the preparers of financial reports to induce a predetermined outcome or a particular income. Accordingly,
mode of behavior? A. A provision for a temporary decline in value of a security not listed in the stock
A. Verifiability C. Representational faithfulness exchange is recognized
B. Neutrality D. Consistency B. A liability is accrued for a guarantee of the indebtedness of others.
C. Losses on a long-term construction-type contract are recognized in full as soon
7. Neutrality is an ingredient of as they become evident.
I. Reliability D. A dollar-denominated note payable is adjusted for a peso devaluation that occurs
II. Relevance after the balance sheet date.
B. II only D. Neither I nor II 11. When in doubt, a decision to measure an asset lower rather than higher is an
example of
Prudence (Conservatism) (Para. 37) A. Disclosure C. Materiality
6. It is the exercise of care and caution in dealing with uncertainties in measurement so B. Conservatism D. Industry practices
as not to overstate assets and income and not understate liabilities and expenses.
A. Completeness C. Faithful representation Completeness (Para. 38)
B. Prudence D. Neutrality Comparability (Para. 39 to 42)
11. According to the conceptual framework, which of the following relates to both
7. Prudence means that relevance and reliability?
A. Transactions and other events are accounted for and prepared in accordance A. Comparability C. Faithful representation
with their substance and economic reality and not merely their legal form. B. Feedback value D. Timeliness
B. The information contained in the financial statements must be free from bias.
C. A degree of caution in the exercise of judgment is needed in making an estimate 9. When information about two different enterprises has been prepared and presented
required under conditions of uncertainly such that assets or income are in a similar manner, the information exhibits the characteristic of
overstated and liabilities or expenses are understated. A. Relevance C. Consistency
D. A degree of caution in the exercise of judgment is needed in making an estimate B. Reliability D. Comparability
required under conditions of uncertainty such that assets or income are not
overstated and liabilities or expenses are not understated. 9. To achieve the quality of comparability
I. Users must be able to compare the financial statements of an enterprise through
time in order to identify trends in its financial position and performance. when more relevant and reliable alternatives exist.
II. Users must be able to compare the financial statements of different enterprises D. It is important that financial statements show information for the preceding period
in order to evaluate their relative financial position, performance and changes in because users wish to compare financial position, performance and cash flows of
financial position. an enterprise over time.
B. II only D. Neither I nor II Consistency
12. The fact that investors and creditors compare financial statement variables over time
15. The following statements relate to the qualitative characteristic of comparability. supports
Which statements is incorrect? A. Consistency C. Monetary unit
A. Users must be able to compare the financial statements of an enterprise through B. Revenue realization D. Matching
time in order to identify trends in its financial position and performance.
B. Users must also be able to compare the financial statements of different 23. It is the presentation and classification of financial statement items on a uniform basis
enterprises in order to evaluate their relative financial position, performance and from one accounting period to the next.
changes in financial position. A. Comparable information C. Aggregation
C. The need for comparability should not be confused with mere uniformity and B. Consistency of presentation D. Accrual basis
should not be allowed to become an impediment to the introduction of improved
accounting standards. 11. The consistency standard of reporting requires that
D. It is appropriate for an enterprise to leave its accounting policies unchanged A. Expenses be reported as charges against the period which they are incurred.
when relevant and reliable alternatives exist. B. The effect of changes in accounting upon income be property disclosed.
C. Extraordinary gains and losses should not appear on the income statement.
7. The following statements relate to the qualitative characteristic of comparability. D. Accounting procedures be adopted which give consistent rate of return.
Which is not valid?
A. Users must be able to compare the financial statements of an enterprise through 33. The term “consistency” implies that
time in order to identify trends in its financial position and performance A. Business entity may not switch to alternative accounting policy once an
B. Users must be able to compare the financial statements of different enterprises accounting policy is established
in order to evaluate their relative financial position, performance and cash flows B. Business entity must disclose defensible changes in accounting policies
C. An important implication of the qualitative characteristic of comparability is that C. Business entity must apply the same depreciation method to all classes of assets
users are informed of the accounting policies employed, any changes in those D. All firms in a particular industry must agree to the same basic accounting policies
policies and the effects of such changes
D. It is appropriate for an enterprise to leave its accounting policies unchanged even 8. Consistency is an important factor in comparability within a single enterprise. The
when more relevant and reliable alternatives exist consistency standard of reporting requires that
A. Some costs should be recognized as expenses on the basis of a presumed
5. Which is incorrect concerning comparability of financial information? direct association with specific revenue.
A. Users must be able to compare the financial statements of an enterprise through B. Assets whose prices or utility are increased by external events other than
time in order to identify trends in its financial position and performance. transfers should be retained in the accounting records at their recorded amounts
B. Users must be able to compare the financial statements of different enterprises until they are exchanged.
in order to evaluate their relative financial position, performance and cash flows. C. Historical cost should be the primary basis used in measuring inventory,
C. It is appropriate for an enterprise to leave its accounting policies unchanged property, plant and equipment.
D. Changes in circumstances or in the nature of the underlying transactions should A. Financial statements are issued in nine months late
be disclosed. B. Data on segments having the same expected risk and growth rates are reported
to analysts estimating future profits.
25. Financial information exhibits the characteristic of consistency when C. Management reports to stockholders regularly refer to new projects undertaken
A. Expenses are reported as charges against revenue in the period in which they but the financial statements never report project results
are paid. D. Financial statements include property with carrying amount increased to
B. Accounting entities give accountable events the same accounting treatment from management’s estimate of market value.
period to period.
C. Extraordinary gains and losses are not included on the income statement. 4. The reliability of accounting information depends on the following except
D. Accounting procedures are adopted which give a consistent rate of net income. A. The information must be complete within the bounds of materiality and cost.
B. The financial statements must be free from bias, meaning the financial
Comprehensive information should not favor one party to the detriment of another party.
8. Which one of the following is not an ingredient of reliability? C. The information should reflect the legal form of the transactions rather than their
A. Faithful representation C. Understandability economic substance
B. Substance over form D. Prudence D. Prudence is the inclusion of a degree of caution in the exercise of judgment
needed in making an estimate required under conditions of uncertainty, such that
9. Which of the following has the primary responsibility for the reliability of information assets or income are not overstated and liabilities or expenses are not
presented in a company’s financial statements? understated.
A. The company’s management
B. The company’s internal audit staff 4. Qualitative characteristics are the attributes that make the information provided in
C. The company’s internal management accounts financial statements useful to users. The qualitative characteristics are
D. The company’s external accounts A. Relevance, reliability, understandability and comparability
B. Relevance, reliability, understandability and consistency
18. The following statements relate to the qualitative characteristic of reliability. Which C. Relevance and reliability
statement is incorrect? D. Understandability and comparability
A. If the information is to represent faithfully the transactions and other events that it
purports to represent, it is necessary that they are accounted for and prepared in 1. Which statement is true concerning the qualitative characteristics of financial
accordance with their substance and economic reality and not merely their legal accounting?
form. A. Accountants have a responsibility to simplify financial statements so that the
B. The information contained in the financial statements must be neutral, that is, information will be understandable to all users.
free from bias. B. Measures that have a higher degree of verifiability are also likely to be highly
C. Prudence is the inclusion of a degree of caution in the exercise of the judgment relevant.
needed in making an estimate required under conditions of uncertainty, such that C. Accounting information, which is verifiable, representationally faithful, and
assets or income are overstated and liabilities or expenses are understated. neutral, is considered relevant.
D. The information in financial statements must be complete within the bounds of D. Information loses its relevance if it is not timely.
materiality and cost.
2. Which statement is incorrect concerning the qualitative characteristics?
9. Which of the following situations violates the concept of reliability? A. The qualitative characteristics are the attributes that make the information
provided in the financial statements useful to the users. B. To provide information on a timely basis, it may often be necessary to report
B. Users are assumed to have a reasonable knowledge of business and economic before all aspects of a transaction or other events are known, thus impairing
activities and a willingness to study the information with reasonable diligence. reliability.
C. Users are informed of the accounting policies employed in the preparation of C. In achieving a balance between relevance and reliability, the overriding
statements, any changes in those polices and the effects of such changes. consideration is how best to satisfy the economic decision-making needs of
D. The predictive and confirmatory roles of relevant information are not interrelated. users.
D. The benefits derived from information should exceed the cost of providing it.
Constraints on Relevant and Reliable Information
Timeliness (Para. 43) 8. Which statement is incorrect concerning the constraint on relevant and reliable
Balance between Benefit and Cost (Para. 44) information?
12. According to the ASC Framework, the usefulness of providing information in financial A. Information may be relevant but so unreliable in nature or representation that its
statements is subject to the constraint of recognition may be potentially misleading
A. Consistency C. Reliability B. In achieving a balance between relevance and reliability, the overriding
B. Cost and benefit D. Relevance consideration is how best to satisfy the economic decision making needs of
users
Balance between Qualitative Characteristics (Para. 45) C. The balance between benefit and cost is a pervasive constraint which means
12. Tradeoffs between the characteristics that make information useful may be necessary that the benefits derived from the information should exceed the cost of providing
or beneficial. Issuance of interim financial statements is an example of a tradeoff it
between D. If there is undue delay in the reporting of information it may lose its relevance
A. Relevance and reliability C. Timeliness and materiality and reliability
B. Reliability and periodicity D. Understandability and timeliness
10. The following statements pertain to constraints on relevant and reliable information.
13. Allowing firms to estimate rather than physically count inventory at interim periods is Which statement is incorrect?
an example of a tradeoff between A. In practice, a balancing or tradeoff between qualitative characteristics is often
A. Verifiability and reliability C. Timeliness and verifiability necessary.
B. Reliability and comparability D. Neutrality and consistency B. In achieving a balance between relevance and reliability, the overriding
consideration is how best to satisfy the economic decision-making need of users.
Comprehensive C. The balance between benefit and cost is a qualitative characteristic rather than a
10. Which of the following are considered pervasive constraints? pervasive constraint.
A. Cost-benefit relationship and conservatism D. If there is undue delay in the reporting of information it may lose its relevance.
B. Timeliness and feedback value
C. Conservatism and verifiability True and Fair View/Fair Presentation (Para. 46)
D. Materiality and cost-benefit relationship Comprehensive
17. The following statements relate to the constraints on relevant and reliable information. The Elements of Financial Statements (Para. 47 to 48)
Which statement is incorrect? 19. Financial statements portray the financial effects of transactions and other events by
A. If there is undue delay in the reporting of information it may lose its relevance grouping them into broad classes according to their economic characteristics. These
and reliability. broad classes are termed the
A. Elements of financial statements. D. Recognized when paid for,

B. Basic features of financial accounting and financial statements.
C. Chart of accounts. 13. According to the conceptual framework, which of the following is an essential
D. Audit reports. characteristic of an asset?
A. The claims to an asset’s benefits are legally enforceable.
Financial Position (Para. 49 to 52) B. An asset is tangible.
14. The elements of financial position do not include C. An asset is obtained at a cost.
A. Assets C. Liabilities D. An asset provides future benefits.
B. Owners equity D. Financing activities
15. The essence of an asset to an enterprise is the existence of
Assets (Para. 53 to 59) A. Ownership of the asset by the enterprise
13. The potential of an asset to contribute directly or indirectly to the flow of cash and B. Probable future economic benefits to the enterprise
cash equivalent to the enterprise may C. The ability of the enterprise to sell the asset, either alone or with other assets
I. Be a productive one that is part of the operating activities of the enterprise. D. A historical cost for the asset incurred by the enterprise
II. Take the form of convertibility into cash and cash equivalents
III. Take the form of a capability to reduce cash outflows such as when an 9. Which is not an essential characteristic of an asset?
alternative manufacturing process lowers the costs of production A. The asset is controlled by the enterprise
A. I only C. III only B. The asset is the result of a past transaction or event
B. II only D. I, II and III C. The asset provides future economic benefits
D. The cost of the asset can be measured reliably and must be paid for
5. It is a resource controlled by the enterprise as a result of past events and transactions
and from which future economic benefits are expected to flow to the enterprise. 6. Which statement is incorrect concerning asset?
A. Asset C. Equity A. The future economic benefit embodied in an asset is the potential to contribute
B. Liability D. Revenue directly or indirectly to the flow of cash and cash equivalent to the enterprise.
B. The potential of an asset may be a productive one that is part of the operating
1. Which of the following is not among the economic resources of a business activities of the enterprise, take the form of convertibility into cash or cash
enterprise? equivalents, or capability to reduce cash outflows, such as when an alternative
A. Money C. Obligations to pay money manufacturing process lowers the costs of production.
B. Products or output of the enterprise D. Ownership interest in other C. An asset is a resource controlled by the enterprise as a result of past events and
enterprises from which future economic benefits are expected to flow to the enterprise.
D. An asset is recognized when it is possible that future economic benefits will flow
20. An asset is to the enterprise and the asset has a cost or value that can be measured reliably.
A. A resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise. 10. The following statements relate to the concept of asset. Which is false?
B. A present obligation of the enterprise arising from past events, the settlement of A. The primary characteristic of an asset is its capacity to provide the enterprise
which is expected to result in an outflow from the enterprise of resources with probable economic benefits.
embodying economic benefits. B. There is an expiration of economic benefits when an asset is used up in the
C. The residual interest in the enterprise. production of another asset.
C. A business entity may recognize an asset even if it does not possess legal title. I. Settlement of a present obligation may occur in a number of ways, for example,
D. The assets of an enterprise result from past transactions or other past events by payment of cash, transfer of other assets, provision of services, replacement
of that obligation with another obligation, or conversion of the obligation to equity.
Liabilities (Para. 60-64) II. An obligation may also be extinguished by other means, such as a creditor
1. Liabilities are present obligations which represent waiving or forfeiting its rights.
A. Any accounts having credit balances after closing entries are made. A. I only C. Both I and II
B. Deferred credits that are recognized and measured in conformity with GAAP. B. II only D. Neither I nor II
C. Obligations to transfer ownership shares to other entities in the future.
D. Both legal and constructive obligations. 4. The following statements relate to present obligations. Which statement is incorrect?
A. A legal obligation is an obligation arising from contract, legislation or operation of
15. Which statement is correct concerning liabilities? law
I. A decision by management of an enterprise to acquire an asset in the future in B. A constructive obligation is an obligation derived from an enterprise’s action that
itself does give rise to a present obligation. the enterprise will accept certain responsibilities because of past practice,
II. Obligations may be legally enforceable as a consequence of a binding contract published policy or current statement and as a result the enterprise has created a
or statutory requirement. valid expectation in other parties that it will discharge those responsibilities
A. I only C. Both I and II C. The event that creates a legal or constructive obligation because the enterprise
B. II only D. Neither I nor II has no other realistic alternative but to settle the obligation is known as past
event.
71. It is an event that creates a legal or constructive obligation because the enterprise D. The term “probable” means that the probability of the event occurring is greater
has no other realistic alternative but to settle the obligation that the probability of the event not occurring.
A. Obligation event C. Subsequent event
B. Past event D. Current event 11. Which statement is incorrect concerning the concept of an accounting liability?
A. An essential characteristic of a liability is that the enterprise has a present
21. For a liability to exist obligation
A. There must be a past transaction or event. B. A liability results from past transaction or other past event
B. The exact amount must be known. C. Some liabilities can be measured only by using a substantial degree of
C. The identity of the party to whom the liability is owed must be known. estimation
D. There must be an obligation to pay cash in the future. D. A decision by the management of an enterprise to acquire an asset in the future
in itself gives rise to a present obligation
12. Liabilities are economic obligations of an enterprise and include
A. Stock dividends declared but not yet issued 22. The following statements pertain to liabilities. Which statement is incorrect?
B. Guarantees of the indebtedness of others A. An essential characteristic of a liability is that the enterprise has a present
C. Purchase commitments obligation.
D. Obligations where the amount is an estimate and the payees are uncertainty B. Obligations may be legally enforceable as a consequence of a binding contract
statutory requirement.
11. The settlement of a present obligation usually involves the enterprise giving up C. If an enterprise decides as a matter of policy to rectify faults in its products even
resources embodying economic benefits to satisfy the claim of the other party. Which when these become apparent after the warranty period has expired, the amounts
statement is correct? that expected to be expanded in respect of goods already sold are liabilities.
D. A decision by the management of an enterprise to acquire assets in the future in A. I only C. Both I and II
it does give rise to a present obligation. B. II only D. Neither I nor II
Equity (Para. 65 to 68) 14. Conceptually, an entity’s revenue may result from
13. What theory of ownership equity is enumerated by the following equation: assets A. A decrease in an asset from primary operations
minus liabilities minus preferred stock equity equals common stock equity? B. An increase in an asset from incidental transactions
A. Fund C. Proprietary C. An increase in a liability from incidental transactions
B. Enterprise D. Residual equity D. A decrease in a liability from primary operations
Liabilities vs. Equity 14. The following statements relate to the concept of "revenue." Which statement is not
13. Which of the following is a characteristic of liabilities rather than of equity? true?
A. The capital providers' claims are residual in the event of liquidation of the A. Income determination is a technical term that refers to the process of identifying,
business measuring and relating revenue and expenses during an accounting period.
B. The capital providers normally have the right to exercise control over business B. Transactions like issuance of capital stock and payment of dividends between
operations the business entity and its owners cannot give rise to revenue.
C. The capital providers frequently are entitled to receive interest payments C. Deferred revenue is not synonymous with unrealized revenue.
D. The obligation of the capital providers does not mature D. The definition of revenue encompasses both income and gains.
Liabilities & Equity Revenues and gains

22. Liabilities and owners’ equity are similar in that 14. In classifying the elements of financial statements, the primary distinction between
A. Both provide certain amounts of payments in the form of interest and dividends revenues and gains is
respectively based upon written agreements. A. The materiality of the amounts involved.
B. Both provide specific timing of payments as a result of specific maturity dates. B. The likelihood that the transactions involved will recur in the future.
C. Both creditors and stockholders are equity holders, although they have different C. The nature of the activities that give rise to the transactions involved.
rights with respect to income, risk, control, and liquidation. D. The costs versus the benefits of the alternative methods of disclosing the
D. Both liabilities and owners’ equity are ranked equally when an enterprise’s assets transactions involved.
are distributed.
Earnings
Performance (Para. 69 to 73) 15. According to the ASC conceptual framework, the term "earnings”
Income (Para. 74 to 77) A. Is the same as comprehensive income.
Revenue B. Excludes certain gains and josses that are included in comprehensive income.
10. Revenue is C. Includes certain gains and losses that are excluded from comprehensive income.
I. Gross inflow of economic benefits during the period arising in the ordinary course D. Includes certain losses that are excluded from comprehensive income.
of ordinary activities of an enterprise when such inflow results in an increase in
equity, other than contribution from owners. Expenses (Para. 78 to 80)
II. Gross outflow of economic benefits during the period in the ordinary course of 24. An outflow of assets from an entity based on activity that represents the entity’s major
ordinary activities when such outflow results in a decrease in equity, other than operations is called
distribution to owners. A. Loss C. Expense
B. Liability D. Equity C. Expense is synonymous with expenditure.

D. Business enterprises do not incur expenses per se but they initially acquire
15. Gross decreases in assets or gross increases in liabilities recognized and measured assets.
in conformity with generally accepted accounting principles that result' from those
types of profit-directed activities of an enterprise that can change owners' equity refer Loss
to 18. An expiration of cost which is incurred without compensation or return and not
A. Expenses C. Revenue absorbed as cost of revenue is called
B. Results of operations D. Net income A. Deferred credit C. Loss
B. Deferred charge D. Indirect cost
5. It is a decrease in economic benefit during the accounting period in the form of
outflow or decrease of asset or increase of liability that results in decrease in equity 16. A decrease in net assets arising from peripheral or incidental transactions is called
other than distribution to equity participants. A. Capital expenditure C. Loss
A. Income C. Net income B. Cost D. Expense
B. Expense D. Gain
Income and Expenses
6. The following expenditures should be expensed when incurred, except 12. The elements directly related to the measurement of performance are income and
A. Expenditure on start up activities expenses. Which statement is correct?
B. Expenditure on training activities I. Income is increases in economic benefits during the accounting period in the
C. Expenditure on advertising and promotional activities form of inflows or enhancements of assets, or decreases of liabilities that result
D. Payment in advance of delivery of goods or the rendering of services in increases in equity, other than those relating to contributions from equity
participants.
13. The following statements relate to the concept of expenses. Which statement is II. Expenses are decreases in economic benefits during the accounting period in
incorrect? the form of outflows or depletions of assets or increases in liabilities that result in
A. The definition of expenses encompasses losses as well as those expenses that decreases in equity, other than those relating to distributions to equity
arise in the course of ordinary activities of the enterprise. participants.
B. Expenses that arise in the course of ordinary activities of the enterprise include, A. I only C. Both I and II
for example cost of sales, wages and depreciation. B. II only D. Neither I nor II
C. Losses include those arising from disasters such as fire and flood, but not those
arising on the disposal of noncurrent assets. 12. Profit is frequently used as a measure of performance and the elements directly
D. Losses represent decreases in economic benefits and as such they are no related to the measurement of profit are income and expenses. Which statement is
different in nature from other expenses. correct concerning concept of income and expenses?
A. The terms income, revenue and gains are technically the same
16. The following statements relate to the concept of "expense," which of the following is B. Income arises in the course of ordinary activities of an enterprise and is referred
false? to by a variety of different names including sales, fees, interest, dividends,
A. All expenses and losses are expired costs, but not all expired costs are royalties and rent.
expanses or losses. C. Expenses encompass only expenses that arises in the course of ordinary
B. All expenses decrease owners' equity, but not all decreases in owners' equity are activities of the enterprise
expenses. D. Losses represent other items that meet the definition of expenses and may or
may not arise in the course of ordinary activities of the enterprise B. The event or item is relevant and reliable.
C. The event or item is an element.
Capital Maintenance Adjustments (Para. 81) D. All of these must be met.
Comprehensive
28. The following statements refer to the elements directly related to the measurement of 17. Under generally accepted accounting principles
performance. Which statement is incorrect? A. Income and expenses, assets and liabilities are measured based on the
A. The definition of revenue encompasses both income and gains. occurrence of changes in the economic resources and obligations.
B. The definition of expenses encompasses losses as well as those expenses that B. Assets and liabilities are measured on the basis of their liquidation values
arise in the course of ordinary activities of the enterprise. C. Income and expenses are recognized on the basis of cash receipts and
C. Gains represent other items that meet the definition of income and may or may payments, including depreciation of property, plant and equipment.
not arise in the course of ordinary activities. D. Financial position and results of operations are measured on the basis of cash
D. Losses represent other items that meet the definition of expenses and may or received and cash paid.
may not arise in the ordinary course of ordinary activities.
Recognition of Assets (Para. 89 to 90)
Recognition of the Elements of Financial Statements (Para. 82 to 84) Recognition of Liabilities (Para. 91)
19. According to the conceptual framework, the process of reporting an item in the Recognition of Income (Para. 92 to 93)
financial statements of an entity is 13. Income is recognized when it is probable that
A. Allocation C. Realization A. The future economic benefits will flow to the enterprise and the asset has a cost
B. Matching D. Recognition or value that can be measured reliably.
B. An outflow of resources embodying economic benefits will result from the
11. It is the process of incorporating in the balance sheet or income statement an item settlement of a present obligation and the amount at which the settlement will
that meets the definition of an element of financial statement take place can be measured reliably.
A. Measurement C. Allocation C. An increase in future economic benefits related to an increase in an asset or a
B. Realization D. Recognition decrease in a liability has arisen and can be measured reliably.
D. A decrease in future economic benefits related to a decrease in an asset or an
The Probability of Future Economic Benefit (Para. 85) increase in liability has arisen and can be measured reliably.
Reliability of Measurement (Para. 86 to 88)
26. When an item that meets the definition of an element of financial statements has a 20. When products, merchandise, or other assets are exchanged for cash or claims to
relevant attribute measurable with sufficient reliability, and is both relevant and cash" is a definition of
reliable, the item would ordinarily A. Allocated C. Realizable
A. Be recognized. B. Realized (?) D. Earned
B. Be reported in financial statements or in related notes.
C. Be reported in financial statements, related notes, or the auditor’s report. 27. Which of the following represents the least desirable choice in terms of realization
D. Not be reported in financial statements. and recognition of revenue?
A. Recognition of revenue during production
21. Which of the following criteria must be met before an event or item should be B. Recognition of revenue when a sale occurs
recorded for accounting purposes? C. Recognition of revenue when cash is collected
A. The event or item can be measured objectively in financial terms. D. Recognition of revenue when production is completed
17. Conceptually, which of the following statements conforms to the realization concept? Basis for Cost Allocation
A. Equipment depreciation was assigned to a production department and then to 13. Which of the following is not a theoretical basis for the allocation of expense?
product unit cost. A. Summarization C. Profit maximization
B. Depreciated equipment was sold in exchange for a note receivable. B. Classification D. Immediate recognition
C. Cash was collected on accounts receivable.
D. Product unit costs were assigned to cost of goods sold when the units were sold. Associating Cause & Effect
24. The accounting principle of matching is best demonstrated by
Recognition of Expenses (Para. 94 to 98) A. Not recognizing any expense unless some revenue is realized.
24. This process involves the simultaneous or combined recognition of revenues and B. Associating effort with accomplishment.
expenses that result directly or jointly from the same transactions or other events on C. Recognizing prepaid rent received as revenue.
the basis of direct association between the costs incurred and the earning of specific D. Establishing an appropriation for contingencies account
items of income.
A. Matching of costs with revenues. C. Immediate recognition. 38. Which accounting principle is being observed when an accountant changes to
B. Systematic and rational allocation. D. Realization. expense a cost that contributed to revenues during a period?
A. Revenue realization C. Monetary unit
13. Which statement is incorrect concerning recognition of expenses? B. Matching D. Conservatism
A. Expenses are recognized when an increase in future economic benefit related to
an increase in an asset on a decrease in a liability has arisen that can be 12. This process involves the simultaneous or combined recognition of revenues and
measured reliably expenses that result directly and jointly from the same transactions or other event on
B. Expenses are recognized on the basis of a direct association between costs the basis of direct association between the costs incurred and the earning of specific
incurred and the earning of specific items of income items of income.
C. An expense is recognized immediately when an expenditure produces no future A. Matching of costs with revenue C. Systematic and rational allocation
economic benefits or when future economic benefits do not qualify or cease to B. Matching of revenue with costs D. Immediate recognition
qualify for asset recognition
D. An expense is also recognized in those cases when a liability is incurred without 18. When cost can be reasonably associated with specific revenue but not with specific
the recognition product, the cost should be
A. Expensed in the period incurred
49. An exception to the general rule that costs should be charged to expense in the B. Allocated to the specific product based on the best estimate of the product
period incurred is processing time
A. Factory overhead costs incurred on a product manufactured but not sold during C. Expensed in the period in which the related revenue is recognized
the current accounting period. D. Capitalized and then amortized over a reasonable period
B. Interest costs for financing of inventories that are routinely manufactured in large
quantities on a repetitive basis: Systematic & Rational Allocation
C. General and administrative fixed costs incurred in connection with the purchase 17. When economic benefits are expected to arise over several accounting periods and
of inventory. the association with income can only be broadly or indirectly determined, expenses
D. Safes commission and salary costs incurred in connection with the sale of are recognized in the income statement on the basis of
inventory. A. Cause and effect association C. Immediate recognition
B. Systematic and rational allocation D. Profit maximization A. Telephone expenses C. Cost of merchandise sold
B. Sales commissions D. Transportation in
18. It is the simultaneous or combined recognition of revenues and expenses that result
directly and jointly from the same transactions or other events on the basis of direct 16. Some costs cannot be directly related to particular revenue but are incurred to obtain
association between costs incurred and the earnings of specific items of income. benefits that are exhausted in the period in which costs are incurred. An example of
A. Profit C. Systematic and rational allocation such costs is
B. Immediate recognition D. Matching of costs with revenue A. Sales commissions C. Freight in
B. Sales salaries D. Prepaid insurance
7. An application of the matching principle where there is no direct or clear association
of the expense with the revenue earning process and therefore costs are simply Comprehensive
allocated over the periods benefited. 25. The following statements relate to the recognition of the elements of the financial
A. Cause an effect association C. Immediate recognition statements. Which statement is correct?
B. Systematic and rational association D. Depreciation and amortization A. As asset is recognized when it is possible that future economic benefits will flow
to the enterprise and the asset has a cost or value that can be measured reliably.
15. Which of the following principles best describes the conceptual rationale for the B. A liability is recognized when it is possible that an outflow of resources
method of matching depreciation with revenue? embodying economic benefits will result from the settlement of a present
A. Associating cause and effect C. Immediate recognition obligation that can be measured reliably.
B. Systematic and rational allocation D. Partial recognition C. Income is recognized when increase in future economic benefits related to a
decrease in asset or an increase in liability has arisen that can be measured
36. The recognition of depreciation expense is an example of reliably.
A. Direct matching C. Asset valuation D. Expenses are recognized when a decrease in future economic benefits related to
B. Systematic and rational allocation D. Immediate recognition a decrease in an asset or an increase in a liability has arisen that can be
measured reliably.
Immediate Recognition
14. An expense is recognized immediately in the income statement Measurement of the Elements of Financial Statements (Para. 99 to 101)
I. When an expenditure produces no future economic benefits 27. It is the process of determining the monetary amounts at which the elements of the
II. When cost incurred ceases to qualify for recognition as an asset in the balance financial statements are to be recognized and carried in the balance sheet and
sheet. income statement.
A. I only C. Both I and II A. Summarization. C. Measurement.
B. II only D. Neither I nor II B. Recognition. D. Accrual.
36. The costs of selling and administration in a manufacturing firm are an example of 21. It is the process of determining the monetary amounts at which the elements of the
A. Direct matching C. Asset valuation financial statements are to be recognized and carried in the balance sheet and
B. Systematic and rational allocation D. Immediate recognition income statement.
A. Measurement C. Matching
37. Some costs cannot be directly related to particular revenues but are incurred to B. Realization D. Prudence
obtain benefits in the period in which the costs are incurred. An example of such cost
is 16. The measurement basis used in preparing the financial statements includes
A. Historical cost only A. Conservatism C. Relevance

B. Historical cost and current cost B. Objectivity D. Comparability
C. Historical cost, current cost and realizable value
D. Historical cost, current cost, realizable value and present value 19. Proponents of historical cost ordinarily maintain that in comparison with all other
valuation alternatives for general purpose financial reporting, statements prepared
Historical Cost using historical costs are more
22. Historical cost means that assets are recorded at the A. Reliable C. Indicative of the entity's
A. Discounted value of the future net cash flows from the use of an asset purchasing power
B. Amount of cash or cash equivalents that could currently be obtained from the B. Relevant D. Conservative
sale of an asset in an orderly disposal.
C. Amount of cash or cash equivalents that would have to be paid if the same asset 30. Valuing assets at their liquidation values rather than their cost is inconsistent with the
was acquired currently. A. Periodicity assumption C. Materiality constraint
D. Amount of cash or cash equivalents paid, or the fair value of the consideration B. Matching principle D. Historical cost principle
given to acquire them at the time of acquisition.
Current Cost
10. The measurement basis most commonly adopted by enterprises in recording its 12. Current cost is the
assets is A. Amount of cash paid or fair value of the consideration given at the time of
A. The amount of cash or cash equivalents that would have to be paid if the same acquisition.
or an equivalent asset was acquired currently. B. Amount of cash that would have to be paid if the same or an equivalent asset is
B. The amount of cash and cash equivalents that could currently be obtained by acquired currently.
setting the asset in an orderly disposal. C. Amount of cash that could currently be obtained by selling the asset in an orderly
C. The amount of cash or cash equivalents paid or the fair value of the disposal.
consideration given to acquire them at the time of their acquisition. D. Discounted value of the future net cash inflows that the item is expected to
D. The present discounted value of the future net cash inflows that the item is generate in the normal course of business.
expected to generate in the normal course of business.
16. What is the measurement basis when assets are carried at the amount of cash or
30. The primary measurement basis currently used to value assets in general purpose cash equivalents that would have to be paid if the same or an equivalent asset was
financial statements of an enterprise is acquired currently.
A. The current market price if the assets currently held by an enterprise were sold A. Present value C. Current cost
on the open market. B. Realizable value D. Historical cost
B. The current market price if the assets currently held by an enterprise were
purchased on the open market. Realizable (Settlement) Value
C. The present value of the cash flows assets are expected to generate over their 20. Realizable value is the
remaining useful lives. A. Amount of cash or cash equivalent paid or the fair value of the consideration
D. The market price of the assets at the date the assets were acquired. given.
B. Amount of cash or cash equivalent that would have to paid if the same or an
11. Which of the following accounting theory justifies the use of historical cost in the equivalent asset was acquired currently.
preparation of financial statements? C. Amount of cash or cash equivalent that could currently be obtained by the selling
the asset in an orderly disposal. C. Productive capacity or operating capability of the enterprise (resources or funds
D. Discounted value of the future net cash inflows that an item is expected to to achieve that capacity)
generate in the normal course of business. D. Net assets or equity of the enterprise (money invested or invested purchasing
power)
14. A number of different measurement bases are employed to different degrees and un
varying combinations in financial statements. Which measurement basis means that 23. The financial capital concept means that a profit is earned only if
the assets are carried at the amount of cash or cash equivalent that could currently A. The physical productive capacity at the end of the period exceeds the physical
be obtained by selling the asset in an orderly disposal? productive capacity at the beginning of the period, after excluding distributions to
A. Realizable (settlement) value C. Current cost and contributions from owners.
B. Present value D. Historical cost B. The financial amount of the net assets at the end of the period exceeds the
financial amount of net assets at the beginning of the period, after excluding any
Present Value distributions to and contributions from owners during the period.
9. This measurement basis is the discounted value of future net cash inflows that an C. The physical productive capacity at the end of the period exceeds the physical
asset is expected to generate in the normal course of business. productive capacity at the beginning of the period.
A. Historical cost C. Realizable value D. The financial amount of net assets at the end of the period exceeds the financial
B. Current cost D. Present value amount of net assets at the beginning of the period.
31. Which of the following financial attributes of assets is generally considered to be the 30. Under the financial capital maintenance concept, a profit is earned only if
most relevant? A. The financial amount of net assets at the end of the period exceeds the financial
A. Present value C. Current cost amount of net assets at the beginning of the period.
B. Current exit value D. Historical cost B. The financial amount of the net assets at the beginning of the period exceeds the
financial amount of the net assets at the end of the period.
Concepts of Capital & Capital Maintenance C. The financial amount of the net assets, at the end of the period exceeds the
Concepts of Capital (Para. 102 to 103) financial amount of net assets at the beginning of the period, after excluding any
29. The following statements relate to the two concepts of capital. Which statement is distributions to and contributions from owners during the period.
correct? D. The financial amount of the net assets at the beginning of the period exceeds the
I. Under a financial concept, such as invested money or invested purchasing financial amount of net assets at the end of the period, after excluding
power, capital is synonymous with the net assets or equity of the enterprise. distributions to and contributions from owners during the period.
II. Under a physical concept, such as operating capability, capital is regarded as the
productive capacity of the enterprise. 13. Under the financial capital maintenance concept, a profit is earned only
A. I only. C. I and II. I. If the monetary amount of the net assets at the end of the period exceeds the
B. II only. D. Neither I nor II. monetary amount of the net assets at the beginning of the period, after excluding
any distributions to and contributions from owners.
Concepts of Capital Maintenance and the Determination of Profit (Para. 104 to 110) II. If the physical productive capacity of the enterprise (resources or funds needed
Financial Capital Maintenance Concept to achieve that capacity) at the end of the period exceeds the physical productive
19. Under a financial capital concept, capital is synonymous with capacity at the beginning of the period, after excluding any distributions to and
A. Historical cost of all assets contributions from owners.
B. Current cost of all assets A. I only C. Both I and II
B. II only D. Neither I nor II contributions from owners during the period.

II. Under the physical capital concept, an income is earned if the physical
32. The following statements relate to the capital maintenance concept. Which statement productive capacity at the end of the period exceeds the physical productive
is incorrect? capacity at the beginning of the period, after excluding distributions to and
A. The physical capital maintenance concept requires the adoption of the historical contributions from owners during the period.
cost basis of measurement. A. I only C. Both I and II
B. In general terms, an enterprise has maintained its capital if it has as much capital B. II only D. Neither I nor II
at the end of the period as it had at the beginning of the period.
C. Under the financial capital maintenance concept when capital is defined in terms Comprehensive
of nominal monetary units, a profit represents the increase in nominal money 3. Which is incorrect concerning financial statements?
capital over the period. A. Financial statements are prepared and presented at least annually and are
D. Under the physical capital maintenance concept where capital is defined in terms directed toward the specific information needs of a wide range of users.
of physical productive capacity, profit represents the increase in that capital over B. The management of an enterprise has the primary responsibility for the
the period. preparation and presentation of the financial statements of the enterprise.
C. The objective of financial statements is to provide information about the financial
Physical Capital Maintenance Concept position, performance and changes in financial position of an enterprise that is
31. Under the physical capital maintenance concept, a profit is earned only if useful to a wide range of users in making economic decisions.
A. The physical productive capacity at the end of the period exceeds the physical D. Financial statements also show the results of the stewardship of management or
productive capacity at the beginning of the period, after excluding distributions to the accountability of management for the resources entrusted to it.
and contributions from owners during the period.
B. The physical productive capacity at the beginning of the period exceeds the 19. Which is incorrect concerning financial statements?
physical productive capacity at the end of the period, after excluding distributions A. Each component of the financial statements should be clearly identified
to and contribution from the owners during the period. B. The Board of Directors, in discharging its responsibilities, reviews and approves
C. The physical productive capacity at the beginning of the period exceeds the the financial statements before these are submitted to the stockholders of the
physical productive capacity at the end of the period. enterprise
D. The physical productive capacity at the end of the period exceeds the physical C. Comparative information should not be disclosed in respect of the previous
productive capacity at the beginning of the period. period for all numerical information in the financial statements
D. Financial statements should be clearly identified and distinguished from other
22. What is the basis of measurement under a physical capital maintenance concept? information in the published document
A. Historical cost C. Realizable value
B. Current cost D. Present value
Comprehensive
21. The following statements relate to the two concepts of capital. Which statement is
correct?
I. Under the financial capital concept, an income is earned if the financial amount
of net assets at the end of the period exceeds the financial amount of net assets
at the beginning of the period, after excluding any distributions to and
ASC SFAS No. 1

Introduction 2. Robbers stole from ABC Company 25 computers worth P500,000. The value of the
Financial Statements loss should be classified as
Financial Position – the Balance Sheet A. An exchange C. A cost
Changes in Financial Position – Income Statement B. A casualty D. A nonreciprocal transfer
Changes in Financial Position – Changes in Owners’ Equity
Changes in Financial Position – Other Statements 9. External events include all of the following, except
The Source of Financial Statements A. Sale of merchandise
The Environment of Financial Accounting B. Borrowing of money from the bank
Common & Special Needs C. Donation received from stockholder
The Organization of Economic Activity in Society D. Casualty caused by fire, flood, earthquake or other calamity.
Economic Activity in Individual Business Enterprise
Economic Resources Internal Events (Production, Casualties)
Economic Obligations 22. Which of the following is not an internal event
Residual Interest A. Depreciation
Relationship among … B. Using raw materials in the production process
20. The most appropriate equation for portraying the relationship of the assets, liabilities, C. Dividend declaration and subsequent payment
and owners’ equity of a corporation is D. All of these are internal transactions.
A. Assets – Liabilities = Owners’ Equity C. Assets = Restriction of
Assets Measuring Economic Activity
B. Assets = Liabilities + Owners’ Equity D. Liabilities = Assets - Measurement Problem
Owners’ Equity Exchange Prices
19. Four types of money prices are used in measuring resources in financial accounting.
Changes in … The type which uses such concepts as present value, discounted cash flow and value
Classification of Events in use is known as
External Events (Exchanges, Nonreciprocal Transfers) A. Price in a current purchase exchange C. Price based on future exchange
3. External events are those that affect the enterprise and in which other entities B. Price in past purchase exchange D. Price in a current sale exchange
participate. An example of external event is
A. Manufacture of a product out of raw materials. Objectives of Financial Accounting & Financial Statements
B. Loss of property due to flood. Basic Purpose
C. Issuance of a promissory note in settlement of an account Objectives of Particular Financial Statements
D. Transfer of goods from one department to another General Objectives
Statement of General Objectives
13. An example of revenue derived from a nonreciprocal transfer is Discussion of General Objectives
A. Compensation received as damages in a successful lawsuit. Qualitative Objectives
B. Appreciation of property. Relevance
C. Land acquired by donation. Understandability
D. Settlement of a liability at less than its book value. Verifiability
23. The characteristic that is demonstrated when a high degree of consensus can be by the doctrine that more information is always better than less
secured among independent measurers using the same measurement methods is B. Financial accounting information that meets the qualitative objectives of financial
A. Relevance C. Verifiability accounting also meets the reporting standard of adequate disclosure.
B. Reliability D. Neutrality C. Adequate disclosure is concerned not only with the kind of information contained
in financial statements but also with the manner in which that information is
8. The ability through consensus among measurers to ensure that information presented
represents what it purports to represent is an example, of the concept of D. The disclosure standard calls for financial reporting of any financial facts
A. Relevance C. Comparability significant enough to influence the judgment of an informed reader of the
B. Verifiability D. Feedback value statements.
32. Which concepts of accounting holds that, to the maximum extent possible, financial 26. Application of the full disclosure principle
statements should be based on arm’s length transactions? A. Is theoretically" desirable but not practical because the costs of complete
A. Revenue realization C. Monetary unit disclosure exceed the benefits.
B. Verifiability D. Matching B. Is violated when important financial information is buried in the notes to the
4. Objectivity is assumed to be achieved when an accounting transaction C. Is demonstrated by the use of supplementary information presenting the effects
A. Is recorded in a fixed amount of pesos of changing prices.
B. Involves the payment or receipt of cash D. Requires that the financial statements be consistent and comparable.
C. Involves an arm's length transaction between two independent parties
D. Allocates revenue or expenses in a rational and systematic manner Reliability
Achieving the Objectives
6. Which transaction indicates compliance with the concept of objectivity? Basic Features & Basic Elements of Financial Statements
A. The accounting transaction that furthers the objectives of the enterprise. Basic Features
B. The accounting transaction which involves the allocation of revenue or expense Accounting Entity
items in a rational and systematic manner. 16. When a parent and subsidiary relationship exists, consolidated financial statements
C. An arm's-length transaction between two independent parties. are prepared in recognition of
D. The accounting transaction which is promptly recorded in a fixed amount. A. Legal entity C. Stable monetary unit
B. Economic entity D. Time period
Neutrality
Timeliness 27. Preparation of consolidated financial statements when a parent-subsidiary
Comparability relationship exists is an example of the
Completeness A. Economic entity assumption C. Comparability characteristic
Consistency B. Relevance characteristic D. Neutrality characteristic
Regular Reporting Period
Adequate Disclosure 34. Which of the following statements regarding the economic entity assumption is most
5. The following statements relate to the standard of adequate disclosure. Which accurate?
statement is considered false? A. The economic entity assumption applies only to corporations and not to sole
A. In complying with the standard of adequate disclosure, accountants are guided proprietorships and partnerships.
B. The economic entity assumption does not apply to a segment of a firm (such as C. The enterprise will continue in operation for the foreseeable future and the
a division). enterprise has neither the intention nor the need to liquidate or curtail materially
C. The economic entity assumption recognizes the fiduciary responsibility of the scale of its operations
management to stockholders. D. The indefinite life of an enterprise is subdivided into accounting periods which
D. The economic entity assumption is irrelevant to decisions regarding the are usually of equal length for the purpose of preparing financial reports on
consolidation of several interrelated firms. financial position, performance and cash flows
11. Which of the following statements is incorrect? Measurement in terms of Money

A. The accounting theory, which explains well the accounting equation "Assets 12. One of the basic features of financial accounting is the direct measurement of
minus liabilities equals capital", is the proprietary theory. economic resources and obligations and changes in them in terms of
B. Under the entity theory, the major accounting effort is directed toward proper A. money and sociological and psychological impact
valuation of assets rather than income determination B. money.
C. Strict adherence to the entity concept would not allow a parent company to take C. money and sociological impact.
up in its books its proportionate share in the profits and losses of its subsidiaries. D. money and psychological impact.
D. Under the fund theory, assets represent prospective services to the fund,
liabilities represent restriction against assets of the fund, and invested capital Accrual
represents either legal or financial restrictions on the use of assets, Exchange Price
Approximation
Going Concern Judgment
Measurement of Economic Resources & Obligations 9. The following statements relate to the role of professional judgment in the financial
29. Asset measurements in conventional financial statements reporting process. Which one is not valid?
A. Are confined to historical cost A. After a complete list of generally accepted accounting principles is prepared,
B. Are confined to historical cost and current cost judgment need not be exercised in the financial reporting process.
C. Reflect several financial attributes B. Different CPAs may evaluate similar situations differently.
D. Do not reflect output values C. The possibility always exists that professional judgment may later prove to have
been incorrect.
Time Periods D. Professional judgment is required in the determination of which items to
30. The idea that the economic activities of a company can be identified with relatively "disclose" in notes to financial statements
brief time periods best describes
A. Going concern C. Periodicity General-purpose financial information
B. Matching D. Economic entity Fundamentally related financial statements
Substance over form
15. The time period assumption means that Materiality
A. Where parent and subsidiary relationship exists, consolidated statements for the Basic Elements
affiliates are usually prepared because for practical and economic purposes the Financial Position (Assets, Liabilities, Owners’ Equity)
parent and subsidiary are viewed as a “single” economic entity”. Results of Operations (Revenue, Expenses, Net income/loss)
B. The accounting function is to account for nominal pesos and not for constant GAAP – Pervasive Principles
pesos or changes in purchasing power Principles of Selection and Measurement
Principles that Guide Selection of Events & Assignment of Peso Amounts (External 14. Imputing interest for certain assets and liabilities is primarily based on the concept of
Events, Internal Events) A. Valuation C. Consistency
Principles of Financial Statement Presentation B. Conservatism D. Stable monetary unit
Statement of the Principles of Financial Statement Presentation
Pervasive Measurement Principles Accrual
Initial Recording Principle Estimates & Judgment
Income Determination Verifiability
Revenue and Realization Conservatism
Realization Substance over Form
Realization Principle Technical Terminology
Unit of Measure Audience
41. Which of the following represents a major limitation to the application of the historical Comprehensive
cost principle? 1. Which of the following is not an important characteristic or limitation of the financial
A. Objectivity C. Reliability statements that accountants currently prepare?
B. The going concern assumption D. The monetary unit principle A. The information in financial statements is expressed in units of money adjusted
for changing purchasing power.
33. Conventional financial statements are reported in nominal pesos because of B. Financial statements articulate with one another because measuring financial
A. Time period C. Monetary unit position is related to measuring changes in financial position.
B. Revenue realization D. Matching C. The information in financial statements is summarized and classified to help
meet users’ needs.
Modifying Convention D. Financial statements can be justified only if the benefits they provide exceed the
Conservatism costs.
Emphasis on Income
Application of Judgment by the Accounting Profession as a Whole Use of Financial Accounting Information
GAAP – Broad Operating Procedures Dynamic Nature of Financial Accounting
GAAP – Detailed Operating Procedures Comprehensive
Characteristics & Limitations 12. Which of the following statements is incorrect?
Historical Report A. The accounting theory which explains well the accounting equation "Assets
General Purpose Financial Statements minus liabilities equals capital” is the proprietary theory.
Fundamentally Related Financial Statements B. Under the entity theory, the major accounting effort is directed toward proper
Classification valuation of assets rather than income determination.
Summarization C. Strict adherence to the entity concept would not allow a parent company to take
Measurement in Terms of Money up in its books its proportionate share in the profits and losses of its subsidiaries.
40. The elements of financial statements should be measured in D. Under the fund theory, assets represent prospective services to the fund,
A. Constant pesos C. Fixed pesos liabilities represent restriction against assets of the fund, and invested capital
B. Nominal pesos D. Flexible pesos represents either legal or financial restrictions on the use of assets.
Measurement Bases 9. The following refer to the accounting assumptions. Which is false regarding the
postulates? II. Income and expenses, including gains and losses.

A. Financial statements are normally prepared on the assumption that the III. Cash flows.
enterprise will continue in operation for the foreseeable future. A. I only. C. I, II and III.
B. Income should be recognized when earned regardless of when received and B. I and II only. D. II and III only.
expense is recognized when incurred regardless of when paid.
C. The business enterprise is an accounting entity, separate from owners, Responsibility for Financial Statements
managers and employees. Components of Financial Statements
D. The purchasing power of the peso is a vital tool in measuring enterprise Comprehensive
performance and therefore elements of the financial statements must be 2. Which is incorrect concerning financial statements?
adjusted for such changes. A. Financial statements are prepared and presented at least annually and are
directed toward the common information needs of a wide range of users.
PRESENTATION OF FINANCIAL STATEMENTS B. The management of an enterprise has the primary responsibility for the
Presentation of Financial Statements preparation and presentation of financial statements.
Objective C. Financial statements include such items as reports by directors, statements by
Scope chairman, discussion and analysis by management and similar items that may be
1. The information provided by financial reporting pertains to included in a financial or annual report.
A. Individual business enterprises, rather than to industries or an economy as a D. The users of financial statements include present and potential investors,
whole or to members of society as consumers employees, lenders, suppliers and other trade creditors, customers, government
B. Individual business enterprises and an economy as a whole or to members of and its agencies, and the public.
society as consumers
C. Individual business enterprises and an economy as a whole, rather than to Overall Considerations
industries or to members of society as consumers 13. Which is correct regarding the overall considerations in preparation and presentation
D. Individual business enterprises, industries and an economy as a whole, rather of financial statements?
than to members of society as consumers A. Assets and liabilities, and income and expenses, when material should be offset
against each other.
23. Under ASC SFAS No. 1 “Presentation of Financial Statements,” a complete set of B. Financial statements should be prepared on a liquidity concern basis.
financial statements includes all of the following, except C. Each material item should be presented separately in the financial statements.
A. Accounting policies and explanatory notes Immaterial amounts of similar nature and function should be grouped or
B. Additional statements such as environmental reports condensed as one line item in the financial statements.
C. Statement of changes in equity D. The presentation and classification of financial statement items should not be
D. Balance sheet, income statement and cash flow statement uniform from one accounting period to the next.
Purpose of Financial Statements Fair Presentation & Compliance with GAAP

7. The objective of general-purpose financial statements is to provide information about 29. Generally accepted accounting principles
the financial position, performance and cash flows of an enterprise that is useful to a A. Are fundamental truths or axioms that can be derived from laws of nature.
wide range of users in making economic decisions. To meet this objective, financial B. Derive their authority from legal court proceedings.
statements should provide information about an enterprise’s C. Derive their credibility and authority from general recognition and acceptance by
I. Assets, liabilities and equity. the accounting profession
D. Have been specified in detail in the ASC conceptual framework. principles occupy in the hierarchy of GAAP is
A. First C. Third
1. The principles, which constitute the ground rules for financial reporting, are termed B. Second D. No particular rung
"generally accepted accounting principles." To qualify as "generally accepted," an
accounting principle must 2. The Generally Accepted Accounting Principles also apply to
A. Usually guide corporate managers in preparing financial statements, which will A. The Board of Accountancy
be under-stood by widely scattered stockholders, B. The Bureau of Internal Revenue
B. Guide corporate managers in preparing financial statements, which will be used, C. The Philippine Institute of Certified Public Accountants
for collective bargaining agreements with trade unions. D. The Professional Regulation Commission
C. Guide an entrepreneur of the choice of an accounting entity like single
proprietorship, partnership, or corporation, 6. Which is true concerning fair presentation of financial statements and compliance
D. Receive substantial authoritative support. with GAAP?
I. In virtually all circumstances, a fair presentation is achieved by compliance in all
2. Which of the following statements best describes generally accepted accounting material respects with applicable Statements of Financial Accounting Standards
principles? and Interpretations.
A. They have been formulated in the public sector. II. Inappropriate accounting treatments are rectified either by disclosure of the
B. They have been developed on the basis of such factors as usage and practical accounting policies used or by notes or explanatory material.
necessity. A. I only. C. Both I and II.
C. They are the same as laws within our legal system. B. II only. D. Neither I nor II.
D. They do not apply to small companies.
28. Generally accepted accounting principles
3. The financial statements prepared under GAAP I. Include detailed practices and procedures as well as broad guidelines of general
A. Do not articulate with one another. application.
B. Reflect a single measurement basis which is historical cost. II. Are influenced by pronouncements of the SEC.
C. Are not highly precise because many estimates and judgments must be made. III. Change over time as the nature of the business environment changes.
D. Contain a limited number of future projections, such as projected sale. A. I only C. II and lit only
B. I and II only D. I, II and III
4. The standard of fair presentation in conformity with GAAP does not require that
A. Changes in GAAP from period to period should be disclosed. 16. Which is incorrect regarding the overall principles of statement presentation?
B. There should be a proper balance between disclosure and summarization of A. The financial statements should present fairly the financial position, performance
financial accounting information. and cash flows of the enterprise
C. Information in the underlying records should be properly reflected and described B. Management should select and apply accounting policies that are in conformity
in the financial statements in conformity with GAAP. with ASC standards
D. The financial statements should provide all available information about the C. An enterprise should prepare its financial statements in accordance with the cash
enterprise. basis of accounting.
D. Financial statements should be prepared on a going concern basis
35. Generally accepted accounting principles may be classified into three, namely
pervasive, broad operating and detailed principles. The rung which the pervasive 16. The following statements pertain to fair presentation of financial statements. Which
statements is incorrect? A. I, II and III C. I only

A. Financial statements should present fairly the financial position, performance and B. I and II only D. III only
cash flows of an enterprise.
B. An enterprise whose financial statements comply with GAAP should disclose that 23. Technically, which of the following is not offsetting under the ASC standard?
fact. A. Offsetting of receivable and payable balances with the same person if a right of
C. Inappropriate accounting treatments are rectified either by disclosure of the offset exists or if separate settlement of those balance is expected.
accounting policies used or by notes or explanatory material. B. The reporting of assets net of valuation allowance, for example, obsolescence
D. In virtually all circumstances, a fair presentation is achieved by compliance in all allowance on inventories and doubtful debt allowances on receivables.
material respects with applicable Statements of Financial Accounting Standards. C. The offsetting of a bank overdraft against a current account with a debit balance
in the same bank.
Accounting Policies D. A noncurrent deferred tax asset is netted against noncurrent deferred tax liability.
Going Concern
Accrual Basis of Accounting Comparative Information
Consistency of Presentation Structure & Content
Materiality & Aggregation Introduction
17. Immaterial amounts of similar nature and function should be grouped or condensed 12. The most important information about a company generally should be disclosed in
as one line item in the financial statements. A. The body of the financial statements C. Supplementary statements
A. Consistency C. Offsetting B. Notes to the financial statements D. Schedules
B. Aggregation D. Comparability
5. As a minimum, the ASC standard recognizes certain line items to be presented on
14. The following statements relate to the overall consideration of materiality and the face of the balance sheet and income statement. Additional line items, headings
aggregation, Which statement is false? and subtotals should be presented
A. Immaterial amounts should be aggregated with amounts of a similar nature or I. When a Statement of Financial Accounting Standards requires it.
function and need not be presented separately. II. When such presentation is necessary to present fairly the enterprise’s financial
B. Information is material if its nondisclosure could influence the economic position and performance.
decisions of users taken on the basis of financial statements. A. I only C. Both I and II
C. Materiality depends on the size and nature of the item judged in the particular B. II only D. Neither I nor II
circumstances of its omission.
D. Materiality provides that the specific disclosure requirements of Statements of 26. The face of the balance sheet and income statement should include certain line items
Financial Accounting Standards must be met even if the resulting information is as a minimum. However, additional line items, headings and subtotals should be
not material. presented
A. Only when a Statement of Financial Accounting Standards requires it.
Offsetting B. When a Statement of Financial Accounting Standards requires it or when such
24. Which is “offsetting” under the ASC standard? presentation is necessary to present fairly the enterprise’s financial position and
I. A current deferred tax asset is netted against a current deferred tax liability. performance.
II. A bank overdraft is netted against another current account with a debit balance in C. When a Statement of Financial Accounting Standards requires it subject to
the same bank. approval by the PRC.
III. Assets are reported net of valuation allowances. D. When a Statement of Financial Accounting Standards requires it subject to
approval by the Board of Accountancy. II. Expected to be realized or held for sale or consumption in the normal course of
the enterprise’s operating cycle.
Identification of Financial Statements III. Held primarily for trading purposes or for the short-term and expected to be
Reporting Period realized within twelve months of the balance sheet date or operating cycle,
Timeliness whichever is longer.
Balance Sheet A. I, II and III C. I and II only
18. A public utility reports noncurrent assets as the first item on its balance sheet. This if; B. I only D. II and III only
an example of
A. In proper statement presentation C. Industry practice 24. Current assets include
B. Conservatism. D. Substance over form I. Inventories and trade receivables that are sold, consumed and realized as part of
the normal operating cycle even when they are not expected to be realized within
The Current/Non-current Distinction twelve months after the balance sheet date
19. On a properly classified balance sheet, liabilities are classified as II. Available for sale securities that are expected to be realized within twelve months
A. Current and noncurrent C. Current and deferred credits after balance sheet date or operating cycle, whichever is longer.
B. Current, noncurrent and deferred credits D. Noncurrent and deferred credits A. I only C. Both I and II
B. II only D. Neither I nor II
20. The basis for classifying assets as current or noncurrent is the period of time normally
elapsed from the time the accounting entity expends cash to the time it converts 22. Current assets include
A. Inventory back into cash, or 12 months, whichever is shorter I. Inventories and trade receivables that are sold, consumed and realized as part of
B. Receivables back into cash, or 12 months, whichever is longer the normal operating cycle even when they are not expected to be realized within
C. Tangible fixed assets back into cash, or 12 months, whichever is longer twelve months of the balance sheet date.
D. Inventory back into cash, or 12 months, whichever is longer II. Available for sale securities that are expected to be realized within twelve months
of the balance sheet date
25. Which is incorrect concerning current and noncurrent classification of assets? A. I only C. Both I and II
A. The term “noncurrent” is meant to include tangible, intangible, operating and B. II only D. Neither I nor II
financial assets of a long-term nature.
B. The operating cycle of an enterprise is the time between the acquisition of 25. Current assets do not include
materials entering into a process and its realization in cash or an instrument that A. Cash and cash equivalents.
is readily convertible into cash. B. Assets held for trading purposes which are not expected to be realized within
C. Current assets include inventories and trade receivables that are sold, consumed one year from balance sheet date.
and realized as part of the normal operating cycle even when they are not C. Assets held for the short-term and are expected to be realized within one year
expected to be realized within twelve months of the balance sheet date. from balance sheet date.
D. Marketable securities are classified as current assets even if they are not D. Assets which are expected to be realized, sold or consumed in the normal
expected to be realized within twelve months of the balance sheet date. course of the enterprise’s operating cycle.
Current Assets 44. Which of the following items is not usually classified as a current asset?
16. An asset should be classified as a current asset when it is A. Plant expansion fund
I. Cash or a cash equivalent which is unrestricted in its use. B. Prepaid rent
C. Supplies C. Is used to determine current assets when the operating cycle is longer than one
D. Goods that are in the process of being completed for another company year
D. Starts with inventory and ends with cash
19. Which of the following should not be considered as a current asset in the balance
sheet? Current Liabilities
A. Installment notes receivable due over 18 months in accordance with normal 53. Current liabilities include
trade practice. A. Only obligations which are expected to be settled within the normal operating
B. Prepaid taxes which cover assessments of the following operating cycle of the cycle.
business. B. Only obligations which are due to be settled within one year from balance sheet
C. Marketable securities purchased by the temporary investment of cash available date.
for current operations. C. Obligations which are expected to be settled within the normal operating cycle
D. The cash surrender value of a life insurance policy carried by a corporation, the and obligations which are due to foe settled within one year from balance sheet
beneficiary, on its president. date.
D. Refinanced long-term debt falling due within one year from balance sheet date.
Operating Cycle
26. The operating cycle of an enterprise 76. Which of the following is a current liability?
A. Is the period of time normally elapsed from the time the enterprise expends cash A. A long-term debt maturing currently which is to be paid with cash in a sinking
to the time it converts trade receivables back into cash. fund
B. Causes the distinction between current and noncurrent items to depend on B. A long-term debt maturing currently which is to be retired with proceeds from a
whether they will affect cash within one year. new debt issue
C. It set by the industry’s trade association usually on average length of time for all C. A long-term debt maturing currently which is to be converted into common stock
firms which are members of the association. D. A long-term debt maturing currently to be paid with current assets
D. Is the time between the acquisition of materials entering into a process and its
realization in cash or an instrument that is readily convertible into cash. 14. Which of the following is not a current liability?
A. Income tax payable
10. The operating cycle of a business is that span of time which B. One-year magazine subscription received in advance
A. Coincides with economy’s business cycle which runs from one trough of the C. Unearned interest income related to no n interest-bearing long-term note
company’s business activity to the next receivable
B. Corresponds with its natural business year which runs from one trough of the D. Estimated warranty liability
particular firm’s business activity to the next
C. Is set by the industry’s trade association usually on an average length of time for Working Capital
all firms which are members of the association 45. Which one of the following items would normally be excluded from the computation of
D. Runs from cash disbursement for items of inventory through their sale to the working capital?
realization of cash from sale A. Advances from customers for goods that will be shipped three months after the
balance sheet date
43. An operating cycle B. Portion of long term debt that matures six months after the balance sheet date
A. Is twelve months or less in length and will be paid from the regular cash account
B. Is the average time required for a company to collect its receivable C. Prepaid insurance
D. Cash surrender value of life insurance A. To provide disclosures required by generally accepted accounting principles.
B. To correct improper presentation in the financial statement.
Information to be Presented on the Face of the Balance Sheet C. To provide recognition of amounts not included in the total of the financial
Information to be Presented Either on the Face of the Balance Sheet or in the Notes statement.
Income Statement D. To present management’s responses to auditor comments.
Information to be Presented on the Face of the Income Statement
Information to be Presented Either on the Face of the Income Statement or in the Notes 34. Indicate the proper order of presenting the following notes to the financial statements:
29. Tania Company classifies expenses by logistics, quality control, manufacturing, plant I. Statement of measurement basis and accounting policies.
engineering, sales and marketing, research and development, finance and II. Supporting information for items presented on the face of the financial
administration. The classification basis is by statements,
A. Object of expenditure C. Area of responsibility III. Contingencies, commitments and other financial and nonfinancial disclosures.
B. Services received D. Function performed IV. Statement of compliance with GAAP.
A. I, II, III and IV. C. IV, I, II and III.
22. What is the benchmark in the analysis of expenses in the income statement? B. I, IV, II and III. D. IV, I, III and II.
A. Nature of expense method because it is simple to apply and the allocation of
costs to functions can be arbitrary and involves considerable judgment. 33. The notes to the financial statements of an enterprise should (choose the incorrect
B. Cost of sales method because this presentation often provides more relevant one)
information to users. A. Present information about the basis of preparation of financial statements and
C. Because each method of preparation has merit for different types of enterprise, the specific accounting policies selected.
the ASC SFAS No. 1 expresses no preference but requires a choice based on B. Disclose the information required by Statements of Financial Accounting
that which most fairly presents the elements of the enterprise's performance. Standards that is not presented elsewhere in the financial statements.
D. A combination of the nature of expense method and cost of sales method. C. Provide additional information which is not presented on the face of the financial
statements but that is necessary for a fair presentation.
Changes in Equity D. Disclose the cumulative effect of changes in accounting policy and the correction
15. An entity shall present the following on the face of its statement of changes in of fundamental errors.
equity all of the following except
A. The profit or loss for the period. 30. The notes to financial statements should (choose the incorrect one)
B. Each item of income and expense for the period, that, as required by other A. Not disclose the fact that the financial statements of an enterprise comply with
standards or interpretations, is recognized directly in equity, and the total of GAAP.
these items. B. Present information about the basis of preparation of financial statements and
C. The total income and expense for the period, showing separately the total the specific accounting policies selected.
amounts attributable to equity holders of the parent and to minority interest C. Provide supporting computations for items presented on the face of the financial
D. The effects of changes in accounting estimates statements.
D. Provide information about contingencies, commitments and other financial and
Cash Flow Statement nonfinancial disclosures.
Notes to the Financial Statements
Structure 37. Which among the following is not required to be disclosed in the notes to financial
24. What is the purpose of information presented in notes to the financial statements? statements?
A. Allowances for decline in value of investments D. Nature of the enterprise’s operations and its principal activities.
B. Amount of fully depreciated assets
C. The sale of the bond after the balance sheet date but before issuance of financial 31. Which of the following information should be disclosed in the summary of significant
statements accounting policies?
D. Methods used for translation of the financial statements of foreign operations for A. Refinancing of debt subsequent to the balance sheet date
incorporation in the financial statements of a reporting enterprise B. Guarantees of indebtedness of others
C. Criteria for determining which investments are treated as cash equivalents
38. Which statement is false pertaining to disclosure requirements in the notes to the D. Adequacy of pension plan assets relative to vested benefits
financial statements?
A. Material unused letters of credit on which drafts may be drawn should be 32. Which of the following information should be included in Aim Company’s 2003
disclosed. summary of accounting policies?
B. Information about geographical and industry segments and the effect on the A. Property, plant and equipment are recorded at cost with depreciation computed
enterprises of changing prices may be provided in the form of supplementary principally by the straight-line method.
information. B. During 2003, Segment D was sold.
C. Related party relationships where control exists should not be disclosed if there C. Business segment 2003 sales are P1M for segment A, P2M for segment B and
are no transactions between the related parties. P3M for segment C.
D. The notes to the financial statements should not merely disclose the cumulative D. Future common share dividends are expected to approximate 60% of earnings.
effect of changes in accounting policy and the correction of fundamental errors.
27. Disclosure of all accounting policies which have been adopted in the preparation of
31. Which is incorrect concerning notes financial statements? financial statements is required. Which of the following statements is not recognized
I. The notes should disclose information required by SFAS that is not presented as valid?
elsewhere in the financial statements. A. Information about the accounting policies adopted by a reporting enterprise is
II. The cumulative effect of changes in accounting policy and the correction of essential for financial statement users.
fundamental errors are merely disclosed in the notes. B. Disclosures by a business enterprise commonly required with respect to
A. I only C. Both I and II accounting policies include among others those relating to depreciation methods,
B. II only D. Neither I nor II inventory pricing and basis of consolidation.
C. Information about the accounting policies adopted and followed by not-for-profit
Presentation of Accounting Policies enterprises should be presented as an integral part of their financial statements.
18. These are defined as the specific principles, methods, practices, rules, bases and D. Disclosure of accounting policies is required even in special reports in which
conventions adopted by an enterprise in preparing and presenting financial incomplete financial preparations are made so long as the enterprise is operated
statements. for profit.
A. Accounting policies C. Nonfinancial disclosures
B. Notes to financial statements D. Other disclosures 26. Which statement is false pertaining to disclosure requirements in the notes to the
financial statements?
28. The “accounting policies section” of the notes to financial statements should describe A. Material unused letters of credit on which drafts may be drawn should be
A. Only the measurement basis used in preparing the financial statements. disclosed.
B. Only the specific accounting policies followed by the enterprise. B. Information about geographical and industry segments and the effect on the
C. Both the measurement basis and accounting policies followed. enterprises of changing prices may be provided in the form of supplementary
information. B. Equity investment in unconsolidated subsidiary

C. Related party relationship where control exists should not be disclosed if there C. Warranty obligation
are no transactions between the related parties. D. Wages payable
D. The notes to the financial statements should not merely disclose the cumulative
effect of changes in accounting policy and the correction of fundamental errors. Comprehensive
35. Which of the following accounting bases may be used to prepare financial statements
32. The notes to the financial statements of an enterprise should (choose the incorrect in conformity with a comprehensive basis of accounting other than generally accepted
one) accounting principles?
A. Present information about the basis of preparation of financial statements and I. Basis of accounting used by an entity to file its income tax return.
the specific accounting policies selected. II. Cash receipts and disbursements basis of accounting.
B. Disclose the information required by Statements of Financial Accounting A. I only C. Both I and II
Standards that is not presented elsewhere in the financial statements. B. II only D. Neither I nor II
C. Provide additional information which is not presented on the face of the financial
statements but that is necessary for a fair presentation. 36. Prospective financial information is defined as
D. Disclose the cumulative effect of changes in accounting policy and the correction A. Any financial information about the past, present, or future
of fundamental errors. B. Any financial information about the present or future
C. Any financial information about the future related to day-to-day operations
Other Disclosures D. Any financial information about the future
33. A company that wishes to disclose information about the effect of changing prices
should report this information in REVENUE RECOGNITION
A. The body of the financial statements Basic Concepts
B. The notes to the financial statements 8. Income determination in accounting is arrived at by
C. Supplementary information to the financial statements A. Measuring the change in the value of owners' equity
D. Management’s report to shareholders B. Identifying the change in the purchasing power of the owners' equity
C. Using a transaction approach
34. Which of the following is required to be disclosed regarding the risk and uncertainties D. Applying the value-added concept.
that exist?
A. Factors causing an estimate to be sensitive 48. Under a strict transaction approach to income measurement, which of the following
B. The potential impact of estimate about value of assets and liabilities when it is would not be considered a transaction?
reasonably possible A. Sale of goods at 25% markup
C. The potential impact of estimates about value of assets and liabilities when it is B. Payment of salaries
remotely possible that the estimate will change in the near future C. Adjustment of inventory to lower of cost or market valuation when market is
D. A description of the operations both within and outside of the home country. below cost
D. Exchange of inventory valued at regular selling price for an equipment
33. In a period of rising general price level, XYZ Company discloses income on a current
cost basis. Which of the following contributes to XYZ’s purchasing power loss on net 9. Gains on assets unsold are identified, in a precise sense, by the term
monetary items? A. Unrecorded C. Unrecognized
A. Refundable deposit with supplier B. Unrealized D. Unallocated
B. Sales of plant and equipment D. Sales of product

16. Income is recognized when it is probable that
A. The future economic benefits will flow to the enterprise and the asset has a cost 9. It is proper to recognize revenue prior to the sale of merchandise when
or value that can be measured reliably. I. The revenue will be reported as an installment sale.
B. An outflow of resources embodying economic benefits will result from the II. The revenue will be reported under the cost recovery method.
settlement of a present obligation and the amount at which the settlement will A. I only C. Both I and II
take place can be measured reliably. B. II only D. Neither I nor II
C. An increase in future economic benefits related to an increase in an asset or a
decrease in a liability has arisen and can be measured reliably. 17. Generally, revenue from sales should be recognized at a point when
D. A decrease in future economic benefits related to a decrease in an asset or an A. Management decides it is appropriate to do so
increase in liability has arisen and can be measured reliably. B. The product is available for sale to the ultimate consumer.
C. The entire amount receivable has been collected from the customer and there
20. The term “revenue recognition” conventionally refers to remains no further warranty liability.
A. The process of identifying transactions to be recorded as revenue in an D. None of these
accounting period.
B. The process of measuring and relating revenue and expenses of an enterprise 33. Which of the following bases of revenue recognition reflects the greatest degree of
for an accounting period. uncertainty about future events?
C. The earnings process which gives rise to revenue realization. A. Sales method applied to sales of a department store
D. The process of identifying those transactions that result in an inflow of assets B. Cost recovery method applied to an installment sales contract
from customers. C. Production method for a gold mining operation
D. Percentage of completion on a construction contract
18. Which of the following is not a time when revenue may be recognized?
A. At time of sale Point of Production Method
B. At receipt of cash 27. Which of the following may be recognized as revenue?
C. During production A. Rental deposits
D. All of these are possible times of revenue recognition. B. Cash from advance magazine subscriptions
C. Value of gold extracted from a mine but not yet sold
17. Under a royalty agreement with another enterprise, a company will receive royalties D. Cash received in payment of a note receivable
from the assignment of a patent for four years. The royalties received in advance
should be reported as revenue Percentage-of-Completion Method
A. In the period received 9. In selecting an accounting method for a newly contracted long-term construction
B. In the period earned project, the principal factor to be considered should be
C. Evenly over the life of the royalty agreement A. The terms of payment in the contract
D. At the date of the royalty agreement B. The degree to which a reliable estimate of the progress toward contract
completion is practicable
26. Which one of the following transactions should not be included in determining C. The method commonly used by the contractor
income? D. The inherent nature of the contractor’s technical facilities used in construction
A. Receipt of interest from bank accounts C. Sales of treasury shares
16. In accounting for a long-term construction contract using the percentage of A. After cash collections equal to the cost of sales have been received
completion method, the amount of income recognized in any year would be added to B. In proportion to the cash collections
A. Deferred revenue C. Construction in progress C. On the date the final cash collection is received
B. Progress billings on contracts D. Property, plant, and equipment D. On the date of sale
15. In arriving at the gross profit during the first year using the percentage of completion Installment Method
method of accounting for a long-term construction contract, the estimated total gross 40. For financial statement purposes, the installment method accounting may be used if
profit from the contract is multiplied by the
A. The percentage of the costs incurred during the year to the total contract price. A. Collection period extends over more than 12 months
B. The percentage of the costs incurred during the year to the total estimated cost B. Installments are due in different years
C. The percentage of the costs incurred during the year to the total costs incurred to C. Ultimate amount collectible is indeterminate
date. D. Percentage-of-completion method is inappropriate.
D. The percentage of the costs incurred during the year to the unbilled portion of the
total contract price. 41. Income recognized using the installment method of accounting generally equals cash
collected multiplied by the
28. How should earned but unbilled revenues at the balance sheet date on a long-term A. Net operating profit percentage
construction contract be disclosed if the percentage-of-completion method of revenue B. Net operating profit percentage adjusted for expected uncollectible accounts
recognition is used? C. Gross profit percentage
A. In a footnote to the financial statements until the customer is formally billed for D. Gross profit percentage adjusted for expected uncollectible
the portion of the work completed
B. As a receivable in the noncurrent asset section of the balance sheet 42. According to the installment method of accounting, gross profit on an installment sale
C. As construction in progress in the noncurrent asset section of the balance sheet is recognized in income
D. As construction in progress in the current asset section of the balance sheet A. On the date of sale
B. On the date the final cash collection is received
Installment Sales C. In proportion to the cash collection
Cost Recovery Method D. After cash collections equal to the cost of sales have been received.
16. Haven Company is engaged in the business of selling tractors on installment basis.
Under which of the following circumstances should you recommend to Haven the use INCOME STATEMENT
of the cost recovery method of revenue recognition to account for the installment 46. Limitations of the income statement include all of the following except
sales? A. Items that cannot be measured reliably are not reported.
A. Where there is no reasonable basis for estimating collectibility. B. Only actual amounts are reported in determining net income.
B. Where the sales are subject to a high rate of return. C. Income measurement involves judgment.
C. Where no cash payments are due until one year from date of sale. D. Incomes numbers are affected by the accounting methods employed.
D. Where the sale contract provides that title to the equipment only passes to the
buyer when all payments have been made. 47. The single-step income statement emphasizes
A. The gross profit figure.
44. According to the cost recovery method of accounting, gross profit on an installment B. Total revenues and total expenses.
sale is recognized in income C. Extraordinary items and accounting changes are emphasized in the multiple-step
income-statement. C. Disclose separately the amount of sales to unaffiliated customers but not the
D. The various components of income from continuing operations. amount of intracompany sales between geographical areas
D. No disclosure of revenues from foreign operation need be reported.
48. Which of the following is not a generally practiced method of presenting the income
statement?
A. Including prior period adjustments in determining net income
B. The single-step income statement
C. The consolidated statement of income
D. Including gains and losses from discontinued operations of a segment of a
business in determining net income
Ordinary Activities
25. These are activities undertaken by an enterprise as part of its business and such
related activities in which the enterprise engages in furtherance of, incidental to, or
arising from these activities.
A. Operating activities C. Investing activities
B. Financing activities D. Ordinary activities
26. Ordinary activities are

A. Income or expenses that arise from events or transactions that are clearly
distinct from ordinary activities of the enterprise and therefore are not expected
to recur frequently or regularly.
B. Undertaken by an enterprise as part of its business and such related activities in
which the enterprise engages in furtherance of, incidental to, or arising from
these activities.
C. Errors discovered in the current period that are of such significance that the
financial statements of one or more prior periods can no longer be considered to
have been reliable at the date of their issue.
D. Specific principles, bases, conventions, rules and practices adopted by an
enterprise in preparing and presenting financial statements.
Revenues
27. What information should a public company present about revenue from foreign
operations?
A. Disclose separately the amount of sales to unaffiliated customers and the
amount of intracompany sales between geographic areas
B. Disclose as a combined amount of sales to unaffiliated customers and
intracompany sales between geographical areas
Expenses C. Gain from discontinued operations, net of income tax

17. On January 1, 2003 ABC Company installed cabinets to display its merchandise in D. Reduction of the cost of the new warehouse
customers’ stores. ABC expects to use these cabinets for five years. The 2003
income statement should include 30. Ocean Shipping Company sold one of its ships and used the proceeds to acquire a
A. One-fifth of the cabinet costs in cost of goods sold new ship. The excess of the proceeds over the net book value of the ship sold should
B. One-fifth of the cabinet costs in selling, general and administrative expenses be treated as
C. All of the cabinet costs in cost of goods sold A. A gain from discontinued operations, net of income tax
D. All of the cabinet costs in selling, general and administrative expenses B. Part of continuing operations
C. An extraordinary gain, net of income tax
2. Operating losses incurred during the start-up years of a new business should be D. A reduction of the cost of the new ship
A. Accounted for and reported like the operating losses of any other business.
B. Written off directly against retained earnings. 3. At December 31, 2003, Mae Company was holding long-lived assets which it
C. Capitalized as a deferred charge and amortized over 5 years. intended to sell. The company appropriately recognized a loss in 2003 related to
D. Capitalized as an intangible asset and amortized over a period not to exceed 20 these assets. On the income statement for 2003, this loss should be reported as
years. A. Extraordinary item
B. Component of income from continuing operations before income tax
72. The following statements relate to the analysis of expenses on the income statement C. Separate component of selling or administrative expenses, disclosed net of tax
based on either the nature of expenses or their function within the enterprise. Which D. Component of gain or loss from sale of discontinued operations, net of income
statement is incorrect? tax
A. The first analysis is referred to as the nature of expense method which means
that expenses are aggregated according to their nature and are not reallocated 23. How should the gain or loss from an event or transaction that meets the criteria for
among various functions within the enterprise. infrequent occurrence but not unusual nature be disclosed?
B. The second analysis is referred to as the cost of sales method which means that A. Separately in the earnings statement immediately after earnings from continuing
expenses are classified according to their function as part of cost of sales, operations
distribution or administrative activities. B. On a net-of-tax basis in the earnings statement immediately after earnings from
C. Enterprises classifying expenses by function should disclose additional continuing operations
information on the nature of expenses, including depreciation and amortization C. As an extraordinary item and treated accordingly in the earnings statement
expense and staff costs. D. Separately in the earnings statement as a component of earnings from
D. The ASC SFAS No.1 requires the use of the cost of sales method because this continuing operations
presentation often provides more relevant information to users than the nature of
expense method. 31. As a result of a six-month dry spell which benefited its Virginia tobacco plantation,
Dana Company realized a 30% increase in its usual gains from operating the
Income from Continuing Operations plantation. A six-month dry spell has never before occurred within the vicinity of
22. Arrow Company sold a warehouse and used the proceeds to acquire a new Dana's tobacco plantation and is not expected to incur in the foreseeable future. The
warehouse. The excess of the proceeds over the carrying amount of the warehouse gain should be
sold should be reported as: A. Reported with the results of ordinary operations but appropriate disclosure of the
A. Extraordinary gain, net of income tax gain should be made in the notes.
B. Part of continuing operations B. Segregated from the results of ordinary operations and also shown separately in
the income statement.

C. Reported as extraordinary items 19. Extraordinary items are revenues or expenses that arise from events or transactions
D. Reported in the statement of retained earnings that are
A. Clearly distinct from the ordinary activities of the enterprise
7. Gains or losses which should not be reported as extraordinary items but which may B. Not expected to recur frequently or regularly
be reported as part of continuing operations of the current year include C. Usually presented in the statement of recognized gains and losses
A. Appraisal increase from revaluation of property D. Clearly distinct from ordinary activities and are not expected to recur frequently
B. Loss on the sale of a segment of business or regularly
C. Cumulative effect of a change in the depreciation method
D. Cumulative effect of change in accounting policy. 27. Extraordinary items are
A. Activities which are undertaken by an enterprise as part of its business and such
29. In 2003, hail damaged several of ABC Company’s vans. Hailstorm had frequently related activities in which the enterprise engages in furtherance of, incidental to
inflicted similar damage to ABC’s vans. Over the years, ABC had saved money by not or arising from these activities.
buying hail insurance and either paying for repairs or selling damaged vans and then B. Errors discovered in the current period that are of such significance that the
replacing them. In 2003, the damaged vans were sold for less than their carrying financial statements of one or more prior periods can no longer be considered to
amount. How should the hail damage loss be reported in the 2003 financial have been reliable at the date of their issue.
statements? C. Income and expenses that arise from events or transactions that are clearly
A. The actual2003 hail damage loss as an extraordinary loss, net of tax distinct from ordinary activities of the enterprise and are not expected to recur
B. The actual2003 hail damage loss in continuing operations with no separate frequently or regularly.
disclosure D. Income and expenses that arise from events or transactions that are clearly
C. The expected average hail damage loss in continuing operations with no distinct from ordinary activities and are expected to recur frequently or regularly.
separate disclosure
D. The expected average hail damage loss in continuing operations with separate 28. Extraordinary items include
disclosure A. Abandonment of property, plant and equipment
B. Litigation settlements
Extraordinary Item C. Major strike by employees
26. Extraordinary items are D. Expropriation of assets
A. Activities which are undertaken by an enterprise as part of its business and such
related activities in which the enterprise engages in furtherance of, incidental to 20. In reporting results of operations, which of the following represents an extraordinary
or arising from these activities. item?
B. Errors discovered in the current period that are of such significance that the A. A loss resulting from employees' strike
financial statements of one or more prior periods can no longer be considered to B. A gain resulting from the devaluation of the peso
have been reliable at the date of their issue. C. A gain resulting from the state exercising its right of eminent domain on a piece
C. Income and expenses that arise from events or transactions that are clearly of land used as parking area
distinct from ordinary activities of the enterprise and are not expected to recur D. A write-off of deferred research and development costs which are believed to
frequently or regularly. have no future benefits.
D. Income and expenses that arise from events or transactions that are clearly
distinct from ordinary activities and are expected to recur frequently or regularly. 32. Which of the following should be classified as an extraordinary item in reporting
results of operations? prohibition

A. Gain resulting from the national government's expropriation of a corporate D. Claims from policy holders arising from an earthquake for an insurance
property enterprise that insures against such risk
B. Foreign exchange losses relating to appreciation of the Japanese yen in relation
to the Philippines peso 25. During 2001, Peg Construction Company recognized substantial gains from:
C. Losses resulting from the annual lahar flows within the Pampanga area  An increase in value of a foreign customer's remittance caused by a major
D. Losses suffered as a result of a strike declared by rank and file employees foreign currency revaluation.
 A court-ordered increase in a completed long-term construction contract
21. The following statements relate to extraordinary items. Which statement is s price due to design changes.
incorrect? Should these gains be included in continuing operations or reported as an
A. The nature and the amount of each extraordinary item should be separately extraordinary item in Peg's 2001 income statement?
disclosed. Gain from major currency revaluation Gain from increase is contract price
B. When the disclosure of the nature and amount of each extraordinary item is A. Continuing operations Continuing operations
made in the notes, the total amount of all extraordinary items is disclosed on the B. Extraordinary item Continuing operations
face of the income statement. C. Extraordinary item Extraordinary item
C. Whether an event or transaction is dearly distinct from the ordinary activities of D. Continuing operations Extraordinary item
the enterprise is determined by the nature of the event or transaction in relation
to the business ordinarily carried on by the enterprise rather than by the Net Income
frequency with which such events are expected to occur. 25. Conceptually, net income is a measure of
D. Claims from policy holders arising from an earthquake qualify as extraordinary A. Wealth C. Capital maintenance
item for an insurance enterprise that insures against such risks. B. Change of wealth D. Cash flow
28. In open market transactions, Gold Company simultaneously sold its long-term 73. The net income or loss for the period comprises all of the following components
investment in Diamond Company bonds and purchased and its own outstanding except
bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the I. Income or loss from ordinary activities.
purchase of its own bonds exceeded its loss on the sale of the Diamond bonds. Gold II. Extraordinary items.
Company should report III. Cumulative effect of changes in accounting policy.
A. Net effect of the two transactions as extraordinary gain. A. I, II, and III. C. III only.
B. Net effect of the two transactions as income before extraordinary item. B. I and II only. D. I only.
C. Effect of its own bond transaction gain in income before extraordinary item and
report the Diamond bond transaction loss as extraordinary loss 9. Which of the following events would most likely have no effect on 2003 net income
D. Effect of its own bond transaction gain as extraordinary gain and report the assuming that all the amounts involved are material?
Diamond bond transaction loss in income before extraordinary item. A. Sale in 2003 of a parcel of land which was contributed in 2002 by a stockholder.
B. Writing off in 2003 the value of the stocks purchased in 2002 due to the
23. Extraordinary items include all of the following, except bankruptcy add closure of the issuing company.
A. Condemnation of asset C. Settlement in 2003 by way of litigation previously unrecognized damages from
B. Casualty loss from earthquake, typhoon, flood, fire, and other natural disaster serious accident that occurred in 2002.
C. Destruction of large quantity of inventory because of government ban or D. Collection in 2003 of a receivable which was written off in 2002.
directors has both approved and announced the planned discontinuance,

Discontinuing Operating whichever event occurs later.
75. A discontinuing operation is a component of an enterprise
I. That the enterprise, pursuant to a single plan is disposing of substantially in its 23. The amounts of revenues, expenses and net income or loss from ordinary activities
entirety, disposing of piecemeal, or terminating through abandonment. attributable to a discontinuing operation and the related income tax expense are
II. That represents a separate major line of business or geographical area of shown
operation. A. As extraordinary items
III. That can be distinguished operationally and for financial reporting purposes. B. As part of the continuing operation
A. I and II. C. I, II, and III. C. Separately in juxtaposition with the continuing operation
B. I and III. D. I only. D. As gain or loss from discontinuing operation
76. Which is a discontinuing operation? 78. What is the appropriate presentation of a discontinuing operation?
A. Gradual or evolutionary phasing out of a product line or class of service. A. The amounts of revenue, expenses and pre-tax profit or loss from ordinary
B. Shifting of some production and marketing activities for a particular line of activities attributable to the discontinuing operation during the current period, and
business from one location to another. the related income tax expense are presented on the face of the income
C. Closing of a facility to achieve productivity improvements or other cost savings. statement side by side with the continuing operation.
D. Selling a subsidiary whose activities are different from those of the parent and B. Net profit or loss from the activities of discontinuing operation is treated as an
other subsidiaries. extraordinary item.
C. Net profit or loss from the activities of the discontinuing operation is accounted
77. It is the occurrence whereby the enterprise has entered into an agreement to sell for as a change in accounting policy.
substantially all of the assets of the discontinuing operation or the enterprise’s board D. The net income or loss from operations and the net gain or loss from the disposal
of directors has both approved and announced the planned discontinuance. of the discontinuing operation should be represented as a “below-the-line” item
A. Initial disclosure event. following income from continuing operations.
B. Disposal of segment.
C. Measurement of assets and liabilities of the discontinuing operation. 22. What is the appropriate presentation of a discontinuing operation?
D. Approval and announcement of the discontinuing operation. I. The amounts of revenue, expenses and pre-tax profit or loss from ordinary
activities attributable to the discontinuing operation during the current period, and
28. Initial disclosure event is the occurrence whereby the related income tax expense are presented on the face of the income
A. The enterprise has entered into a binding sale agreement for substantially all of statement side by side with the continuing operation.
the assets attributable to the discontinuing operation. II. The net income or loss from operations and the net gain or loss from the disposal
B. The enterprise's board of directors has both approved and announced the of the discontinuing operation should be presented as a “below-the-line" item
planned discontinuance. following income from continuing operations.
C. The enterprise has entered into a binding sale agreement for substantially all of A. I only C. Both I and II
the assets attributable to the discontinuing operation or the enterprise's board of B. II only D. Neither I nor II
directors has both approved and announced the planned discontinuance,
whichever event occurs earlier. 19. Which is correct under IFRS 5 relating to discontinued operation?
D. The enterprise has entered into a binding sale agreement for substantially all of I. The post-tax profit or loss of the discontinued operation should be presented as a
the assets attributable to the discontinuing operation, or the enterprise's board of single amount below post-tax profit or loss from continuing operations on the
face of the income statement. capital of the company.

II. The amount of revenue, expenses and post-tax profit or loss of the discontinued D. Treasury shares should be reported as a deduction, at cost, from the total
operation should presented on the face of the income statement side by side with stockholders' equity, and the restriction on retained earnings occasioned by their
the continuing operations. acquisition must also be stated.
B. II only D. Neither I nor II 43. The account form of balance sheet
A. Shows the liabilities and owners’ equity below the assets
Comprehensive Income B. Shows liabilities and owners’ equity to the right of the assets
28. What is the purpose of reporting comprehensive income? C. Shows working capital as a separate amount
A. To report changes in equity due to transactions with owners. D. Is rarely used in practice
B. To report a measure of overall enterprise performance
C. To replace net income with a better measure 19. An example of an item which is not liability is
D. To combine net income from continuing operations with income from A. Dividend payable in stock
discontinued operations and extraordinary items. B. Advance from customer on contract
C. Accrued estimated warranty cost
27. Which of the following items would cause earnings to differ from comprehensive D. The portion of long-term debt due within one year
income for an enterprise in an industry not having specialized accounting principles?
A. Unrealized loss on available for sale securities 45. Which of the following would be classified in a different major section of a balance
B. Unrealized loss on trading securities sheet from the others?
C. Loss on exchange of similar assets A. Common stock. C. Stock dividend distributable
D. Loss on exchange of dissimilar assets B. Common stock subscribed D. Stock investment in affiliate
22. One of the elements of a financial statement is comprehensive income. CASH FLOW STATEMENTS
Comprehensive income excludes changes in equity resulting from which of the 2. The following statements relate to the cash flow statement. Which statement is
following? incorrect?
A. Loss from discontinued operations A. An enterprise should prepare a cash flow statement and should present it as an
B. Prior period error correction integral part of the enterprise's basic financial statements.
C. Dividends paid to stockholders B. Preferred shares with specified redemption date and acquired three months
D. Unrealized loss on investments in noncurrent marketable equity securities before redemption date can qualify as cash equivalent.
C. Bank overdrafts are component of cash and cash equivalents if they are
BALANCE SHEET repayable on demand and the bank balance often fluctuates from being positive
18. In the preparation of a statement of financial position, which of the following to overdrawn.
statements is true? D. Cash flows in the cash flow statement are inflows and outflows of cash.
A. No reference need be made to donated treasury stock since the acquisition of
such stock does not restrict retained earnings. 51. Preparing the cash flow statement involves all of the following except determining the
B. Treasury shares and unissued shares can be reported as the total shares not A. Cash provided by operations.
outstanding with no distinguishing comments. B. Cash provided by or used in investing and financing activities.
C. Treasury shares should be reported as a deduction, at cost, from the total paid-in C. Change in cash during the period.
D. Cash collections from customers during the period. assumed use of cash.
Operating Activities 10. A decrease in accounts payable should be classified in the cash flow statement
Direct Method prepared under the indirect method as
24. In a cash flow statement, which of the following would increase reported cash flows A. Addition to cash flows from financing activities
from operating activities using the direct method? B. Addition to cash flows from operating activities
A. Dividends received from investments C. Deduction from cash flows from financing activities
B. Gain on sale of equipment D. Deduction from cash flows from operating activities.
C. Gain on early retirement of bonds
D. Change from straight-line to accelerated depreciation 16. Dividends received from an equity investee should be presented in the cash flow
statement as
Indirect Method A. Deduction from cash flows from operating activities
50. In preparing a cash flow statement, cash flows from operating activities B. Addition to cash flows from investing activities
A. Are always equal to accrual accounting income. C. Addition to cash flows from operating activities
B. Are calculated as the difference between revenues and expenses. D. Deduction from cash flows from investing activities
C. Can be calculated by appropriately adding to or deducting from net income those
items in the income statement that do not affect cash. Investing Activities
D. Can be calculated by appropriately adding to or deducting from net income those 34. Peak Company purchased a building and land for a total consideration of P10 million.
items in the income statement that do affect cash. The company paid P7 million in cash and issued a mortgage on the building payable
to the seller in the amount of P3 million. In Peak's cash flow statement, what amount
2. Under the indirect method of reporting cash flow from operating activities is included in the investing activities for the above transactions?
I. Major classes of gross cash receipts and gross cash payments are disclosed. A. P10 million C. P3 million
II. Net income or loss is adjusted for the effects of transactions of a non-cash B. P7 million D. Zero
nature, any deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing Financing Activities
cash flows. 23. These are activities that result in the size and composition of the equity capital and
A. I only C. Both l and II borrowings of the enterprise.
B. II only D. Neither I nor II A. Financing activities C. Operating activities
B. Investing activities D. Borrowing activities
11. What is the possible underlying reason why, in the preparation of a cash flow
statement, an increase in ending inventory over beginning inventory will result in an 3. Financing activities are
adjustment to reported net earnings? A. The principal revenue-producing activities of the enterprise.
A. All changes in non-cash accounts must be disclosed under the all-financial B. The acquisition and disposal of long-term assets and other investments not
resources concept. included in cash equivalents.
B. Since inventory is a current asset, cash was increased. C. The activities that result in changes in the size and composition of the equity
C. Inventory is an expense deduction in computing net earnings but it does not capital and borrowings of the enterprise.
represent use of cash. D. Short-term, highly liquid investments that are readily convertible to known
D. The net increase in inventory reduces cost of goods sold and represents an amounts of cash and which are subject to an insignificant risk of changes in
value. virtue only of those dealings.

B. Securities and Exchange Commission
25. In a cash flow statement, proceeds from issuing equity instruments should be C. Single major customer with whom an enterprise transacts a significant volume of
classified as cash inflows from business merely by virtue of the resulting economic dependence.
A. Lending activities C. Investing activities D. Key management personnel and close family members of such individuals
B. Operating activities D. Financing activities
16. Which can be classified as related parties?
26. In a cash flow statement, which of the following items is reported as a cash flow from A. Two entities simply because they have a director or other key management
financing activities? personnel in common.
I. Payments to retire mortgage notes B. Public utilities, government departments and agencies.
II. Interest payments on mortgage notes C. Venturers in relation to the joint venture
III. Dividend payments D. Two venturers simply because they share joint control over a joint venture.
A. I, II and III C. I only
B. II and III D. I and III 38. Unrelated parties include all of the following, except
A. Providers of finance, trade unions and public utilities in the course of their normal
Free Cash Flow dealings with an enterprise by virtue only of those dealings.
52. Free cash flow is calculated as net cash provided by operating activities less B. Government departments and agencies
A. Capital expenditures C. Capital expenditures and C. Single customer, supplier, franchisor, distributor and general agent with whom an
dividends enterprise transacts a significant volume of business merely by virtue of the
B. Dividends D. Capital expenditures and resulting economic dependence.
depreciation D. Key management personnel and close family members of such individuals.
RELATED PARTIES & RELATED-PARTY TRANSACTIONS 86. Related parties do not include
Related Parties A. Subsidiaries.
85. Parties are considered to be related if one party has the ability to B. Associates.
I. Control the other party. C. Individuals owning, directly or indirectly, an interest in the voting stock of the
II. Exercise significant influence over the other party in making financial and reporting enterprise that gives them significant influence over the enterprise.
operating decisions. D. Two enterprises that have a director in common.
A. I only. C. I and II,
B. II only. D. Neither I nor II. 30. Related parties include all of the following, except
A. Two companies simply because they have a director in common.
18. The elements of related party transactions necessary for an understanding of the B. Holding companies, subsidiaries and fellow subsidiaries.
financial statements include all of the following, except C. Key management personnel and close family members of such individuals.
A. Volume of operations C. Pricing policies D. Enterprises that have the ability to exercise significant influence over the
B. Amounts of outstanding items D. Nature of the relationship investee in making financial and operating decisions.
24. Related parties include 64. Related parties do not include

A. Providers of finance, in the course of their normal dealings with an enterprise by A. Affiliates C. Key management personnel
B. Associates D. Trade unions financial statements.

C. In financial statements of a wholly-owned subsidiary if its parent is incorporated
Related Party Transactions in the same country and provides consolidated financial statements in that
27. A related party transaction is a transfer of resources or obligations between country.
A. related parties when a price is charged D. In financial statements of state-controlled enterprises of transactions with other
B. related parties, regardless of whether a price is charged state-controlled enterprise.
C. unrelated parties when a price is charged
D. unrelated parties, regardless of whether a price is charged 90. The following statements relate to disclosure of related party transactions. Which
statement is incorrect?
Measurement A. Related party relationships where control exists should not be disclosed if there
19. This is a pricing policy between related parties which sets the price by reference to are no transactions between the related parties.
comparable goods sold in an economically comparable market to a buyer unrelated B. If there have been transactions between the related parties, the reporting
to the seller. enterprise should disclose the nature of the related party relationships, types of
A. No price method C. Resale price method transactions and the elements of transactions necessary for an understanding of
B. Cost plus method D. Uncontrolled price method the financial statements.
C. Disclosure of transactions between members of a group is unnecessary in
Disclosure Requirements consolidated financial statements because consolidated financial statements
91. The elements of related-party transactions necessary for an understanding of the present information about the parent and subsidiaries as a single reporting
financial statements would normally include all of the following, except enterprise.
A. The volume of operations. D. Transactions with associated enterprises accounted for under the equity method
B. Amounts or appropriate outstanding items. are not eliminated and therefore require separate disclosure as related party
C. Pricing policies. transactions.
D. Nature of the relationships.
Comprehensive
50. Disclosure of related party transactions is required in 48. Which statement is incorrect concerning related parties and related party
A. Financial statements of state-controlled enterprises of transactions with other transactions?
state-controlled enterprises. A. Parties are related if one party has the ability to control the other party or
B. Consolidated financial statements with respect to intercompany transactions exercise significant influence over the other party in making financial and
because the consolidated financial statements present information about a operating decisions.
parent and its subsidiaries as a single reporting enterprise. B. An associate is an enterprise in which the investor has significant influence.
C. Financial statements of a wholly-owned subsidiary if its parent is incorporated in C. The method used to price the transactions between related parties by making
the same country and provides consolidated financial statements in that country. reference to comparable goods sold in an economically comparable market to a
D. Financial statements of the parent when they are not published with the buyer unrelated to the seller is known as “uncontrolled price method”.
consolidated financial statements. D. The elements of related party transactions necessary for the understanding of
the financial statements would normally include the volume of operations,
88. No disclosure of related party transactions is required in all of the following, except amounts or appropriate outstanding items, pricing policies and nature of the
A. In consolidated financial statements in respect of intragroup transactions. relationship.
B. In parent financial statements when they are not published with the consolidated
DEVELOPMENT STAGE ENTERPRISE 91. Deficits accumulated during the development stage of a company should be
26. Financial reporting by a development stage enterprise differs from financial reporting A. Reported as organization cost
for an established operating enterprise in regard to footnote disclosures B. Reported as a part of stockholders' equity
A. Footnote disclosures only C. Capitalized and written off in the first year of principal operations
B. Footnote disclosures and expense recognition principles only D. Capitalized and amortized over a five-year period beginning when principal
C. Footnote disclosures and revenue recognition principles only operations commence
D. Footnote disclosures and revenue and expense recognition principles
81. The cumulative net losses for a development stage enterprise should
35. Financial reporting by a development stage enterprise differs from financial reporting A. Be recognized as intangible asset and amortized over a relatively short duration
for an established operating enterprise with regard to. B. Not be recognized at all
A. Revenue recognition principles, expense recognition principles and footnote C. Be recognized within the stockholders’ equity section of the balance sheet
disclosures D. Be recognized as organization costs and amortized over 5 years
B. Footnote disclosures and expense recognition principles only
C. Footnote disclosures only 76. A cash flow statement for a development stage enterprise
D. Revenue recognition principles and footnote disclosures only A. Is the same as that of an established operating enterprise and, in addition, shows
cumulative amounts from the enterprise’s inception
32. A development stage enterprise B. Shows only cumulative amounts from the enterprise’s inception
A. Issues an income statement that shows only cumulative amounts from the C. Is the same as that of an established operating enterprise, but does not show
enterprise’s inception cumulative amounts from the enterprise’s inception
B. Issues an income statement that is the same as an established operating D. Is not presented
enterprise, but does not show cumulative amounts from the enterprise’s
inception as additional information ACCOUNTING PROCESS
C. Issues an income statement that is the same as an established operating 31. The essential characteristics of accounting include
enterprise and shows cumulative amounts from the enterprise’s inception as I. Communication of financial information to interested persons.
additional information II. Communication of financial information about economic entities.
D. Does not issue an income statement III. Identification, measurement, and communication of financial information.
A. I only C. I and II only
25. Which statement is true with respect to development stage enterprise? B. II and III only D. I, II and III
A. An income statement is issued that is the same as that of an established
operating enterprise but which does not show cumulative amounts from the 20. Which statement is correct concerning the accounting process?
enterprise inception. A. Nominal accounts are those types of accounts that measure economic flows over
B. No income statement is issued. a period of time
C. An income statement is issued that only shows cumulative amounts from the B. The normal balance of an account is on the side represented by decrease in the
enterprise's inception. account balance
D. An income statement is issued that is the same as that of an established C. The purchase of equipment on account will increase asset and decrease a
operating enterprise and which shows cumulative amounts from the enterprise's liability
inception as additional information. D. The issuance of common stock at more than par value for cash will increase
stockholders’ equity and retained earnings
21. There are four phases of accounting. The phase whereby the liquidity, solvency,
20. The installation of accounting procedures for the accumulation of financial data is stability and profitability of an enterprise are significantly portrayed is known as
known as A. Summarizing C. Recording
A. Auditing C. Electronic date processing B. Classifying D. Interpreting
B. Financial accounting D. Accounting system
21. A chart of accounts is
20. Which is false concerning the rules of debit and credit? A. A flowchart of all transactions C. A journal
A. The left side of an account is always the debit side and the right side is always B. An accounting procedure manual D. A list of names of all account
the credit side titles
B. Increases in assets and expenses are debit entries, and increases in liabilities,
equity and revenue are credit entries 22. A listing of all the enterprise's general ledger accounts in a systematic form is called
C. The normal balance of any account appears on the side for recording increases A. Subsidiary ledger C. Voucher
D. The word "debit" means to increase and the word "credit" means to decrease. B. Chart of accounts D. Accounts
32. The debit and credit analysis of a transaction normally takes place 11. Special journals are used to facilitate the efficient recording of large numbers of
A. Before an entry is recorded in a journal. similar transactions. The proper use of special journals would permit recording of
B. When the entry is posted to the ledger. A. Only purchases of merchandise on account in the purchases journal.
C. When the trial balance is prepared. B. Only sales of merchandise on account in the sales journal.
D. At some other point in the accounting cycle. C. Only cash purchases of merchandise in the cash disbursement journal
D. Only receipts of cash from sales of merchandise in the cash receipts journal.
26. Debits
A. Increase assets and decrease expenses, liabilities, revenue, and equity. 18. A subsidiary ledger is a
B. Increase assets and expenses and decrease liabilities, revenue and equity A. listing of the components of account balances
C. Increase assets and equity and decrease liabilities, expenses, and revenue. B. backup system to protect against record destruction
D. Decrease assets and expenses and increase liabilities, revenue, and equity. C. listing of account balances just before closing entries are prepared
D. listing of accounts of a subsidiary
53. The purchase of equipment on account
A. Will increase asset and decrease a liability 21. Which statement is incorrect concerning ledger?
B. Will increase asset and increase a liability A. The function served by the general ledger in the accounting process is
C. Will decrease equity summarizing.
D. Will decrease asset and decrease liability B. A ledger is a collection of account titles – asset, liability, equity, income and
expense accounts
27. Which of the following transactions does not affect the balance sheet totals? C. A subsidiary ledger is a listing of the components of accounts balances.
A. Purchasing P50,000 supplies on account D. The accounts appearing on the general ledger are known as “ controlling
B. Paying a P300,000 note payable
C. Collecting P40,000 from customers on account 52. Which of the following is not true of a subsidiary ledger?
D. Withdrawal of P80,000 by the firm's owner A. The purpose of a subsidiary ledger is to store the details of certain general ledger
accounts.
B. The sum of the individual balances in a subsidiary ledger should equal the accounting errors.
balance in the general ledger control account D. The worksheet helps facilitate the preparation of financial statements.
C. Journal entries posted to a subsidiary ledger need not be posted to the general
ledger 24. The balancing figure in the worksheet is net income or net loss. There is net loss if
D. One benefit of subsidiary ledger is that the number of general ledger accounts A. The total of the credits exceeds the total of the debits in the income statement
necessary is reduced. columns.
B. In the balance sheet columns, the total of the debits exceeds the total of the
14. Conceptually, asset valuation accounts are credits,
A. Assets C. Part of stockholders' equity C. The total of the credits is the same as the total of the debits in the income
B. Neither assets nor liabilities D. Liabilities statement columns,
D. In the balance sheet columns, the total of the credits exceeds the total of the
23. A control device that helps minimize and localize accounting errors is known as debits.
A. Subsidiary ledger C. Trial balance
B. Worksheet D. Chart of accounts 44. A generally accepted account title is
A. Prepaid revenue C. Earned surplus
44. An unadjusted trial balance B. Appropriation for contingencies D. Reserve for doubtful accounts
A. Provides information that is helpful when making adjusting entries
B. Proves that no errors have been made in the accounting records Journal Entries
C. Usually contains the account balances that should appear in the financial 44. The use of a purchase discount lost account implies that the cost of a purchased
statements. inventory item is the
D. Is a summary taken directly from the general journal A. Invoice price
B. List price
29. The trial balance of a company taken at the end of 2003 showed a debit total which C. Invoice price less the purchase discount taken
exceeded the credit total by P8,100. Which of the following is probably responsible D. Invoice price less the purchase discount allowable whether taken or not taken
for this situation?
A. The balance of P89,000 in the accumulated depreciation account was entered in 33. The purchase of equipment on account will
the trial balance as P80,900. A. increase asset and decrease a liability
B. The balance of P4,050 in the advertising expense was entered as credit. B. increase asset and increase a liability
C. The balance of P9,000 in the office equipment account as entered as a debit of C. decrease equity
P900 in the trial balance. D. decrease asset and decrease liability
D. The balance of P16,200 in the unexpired insurance account was entered as a
credit in the trial balance. Adjusting Entries
54. Adjusting entries are based primarily on the accounting principles of
46. Which of the following is not true of a worksheet? A. Revenue realization and materiality C. Matching and historical cost
A. The worksheet is included as part of the published financial statements. B. Revenue realization and matching D. Matching and monetary unit
B. The worksheet provided a place where adjusting entries can be made informally
before they are journalized and posted. 33. Adjusting entries are necessary to
C. The worksheet provides a balancing mechanism that helps to uncover I. Obtain a proper matching of revenue and expense.
II. Achieve an accurate statement of assets and equities. occurs is called

III. Adjust assets and liabilities to their fair market value. A. Deferral C. Accrual
A. I only C. III only B. Nominal D. Special item
B. II only D. l and II only
36. An accrued revenue can best be described as an amount
34. Which of the following would not be a correct form for an adjusting entry? A. Collected and currently matched with expenses.
A. A debit to a revenue and a credit to a liability B. Collected and not currently matched with expenses.
B. A debit to an expense and a credit to a liability C. Not collected and currently matched with expenses.
C. A debit to a liability and a credit to a revenue D. Not collected and not currently matched with expenses.
D. A debit to an asset and a credit to a liability
29. The accrued balance in a revenue account represents an amount which is
28. Which one of the following items least resembles a typical adjusting entry? A. Earned and collected C. Unearned and collected
A. Debit an asset and credit revenue C. Debit revenue and credit liability B. Earned and uncollected D. Unearned and uncollected
B. Debit an expense and credit liability D. Debit an asset and credit liability
Accrued Expenses
Prepayments 37. If, during an accounting period, an expense item has been incurred and consumed
35. A prepaid expense can best be described as an amount but not yet paid for or recorded, then the end-of-period adjusting entry would involve
A. Paid and currently matched with revenues. A. A liability account and an asset account.
B. Paid and not currently matched with revenues. B. An asset or contra-asset and an expense account.
C. Not paid and currently matched with revenues. C. A liability account and an expense account.
D. Not paid and not currently matched with revenues. D. A receivable account and a revenue account.
14. The premium on a three-year insurance policy expiring on December 31, 2005 was 22. An adjusting entry to accrue wages earned but not yet paid is an example of
paid in total on January 2, 2003. If the company has six-month operating cycle, then A. Aligning recorded costs with appropriate accounting periods
on December 31, 2003, the, prepaid insurance reported as a current asset would be B. Aligning recorded revenue with appropriate accounting periods
for C. Reflecting unrecorded expenses incurred during an accounting period
A. 6 months C. 18 months D. Reflecting unrecorded revenue earned during an accounting period
B. 12 months D. 24 months
Comprehensive
Deferred Revenue 19. Which is an incorrect adjusting entry?
38. An unearned revenue can best be described as ah amount A. Debit doubtful accounts and credit allowance for doubtful accounts
A. Collected and currently matched with expenses. B. Debit accumulated depreciation and credit depreciation
B. Collected and not currently matched with expenses. C. Debit salaries and credit accrued salaries payable
C. Not collected and currently matched with expenses. D. Debit inventory-end and credit income summary
D. Not collected and not currently matched with expenses.
Closing Entries
Accrued Revenue 15. Which of the following closing procedures is unique to a corporation?
45. An adjusting entry in which a revenue is recognized before the related cash receipt A. Close each revenue account to the income summary account
B. Close each expense account to the income summary account B. The entry to record the portion of service fees received in advance that is earned
C. Close the income summary account to the retained earnings account by year-end
D. Close the owner's drawing account to the owner's capital account C. The entry to record supplies used during the period
D. The entry to record service fees earned by year-end but not billed
31. The dividends declared account is a nominal account and
A. Carried forward to the next accounting period Cash vs. Accrual Method, Single-Entry vs. Double Entry Method
B. Closed directly to retained earnings 49. Which of the following accounting bases may be used to prepare financial statements
C. Closed directly to income summary in conformity with a comprehensive basis of accounting other than generally accepted
D. Closed directly to capital accounting principles.
I. Basis of accounting used by an entity to file its income tax return.
Post-Closing Trial Balance II. Cash receipts and disbursements basis of accounting.
56. The post-closing trial balance A. I only C. Both I and II
A. Provides a convenient listing of account balances that can be used to prepare B. II only D. Neither I nor II
the financial statements
B. Does not include nominal accounts 60. Blix, a single proprietor, uses the cash basis of accounting for tax purposes.
C. Is identical to the balance sheet Compared with the accrual basis of accounting, the use of the cash basis understates
D. Proves that accounts have been closed properly income during the accounting period by the net decrease of
A. Both accounts receivable and accrued expenses
Reversing Entries B. Accrued expenses but not of accounts receivable
39. Reversing entries are C. Neither accounts receivable nor of accrued expenses
I. Normally prepared for prepaid, accrued, and estimated items. D. Accounts receivable but not of accrued expenses
II. Necessary to achieve a proper matching of revenue and expense.
III. Desirable to exercise consistency and establish standardized procedures. 41. Under the cash basis of accounting, revenues are recorded
A. I only C. Ill only A. When they are earned and realized. C. When they are earned.
B. II only D. I and II only B. When they are earned and realizable. D. When they are realized.
40. Adjusting entries that should be reversed include those for prepaid or unearned items 42. When converting from cash basis to accrual basis accounting, which of the following
that adjustments should be made to cash receipts from customers to determine accrual
A. Create an asset or a liability account. basis service revenue?
B. Were originally entered in a revenue or expense account. A. Subtract ending accounts receivable.
C. Were originally entered in an asset or liability account. B. Subtract beginning unearned service revenue.
D. Create an asset or a liability account and were originally entered in a revenue or C. Add ending accounts receivable.
expense account. D. Add cash sales.
30. Assume an enterprise initially records prepayments in balance sheet accounts and 43. When converting from cash basis to accrual basis accounting, which of the following
makes reversing entries when appropriate. Which of the following year-end adjusting adjustments should be made to cash paid for operating expenses to determine
entries should be reversed? accrual basis operating expenses?
A. The entry to record depreciation expense for the period A. Add beginning accrued liabilities. C. Subtract ending prepaid expense.
B. Subtract beginning prepaid expense. D. Subtract interest expense. the following, except
A. Remove all assets from the balance sheet
25. Incomplete accounting records using only a cash book is a characteristic of B. Record all assets received and liabilities incurred as proceeds from the sale
A. Cash basis C. Single entry system C. Measure the assets received and liabilities incurred at cost
B. Accrual basis D. Double entry system D. Recognized any gain or loss on the sale
66. Which of the following statements is incorrect? 34. Which one is not a financial asset?
A. Accrual basis financial statements may be prepared from single-entry records. A. Cash
B. Single entry accounting is synonymous with cash basis accounting. B. To deliver cash or other financial asset to another enterprise
C. No adjusting entries are necessary when accounting records are kept on a pure C. A equity instrument of another enterprise
cash basis. D. A contractual right to exchange financial instruments with another enterprise
D. Over the entire life of a business enterprise, there would be no difference under conditions that are potentially favorable
between income on a cash basis and income on an accrual basis.
4. A financial asset includes all, except
Comprehensive A. Equity security
13. Which of the following statements is incorrect? B. Cash and cash equivalent
A. Accrual basis financial statements may be prepared from single-entry records. C. Contractual right to receive cash from another enterprise
B. Single entry accounting is synonymous with cash basis accounting. D. Contractual right to exchange financial instrument with another enterprise under
C. No adjusting entries are necessary when accounting records are kept on a cash conditions that are potentially unfavorable
basis.
D. Over the entire life of a business enterprise, there would be no difference CASH & CASH EQUIVALENT
between income on a cash basis and income on an accrual basis. Basic Concepts
26. Cash equivalents are
FINANCIAL ASSETS A. Short-term highly liquid investments that are readily convertible to known amount
34. It is any contract that gives rise to both a financial asset of one enterprise and a of cash.
financial liability of another enterprise. B. Investments subject to an insignificant risk of change in value.
A. Financial instrument C. Debt instrument C. Short-term highly liquid investments that are readily convertible to known amount
B. Equity instrument D. Derivative instrument of cash and which are subject to an insignificant risk of change in value.
D. Short-term highly liquid investments that are readily convertible to known amount
4. Which of the following is not an objective of accounting for transfers of financial of cash and which are subject to a significant risk of change in value.
assets?
A. To derecognize assets when control is gained 7. Which of the following is considered cash?
B. To derecognize liabilities when extinguished A. Certificates of deposit C. Money market saving certificates
C. To recognize liabilities when incurred B. Money market checking accounts D. ICU
D. To derecognize assets when control is given up
39. Star Company placed P1.5 million in the money market for 60 days subject to pre-
5. ABC Company transferred financial assets to XYZ Company. The transfer meets the termination The PI.5 million should be
conditions to be accounted for as a sale. As the transferor, ABC should do each of A. Included as part of cash and cash equivalents with the appropriate disclosure in
the notes to the financial statements. A. A three-year treasury note maturing on May 30, 2003 purchased by the
B. Recorded as part of its marketable securities without need of any disclosure. enterprise on April 15, 2003
C. Treated as short-term receivable with the appropriate disclosure in the notes to B. A three-year treasury note maturing on May 30, 2003 purchased by the
the financial statements. enterprise on January 2, 2003
D. Considered as part of its marketable securities with the appropriate disclosure in C. A 90-day T-bill
the notes the financial statements. D. A 60-day money market placement
23. Daffy Company placed P1.5 million in the money market for 120 days subject to a 7. The following statements relate to cash. Which statement is false?
pretermination clause. The P1.5 million should be A. Cash equivalents are short-term and highly liquid investments that are readily
A. Included as part of the cash and cash equivalents with the appropriate disclosure convertible into cash and so near their maturity that they represent insignificant
on the notes to the financial statements. risk of changes in value because of changes in interest rates.
B. Recorded as part of its marketable financial assets without need of any B. Classification of a restricted cash balance as current or noncurrent should
disclosure. parallel the classification of the related obligation for which the cash was
C. Treated as short-term receivable with appropriate disclosure in the notes to the restricted.
financial statements. C. Legally restricted bank deposit held as compensating balance should be
D. Considered as part of its marketable financial assets with appropriate disclosure segregated from the cash account and reported as current or noncurrent
in the notes to financial statements. depending on the term of the related loan.
D. A six-month money market placement with remaining maturity of two months on
23. The one item that should be excluded from cash and cash equivalent on the balance sheet date should be classified as cash equivalents
December 31, 2003 balance sheet of Zebra Company is
A. A P10,000 minimum balance in the firm’s current account which is maintained to 32. Which of the following statements is false?
avoid service charges A. A certified check is a liability of the bank certifying it.
B. A check issued by Zebra Company on December 27, 2003, but dated January B. A certified check will be accepted by many persons who would not otherwise
15, 2004 accept a personal check.
C. A P500,000 time deposit which matures on one year C. A certified check is one drawn by a bank upon itself.
D. A customer’s check denominated in a foreign currency D. A certified check should not be included in the outstanding checks.
22. An item that should be excluded from cash and cash equivalents on the December 24. As of December 31, of the current year, Green Company had various checks and
31, 2005 balance sheet of Haydee Company is papers in its safe. Which item should not be included in its cash account in the
A. A customer's check denominated in a foreign currency. current year-end balance sheet?
B. A check issued by Haydee Company on December 30, 2005, but dated January A. US $20,000 cash
10, 2006. B. Past due promissory note issued in favor of Green by its President
C. A P1,000,000 time deposit which matures in 4-months. C. Red Company's December 15, of the current year, P150,000 check payable to
D. A P100,000 balance in the company's current account maintained as a payroll Green Company
fund. D. Green Company's December 28, of the current year, check payable to Blue
Company, a supplier
40. Which among the following is not considered as a cash equivalent for purposes of a
cash flow statement? 8. Which of the following is not considered cash for financial reporting purposes?
A. Petty cash fund and change fund C. The reimbursement of the petty cash fund should be credited to the cash account
B. Money order, certified check and personal check D. Entries that include a credit to the cash account should be recorded at the time
C. Coin, currency and available fund the payments from the petty cash fund are made
D. Postdated check
6. The following statements pertain to accounting for petty cash fund. Which statement
10. Bank overdraft, if material, should be is false?
A. reported as deduction from the current asset section A. Each disbursement from petty cash should be supported by a petty cash
B. reported as a deduction from cash voucher.
C. netted against cash and a net cash amount reported B. The creation of a petty cash fund requires a journal entry to reflect the transfer of
D. reported as a current liability fund out of the general cash account.
C. At any time, the sum of the cash in the petty cash fund and the total of the petty
12. Deposits held as compensating balances cash vouchers should equal the amount for which the imprest petty cash fund
A. Usually do not earn interest. was established.
B. If legally restricted and held against short-term credit may be included as cash. D. With the establishment of the imprest petty cash fund, one person is given
C. If legally restricted and held against long-term credit may be included among authority and responsibility for issuing checks to cover minor disbursements.
current assets.
D. If legally restricted, should be segregated from the cash account and reported as 53. A Cash Over and Short account is
current or noncurrent depending on the term of the related credit. A. not generally accepted.
B. debited when the petty cash fund proves out over.
Valuation C. debited when the petty cash fund proves out short.
29. Which is false concerning valuation of cash and cash equivalents? D. a contra account to cash.
A. Cash is valued at face value
B. Cash in foreign currency is valued at the current exchange rate Bank Reconciliation
C. If a bank or financial institution holding the funds of the company is in bankruptcy 24. If the cash balance shown in the company's bank statement is more than the correct
of financial difficulty, cash should be written down to estimated realizable value cash balance and neither the company nor the bank has made any errors, there must
D. Cash equivalents should be valued at maturity value, meaning face value plus be
interest A. Deposits in transit
B. Bank charges not yet recorded by the company
Petty Cash Fund C. Outstanding checks
30. The internal control feature that is specific to petty cash is D. Withdrawals made by the company debited to another account.
A. Separation of duties C. Proper authorization
B. Assignment of responsibility D. Imprest system 54. When preparing a bank reconciliation, bank credits are
A. Added to the bank statement balance.
24. When a petty cash fund is used, which of the following is true? B. Deducted, from the bank statement balance.
A. The balance of the petty cash fund should be reported on the balance sheet as a C. Added to the balance per book.
long-term investment D. Deducted from the balance per book.
B. The petty cashier’s summary of petty cash payments serves as a journal entry
that is posted to the appropriate general ledger account 11. The journal entries for a bank reconciliation
A. Are taken from the "balance per bank" section only. Comprehensive
B. May include a debt to office expense for bank service charges. 30. The following statements relate to cash. Which statement is true?
C. May include a credit to accounts receivable for NSF check. A. The term “cash equivalent” refers to demand credit instruments such as money
D. May include a debit to accounts payable for NSF check. order and bank drafts.
B. The purpose of establishing a petty cash fund is to keep enough cash on hand to
35. Which statement is true? cover all normal operating expenses of the business for a period of time.
A. Bank service charge will cause the cash balance per ledger to be higher than C. Classification of a restricted cash balance as current or noncurrent should
that reported by the bank, all other things being equal parallel the classification of the related purpose or obligation for which cash was
B. Outstanding checks will cause the cash balance per ledger to be greater than the restricted.
balance reported by the bank, all other things being equal D. Compensating balances required by a bank should always be excluded from the
C. An error made by a bank by charging an amount to the depositor's account “cash” classification on the balance sheet.
requires a correcting entry in the depositor's own records
D. The cash amount shown in the balance sheet must be the balance reported in 31. Which of the following statements is false?
the bank statement A. Not all items included in cash constitute legal tender.
B. Cash may be offset against a liability if the deposit of funds in a restricted
25. Which will not require an adjusting entry on the depositor’s books? account constitutes the legal discharge of the liability.
A. NSF check from customer C. Legally restricted bank deposits held as compensating balances should be
B. Check in payment of account payable amounting to P50,000 is recorded by the segregated from the cash account and reported under a separate caption.
depositor as P5,000 D. One-year BSP treasury bills with remaining maturity of three months on balance
C. Deposit of another company is credited to the account of our enterprise sheet date may be shown as part of “cash and cash equivalents” provided this is
D. Bank service charge disclosed.
Balance Sheet Classification RECEIVABLES

39. At October 31 2004, Els Company had cash accounts at three different banks. One Gross Method vs. Net Method
account balance is segregated solely for a November 15, 2004, payment into a bond 55. If a company employs the gross method of recording accounts receivable from
sinking fund. A second account, used for branch operations, is overdrawn. The third customers, then sales discounts taken should be reported as
account, used for regular corporate operations, has a positive balance. How should A. a deduction from sales in the income statement.
these accounts be reported in the October 31, 2004 classified balance sheet? B. an item of "other expense" in the income statement.
A. The segregated account should be reported as a noncurrent asset, the regular C. a deduction from accounts receivable in determining the net realizable value of
account should be reported as a current asset, and the overdraft should be accounts receivable.
reported as a current liability D. sales discounts forfeited in the cost of goods sold section of the income
B. The segregated and regular accounts should be reported as current assets, and statement
the overdraft should be reported as a current liability
C. The segregated account should be reported as a noncurrent asset, and the Allowance for Bad Debts
regular account should be reported as a current asset net of the overdraft. 31. Which method of recording bad debt loss is consistent with accrual accounting?
D. The segregated and regular accounts should be reported as current assets net of A. Allowance method C. Percent of sales method
the overdraft B. Direct writeoff method D. Percent of accounts receivables

9. Which method of recording uncollectible accounts expense is consistent with accrual

accounting? Aging Method
I. Allowance method II. Direct write-off method 26. Which of method of estimating doubtful accounts fairly presents the net realizable
A. I only C. Both I and II value of accounts receivable?
B. II only D. Neither I nor II A. Percentage of sales method C. Percent of accounts receivable
method
36. Which of the following methods of determining bad debt expense does not match B. Aging of accounts receivable method D. Direct write off method
expense and revenue?
A. Charging bad debts with a percentage of sales under the allowance method 41. The "aging" method of estimating bad debts is
B. Charging bad debts with a percentage of accounts receivable under the A. A procedure where the amount of sales for the year is multiplied by a certain rate
allowance method to get the bad debt expense
C. Charging bad debts with an amount derived from aging the accounts receivable B. An analysis of the accounts whether or not they are past due.
under the allowance method C. A method in which a rate determined from past experience is multiplied by the
D. Charging bad debts as accounts are written off as uncollectible ending balance of accounts receivable in order to get the required allowance
balance.
Allowance for Cash Discounts D. A procedure where a bad debts are directly related to sales from which they arise
56. The allowance for cash discounts which would appear as a deduction from accounts and are reported in the same year of sale.
receivable on a balance sheet and would be based on an estimate of cash discounts
to be taken on accounts receivable is an effect of the application of 17. When an accounts receivable aging schedule is prepared at the end of the fiscal
A. Matching C. Materiality year, a series of computation like the following is sometimes made: 5% of the total
B. Consistency D. Objectivity peso balance of accounts from 1-30 days past due, plus 10% of the total peso
balance of accounts from 31-60 days past due, and so on. Which of the following
Percent of Sales statements best describes how the sum of the amounts determined in this series of
33. Which of the following methods of determining bad debt expense most closely computations is used?
matches expense to revenue? A. When added to the total accounts written off during the year, this new sum is the
A. Charging bad debts only as accounts are written off as uncollectible. desired credit balance of the allowance for doubtful accounts to be reported in
B. Charging bad debts with a percentage of sales for that period. the year-end financial statements.
C. Estimating the allowance for doubtful accounts as a percentage of accounts B. It is the amount of bad debt expense for the year.
receivable. C. It is the amount that should be added to the allowance for doubtful accounts at
D. Estimating the allowance for doubtful accounts by aging the accounts receivable. year-end.
D. It is the amount of desired credit balance of the allowance for doubtful accounts
Percent of Accounts Receivable to be reported in the year-end financial statements.
27. The advantage of relating a company’s bad debt experience to its accounts
receivable is that this approach Receivables Financing
A. Gives a reasonably correct statement of receivables in the balance sheet 11. All but one of the following are required before a transfer of receivables can be
B. Relates bad debt expense to the period of sale recorded as a sale?
C. Is the only generally accepted method for valuing accounts receivable A. The transferred receivables are beyond the reach of the transferor and its
D. Makes estimates of uncollectible accounts unnecessary creditors.
B. The transferor has not kept effective control over the transferred receivables B. II only D. Neither I nor II
purchase agreement.
C. The transferor maintains continuing involvement 56. Which of the following is true when accounts receivable are factored without
D. The transferee can pledge or sell the transferred receivables recourse?
A. The transaction may be accounted for either as a secured borrowing or as a
34. The practice of realizing cash from trade receivables prior to their maturity dates is sale, depending upon the substance of the transaction.
widespread. A term which is not associated with this practice is B. The receivables are used as collateral for a promissory note issued to the factor
A. Hypothecation C. Defalcation by fee owner of the receivables.
B. Factoring D. Pledging C. The factor assumes the risk of collectibility and absorbs any credit losses in
collecting the receivables.
48. Which of the following is a method to generate cash from accounts receivable? D. The financing cost should be recognized ratably over the collection period of the
I. Assignment receivables.
II. Factoring
A. I only C. Both I and II Notes Receivable
B. II only D. Neither I nor II Non-interest bearing note receivable
32. Accounting for the interest in a noninterest bearing note receivable is an example of
Factoring what aspect of accounting theory?
27. Rockwood Company factored its receivables without recourse with National Bank. A. Matching C. Substance over form
Rockwood received cash as a result of this transaction which is best described as a B. Verifiability D. Accounting entity
A. Loan from National Bank collateralized by Rockwood’s accounts receivable.
B. Loan from National Bank to be repaid by the proceeds from Rockwood's Interest bearing note receivable
accounts receivable. Interest receivable
C. Sale of Rockwood's accounts receivable to National Bank, with the risk of 8. On July 1 of this year, XYZ Company received a one year note receivable bearing
uncollectible accounts retained by Rockwood. interest at the market rate. The face amount of the note receivable and the entire
D. Sale of Rockwood's accounts receivable to National Bank, with the risk of amount of the interest are due on June 30 of next year. At December 31 of this year,
uncollectible accounts transferred to National Bank. XYZ should report in its balance sheet
A. A deferred credit for interest applicable to next year
57. When accounts receivable are factored without recourse B. No interest receivable
A. Accounts receivable is credited C. Interest receivable for the entire amount of interest due on June 30 of next year
B. Payable to factor is credited D. Interest receivable for the interest accruing this year
C. A contingent liability is ordinarily created
D. The factoring is accounted for as a borrowing as opposed to a sale of the 28. On July 1, 2004, a company received a one-year note receivable bearing interest at
receivables the market rate. The face amount of the note receivable and the entire amount of the
interest are due on June 30, 2005. The interest receivable account would show a
10. Which of the following is used to account for probable sales discounts, sales returns balance on
and sales allowances? A. July 1, 2004, but not December 31, 2004
I. Due from factor II. Recourse liability B. December 31, 2004, but not July 1, 2004
A. I only C. Both I and II C. July 1, 2004, and December 31, 2004
D. Neither July 1, 2004, nor December 31, 2004 the market rate of interest on that date. The 4-month note was dated July 15, 2004.
Note principal, together with all interest, is due on November 15, 2004. When the
11. On July 1, 2004, a company obtained a 2-year 8% note receivable for services note was recorded on August 15, which of the following accounts increased?
rendered. At that time, the market rate of interest was 10%. The face amount of the A. Unearned discount C. Prepaid interest
note and the entire amount of interest are due on June 30, 2006. Interest receivable B. Interest receivable D. Interest revenue
at December 31, 2004 was.
A. 5% of the face value of the note Notes Receivable Discounted
B. 4% of the face value of the note 58. If a note receivable is discounted without recourse
C. 5% of the July 1, 2004 present value of the amount due on June 30, 2006 A. The contingent liability may be disclosed in either a contra account to note
D. 4% of the July 1, 2004 present value of the amount due June 30, 2006 receivable or in the notes to the financial statements
B. Liability for note receivable discounted should be credited
29. On October 1, 2003 a company received a one-year note receivable bearing interest ƒC. Note receivable should be credited
at the market rate. The face amount of the note receivable and the entire amount of D. The transaction should be accounted for as a borrowing as opposed to a sale
the interest are due on September 30, 2004. The interest receivable account at
December 31, 2003 would consist of an amount representing 33. A 90-day 15% interest-bearing note receivable is sold to a bank without recourse
A. Three months of accrued interest income after being held for 60 days. The proceeds are calculated using an 18% interest rate.
B. Nine months of accrued interest income The amount credited to note receivable at the date of the discounted transaction
C. Twelve months of accrued interest income would be
D. The excess at October 1, 2003 of the present value of the note receivable over A. The same as the cash proceeds C. The face value of the note
its face value B. Less than the face value of the note D. The maturity value of the note
Carrying Cost 27. After being held for 40 days, a 120-day 12% interest-bearing note receivable was
12. In calculating the carrying amount of a loan, the lender adds to the principal discounted at a bank at 15%. The proceeds received from the bank equal
I. Direct loan origination cost A. Maturity value less the discount at 12% C. Face value less the discount at
II. Loan origination fees charged to the borrower 12%
A. I only C. Both I and II B. Maturity value less the discount at 15% D. Face value less the discount at
B. II only D. Neither I nor II 15%
13. Peer Company uses the installment sales method to recognize revenue. Customers 34. A note receivable bearing a reasonable interest rate is sold to a bank with recourse.
pay the installment notes in 24 monthly amounts which include 12% interest. What is At the date of the discounting transaction, the note receivable discounted account
an installment note receivable balance 6 months after the sale? should be
A. 75% of the original sales price A. Decreased by the proceeds from the discounting transaction
B. Less than 75% of the original sales price B. Increased by the proceeds from the discounting transaction
C. The present value of the remaining monthly payments discounted at 12% C. Increased by the face amount of the note
D. Less than the present value of the remaining monthly payments discounted at D. Decreased by the face amount of the note
12%
Valuation
10. On August 15, 2004, Bene Company sold goods for which it received a note bearing 28. Assuming that the ideal measure of short-term receivable in the balance sheet is the
discounted value of the cash to be received in the future, failure to follow this practice A. Decreases both accounts receivable and the allowance for uncollectible
usually does not make the balance sheet misleading because accounts.
A. Most short-term receivables are not interest-bearing B. Decreases accounts receivable and increases the allowance for uncollectible
B. The allowance for uncollectible accounts includes a discount element accounts.
C. The amount of the discount is not material C. Increases the allowance for uncollectible accounts and decreases net income
D. Most receivables cab be sold to a bank or factor D. Decreases both accounts receivable and net income.
26. The following statements pertain to presentation and valuation of receivables. Which Bad Debt Recovery
is not in accordance with generally accepted practice? 42. Wee Company uses the allowance method of recognizing uncollectible account.
A. Receivable balance should be valued at face amount minus allowance for Upon receipt of P20,000 which is a collection of previously written off account, it
doubtful accounts and for any anticipated adjustments which in the normal debited accounts receivable and credited allowance for uncollectible accounts.
course of events will reduce the amount receivable to estimated realizable value Subsequently, it debited cash and credited accounts receivable. The entries would
B. Credit balances in customer’s accounts receivable should be classified as A. Increase the allowance for uncollectible accounts
current liabilities B. Decrease the allowance for uncollectible accounts
C. Long-term notes receivables which nominally bear no interest or an interest C. Have no effect on the allowance for uncollectible accounts
which is unreasonably low should be stated at face value D. Increase net income
D. Receivables denominated in foreign currency should be translated to local
currency using the exchange rate on balance sheet date 47. A company uses the allowance method to recognize uncollectible accounts expense.
What is the effect at the time of collection of an account previously written off on each
Journal Entries of the following?
Write-off A. B. C. D.
25. When the allowance method of recognizing bad debt expense is used, the allowance Allowance account No effect Increase Increase No effect
for doubtful accounts would decrease when Uncollectible accounts Decrease Decrease No effect No effect
A. Specific account receivable is collected expense
B. Account previously written off is collected
C. Account previously written off becomes collectible Presentation & Disclosure Requirements
D. Specific uncollectible account is written off 25. The following statements pertain to presentation and valuation of receivables. Which
is not in accordance with generally accepted practice?
37. XYZ Company uses the allowance method for recognizing uncollectible accounts. A. Credit balances in customers' account receivable should be offset against other
Ignoring deferred tax, the entry to record the writeoff of a specific uncollectible receivables to arrive at the net amount.
account B. Receivable balances should be valued at face amount minus allowance for
A. Affects neither net income nor working capital doubtful accounts and for any anticipated adjustments, which in the normal
B. Affects net income nor accounts receivable course of events will reduce the amount of receivable to estimated realizable
C. Decreases both net income and accounts receivable value.
D. Decreases both net income and working capital C. Long-term notes receivables which nominally bear no interest or an interest,
which is unreasonably low should be stated at present value.
46. When the allowance method of recognizing uncollectible accounts is used, the entry D. Receivables denominated in foreign currency should be translated to local
to record the write-off of a specific account currency using the exchange rate on balance sheet date.
Which of the following cost shall be included in the cost of inventories?

INVENTORIES A. Import duties and other taxes, transport, handling and other costs directly
Basic Concepts attributable to the acquisition of finished goods, materials and services.
Inclusions B. Abnormal amounts of wasted materials, labor or other production costs.
Exclusions C. Storage costs unnecessary in its production process.
28. Which of the following items should be excluded from a company's inventory at the D. Administrative overheads that do not contribute to bringing inventories to their
balance sheet date? present location and condition.
A. Goods lost while in transit, which were purchased FOB shipping point.
B. Goods held by customers on approval or on trial Non-inventoriable costs
C. Goods out on consignment 43. The cost of purchase of inventory does not include
D. Goods purchased FOB destination A. Purchase price
B. Import duties and taxes
Product Costs & Period Costs C. Freight, handling and other costs directly attributable to the acquisition of goods
Product Costs D. Trade discounts, rebates and other similar items
15. How should the following costs affect a retailer's inventory?
A. B. C. D. 43. The cost of purchase of inventory includes all of the following, except
Freight-in Increase Increase No effect No effect A. Purchase price
Interest on inventory No effect Increase Increase No effect B. Cost of conversion
loan C. Other cost incurred in bringing the inventory to its present location and condition
D. Selling cost
19. When determining the unit cost of an inventory item, which of the following should not
be included? Period Costs
A. Interest on loan obtained to purchase the item 44. Costs excluded from cost of inventory and recognized as expenses in period when
B. Commission paid when purchased incurred are
C. Labor cost of the item when manufactured A. Storage costs unless necessary in the production process
D. Depreciation of plant equipment used in manufacturing the item B. Borrowing costs incurred for inventories that require a substantial period of time
to bring them to a salable condition
13. South Company paid the in transit insurance premium for consignment goods C. Foreign exchange differences which result from severe devaluation of a currency
shipped to a consignee. In addition, South Company advanced part of the against which there is no hedging and that affects liabilities directly arising from
commissions that will be due when the consignee sells the goods. What should South the recent acquisition of inventories
Company include in Inventory costs? D. Freight and handling costs in acquiring goods
I. insurance premium
II. Advanced commissions 42. Examples of costs excluded from the cost of inventories and recognized as expenses
A. Both I and II C. I only in the period in which they are incurred include all of the following, except
B. Neither I nor II D. II only A. Abnormal amount of wasted materials, labor and other production costs.
B. Storage costs.
29. The cost of inventories shall comprise all costs of purchase, costs of conversion and C. Foreign exchange differences which arise directly on the recent acquisition of
other costs incurred in bringing the inventories to their present location and condition. inventories invoiced in foreign currency.
D. Administrative overheads that do not contribute to bringing inventories to their A. I only. C. I and II.
present location and condition. B. II only. D. Neither I nor II.
43. The cost of inventories may not be recoverable under all of the following conditions, 28. The costs of conversion of inventories include costs directly related to the units of
except production such as
A. The inventories are damaged. A. Direct materials and direct labor
B. The inventories have become wholly or partially obsolete. B. Direct labor and a systematic allocation of variable production overhead only
C. The selling prices of the inventories have increased. C. Direct labor and a systematic allocation of fixed and variable production
D. The estimated costs of completion or the estimated costs to be incurred to make overhead.
the sale have increased. D. Direct labor and a systematic allocation of all fixed and variable overhead.
Manufacturing Concern Service Providers

Cost of Goods Manufactured 30. The cost of inventories of a service provider consists primarily of
47. What is the manufacturing firm’s analog to the merchandise firms’ net purchases? A. Labor and other cost of personnel directly engaged in providing the service,
A. Cost of goods available for sale C. Cost of goods manufactured including supervising personnel and attributable overhead
B. Cost of goods sold D. Finished goods inventory B. Labor and other cost relating to sales and general administrative personnel
C. Cost of materials used, direct labor incurred and attributable overhead
Cash Discounts D. Operating supplies
35. Theoretically, cash discounts permitted on purchased raw materials should be
A. Added to other income, whether taken or not Comprehensive
B. Added to other income, only if taken 40. The following statements relate to inventories. Which is incorrect?
C. Deducted from inventory, whether taken or not A. The cost of inventories should comprise all costs of purchases, costs of
D. Deducted from inventory, only if taken conversion and other costs incurred in bringing the inventories to their present
location and condition.
Conversion Costs B. The costs of conversion of inventories include costs directly related to the units of
96. The costs of conversion of inventories include costs directly related to the units of production such as direct labor, and systematic allocation of variable production
production such as overhead.
A. Direct materials and direct labor C. The cost of inventories of a service provider consists primarily of labor and other
B. Direct materials, direct labor and a systematic allocation of fixed and variable costs of personnel directly engaged in providing the service, including
production overhead. supervisory personnel and attributable overhead.
C. Direct labor and a systematic allocation of fixed and variable production D. Other costs are included in the cost of inventories only to the extent that they are
overhead. incurred in brining the inventories to their present location and condition.
D. Direct labor and a systematic allocation of variable production overhead.
Consignment in
41. The costs of conversion of inventories include 14. Jean Company, a consignee, paid the freight costs for goods shipped from a
I. Costs directly related to the units of production, such as direct labor. consignor. These freight costs are to be deducted from Jean's payment to the
II. Systematic allocation of fixed and variable production overheads that are consignor when the consignment goods are sold. Until Jean sells the goods, the
incurred in converting materials into finished goods. freight costs should be Included In Jean's
A. Cost of goods sold C. Selling expenses A. Average cost C. Joint cost

B. Freight out costs D. Accounts receivable B. Base stock D. Prime cost
Inventory Accounting Method 59. The pricing of issues from inventory must be deferred until the end of the accounting
Periodic Inventory Method period under which of the following method of inventory valuation?
20. When using the periodic inventory method, which of the following generally would not A. Moving average C. LIFO perpetual
be separately accounted for in the computation of cost of goods sold? B. Weighted-average D. FIFO
A. Trade discounts applicable to purchases during the period
B. Cash discounts taken during the period 11. The weighted average inventory cost flow method is applicable to which of the
C. Purchase returns and allowances of merchandise during the period following inventory systems?
D. Cost of transportation-in for merchandise purchased during the period I. Periodic
II. Perpetual
Perpetual Inventory Method A. Both I and II C. II only
36. What is the method of accounting for inventories in which the cost of goods sold is B. I only D. Neither I nor II
recorded each time a sale is made?
A. Professional inventory system C. Perpetual inventory system 32. Technically, the weighted average inventory cost flow method is applicable to which
B. Periodic inventory system D. Planned inventory system of the following inventory systems?
I. Perpetual II. Periodic
Cost Flow Assumption A. Both I and II C. II only
58. During periods of declining inventory costs, which of the following methods yields the B. I only D. Neither I nor II
most conservative net income?
A. FIFO C. Average cost Sensitivity Analysis
B. LIFO D. Specific identification 19. With respect to the various methods of inventory measurement, which of the following
statements is incorrect?
59. Cost of goods sold is the same under a periodic system as under perpetual system A. In applying the LCM rule, cost must still be determined through FIFO, LIFO or
when a company uses average method.
A. FIFO C. Average cost B. A company can manipulate its earnings to a certain extent if it employs LIFO.
B. LIFO D. Any of the above methods B. LIFO may often result in the cost of goods not sold being charged to cost of
goods sold.
12. During periods increasing costs and prices, the last-in first-out method of inventory D. FIFO usually results in fairly current cost being included in the cost of goods sold.
valuation is preferred because
A. It follows the actual flow of goods. 37. With respect in the various methods of inventory measurement, which of the following
B. It provides reserve for future possible market decline. statements is false?
C. The inventory is valued at current cost. A. The application of the FIFO method will usually result in fairly current cost being
D. There is matching of current costs against current sales. included in the cost of goods sold.
B. LIFO may often result in the cost of goods not sold being charged to cost of
57. In situations where there is a rapid turnover, an inventory method which produces a goods sold.
balance sheet valuation similar to the first-in, first-out method is C. A company can manipulate its net earnings to a certain extent if it employs the
LIFO method. most conservative net income?

D. In applying the lower of cost or NRV method, cost must still be determined A. FIFO C. Average cost
through the use of FIFO, LIFO, or by means of some average method. B. LIFO D. Specific identification
Periods of Rising Prices Gross Profit Method

32. During periods of increasing costs and prices, the last-in, first-out method of inventory 61. The gross profit method of inventory valuation is valid when
valuation is preferred because A. A portion of the inventory is destroyed.
A. It follows the actual flow of goods. B. There is a substantial increase in inventory during the year.
B. It provides reserve for future possible market decline. C. There is no beginning inventory because it is the first year of operation.
C. The inventory is valued at current cost. D. The gross profit percentage applicable to the goods in ending inventory is
D. There is matching of current costs against current sales. different from the percentage applicable to the goods sold during the period.
44. If the inventory levels are stable or increasing, an argument which is not in favor of Retail Inventory Method
the LIFO method as compared to FIFO is 21. The retail inventory method is based on the assumption that
A. Income taxes tend to be reduced in periods of rising prices A. The final inventory and the total of goods available for sale contain the same
B. Cost of goods sold tends to be stated at approximately current cost in the income proportion of high-cost and low-cost ratio goods.
statement B. The ratio of gross margin to sales is approximately the same each period.
C. Cost assignments typically parallel the physical flow of goods C. The ratio of cost to retail changes at a constant rate.
D. Income tends to be smoothed as prices change over time D. The proportions of markups and markdowns to selling price are the same.
16. A company decided to change its inventory valuation method from FIFO to LIFO in a 38. A major advantage of the retail inventory method is that it
period of rising prices. What was the result of the change on ending inventory and A. Permits companies which use it to avoid taking an annual physical inventory
net income in the year of change? B. Gives a more accurate statement of inventory cost than other methods.
A. Both increase in ending inventory and net income C. Hides costs from customers and employees.
B. Increase in ending inventory and decrease in net income D. Provides a method for inventory control and facilitates determination of the
C. Both decrease in ending inventory and net income periodic inventory.
D. Decrease in ending inventory and increase in net income
62. When calculating the cost ratio for the retail inventory method
Periods of Decreasing Prices A. If it is the conventional method, the beginning inventory is included and
16. Assuming no beginning inventory, what can be said about the trend of inventory markdowns are deducted
prices if cost of goods sold computed under FIFO exceeds the cost of goods sold B. If it is the LIFO method, the beginning inventory is excluded and markdowns are
under LIFO? deducted.
A. Prices decreased C. If it is the LIFO method, the beginning inventory is included and markdowns are
B. Prices increased not deducted.
C. Prices remained unchanged D. If it is the conventional method, the beginning inventory Is excluded and
D. Price trend cannot be determined from information given ^markdowns are not deducted.
60. During periods of declining inventory costs, which of the following methods yields the 62. Under the conventional retail method, the calculation of the cost percentage should
A. Include net markups and exclude net markdown

B. Include net markups and include net markdown 45. Which statement is correct concerning the valuation of inventory at LCM?
C. Include net markdowns and exclude net markups I. Inventories are usually written to net realizable value on an item by item basis
D. Exclude net markups and exclude net markdowns II. It is appropriate to write down inventories based on a classification of inventory,
for example, finished goods or all inventories in a particular industry or
38. The retail inventory method would include which of the following in the calculation of geographical segment
the goods available for sale at both cost and retail? A. I only C. Both I and II
A. Freight-in C. Markups B. II only D. Neither I nor II
B. Purchase returns D. Markdowns
30. The original cost of an inventory item is above the replacement cost and the net
33. When the conventional retail inventory method is used, markdown are commonly realizable value. The replacement cost is below the net realizable value less the
ignored in the computation of the cost to retail ratio because normal profit margin. As a result, under the lower of cost or market method, the
A. There may be no markdowns in a given year inventory item should be reported at the
B. This tends to give a better approximate of the lower of cost or market A. Net realizable value
C. Markups are also ignored B. Net realizable value less the normal profit margin.
D. This tends to result in the showing of a normal profit margin in a period when no C. Replacement cost
markdown goods have been sold D. Original cost.
Valuation 13. The original cost of an inventory item is below both replacement cost and net
31. The valuation of inventories on a prime cost basis realizable value. The net realizable value less normal profit margin is below the
A. Would achieve the same results as direct costing original cost. Under the LCM rule, the inventory item should be valued at
B. Would exclude all overhead from reported inventory costs A. Replacement cost
C. Is always achieved when standard costing is adopted B. Net realizable value
D. Is always achieved when the LIFO flow assumption is adopted C. Net realizable value less normal profit margin
D. Original cost
57. Reported inventories at amounts greater than cost can best be justified on the basis
of 44. Net realizable value is the
A. Verifiability C. Substance over form A. Estimated selling price in the ordinary course of business less the estimated
B. Industry practices D. Matching costs of completion.
B. Current replacement cost.
Lower-of-Cost-or-Net-Realizable-Value C. Estimated selling price in the ordinary course of business less the estimated
45. Which statement is correct concerning the valuation of inventory at LCM? costs of completion and the estimated costs necessary to make the sale.
I. Inventories are usually written to net realizable value on an item by item basis D. Estimated selling price in the ordinary course of business less the estimated
II. It is not appropriate to write down inventories based on a classification of costs of completion, the estimated costs necessary to make the sale and the
inventory, for example, finished goods or all inventories in a particular industry or normal profit margin,
geographical segment
A. I only C. Both I and II 35. Net realizable value is
B. II only D. Neither I nor II A. Current replacement cost
B. Estimated selling price written down below cost if the finished products in which they will be incorporated
C. Estimated selling price less estimated cost to complete are expected to be sold at or above cost.
D. Estimated selling price less estimated cost to complete and estimated cost to sell D. When the circumstances which previously caused inventories to be written down
below cost no longer exist, the amount of write-down is reversed so that the net
13. The net realizable value of inventories will not be lower than historical cost when carrying amount is the lower of the cost and the revised net realizable value.
A. The estimated costs of completion or the costs of disposal have increased
B. The inventories have become obsolete 31. The following statements relate to the valuation of inventories at the lower of cost or
C. The inventories are damaged net realizable value. Which statement is not valid?
D. The selling prices of the inventories have increased I. Inventories are usually written down to net realizable value on an item by item
basis.
20. The net realizable value of inventories may not be recoverable under all of the II. Its appropriate to write down inventories based on a classification of inventory,
following conditions, except for example, finished goods or all inventories in a particular industry or
A. The estimated costs of completion or the costs of disposal have increased. geographical segment.
B. The inventories have become obsolete. A. I only C. Both I and II
C. The inventories are damaged. B. II only D. Nether I nor II
D. The selling prices of the inventories have increased.
58. Which of the following types of interest cost incurred in connection with the purchase
16. Which statement is incorrect concerning the application of LCM rule with respect to or manufacture of inventory should be capitalized as a product cost?
inventory? A. Purchase discounts lost
A. The cost of inventories should be assigned by using preferably either the FIFO or B. Interest incurred during the production of discrete projects such as ships or real
average method estate projects
B. Materials and other supplies held for use in production of inventories are not C. Interest incurred on notes payable to vendors for routine purchases made on a
written down below cost if the finished goods in which they will be incorporated repetitive basis
are expected to be sold at or above cost D. All of these should be capitalized.
C. Inventories are usually written down to net realizable value on an item by item
basis 15. Which statement is incorrect concerning valuation of inventory?
D. It is appropriate to write down inventories on a classification of inventory, for A. The cost of inventories that are not ordinarily interchangeable and goods or
example, finished goods or all inventories in a particular industry or geographical services produced and segregated for specific projects should be assigned by
segment using the FIFO method.
B. Inventories should be measured at the lower of cost or net realizable value.
45. The following statements relate to the valuation of inventories at the lower of cost or C. The cost of inventories in applying the LCM rule should be assigned by using
net realizable value. Which statement is not valid? either FIFO or weighted average.
A. Inventories are usually written down to net realizable value on an item-by-item D. When agricultural crops have been harvested or mineral ones have been
basis. extracted and a sale is assured under a forward contract or government
B. If is appropriate to write down inventories based on a classification of inventory, guarantee, such inventories are measured at net realizable value.
for example, finished goods or all inventories in a particular industry or
geographical segment. Nonmonetary Exchange
C. Materials and other supplies held for use in production of inventories are not 42. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair values.
Each will use the other's goods to promote their own products. The retail price of the Product Financing Arrangement
car that Vik gave up is less than the retail price of the clothes received. What profit 63. During 2004 Elma Company transferred inventory to Jewel Company and agreed to
should Vik recognize for the nonmonetary exchange? repurchase the merchandise early in 2005. Jewel then used the inventory as
A. A profit is not recognized collateral to borrow from National Bank, remitting the proceeds to Elma. In 2005 when
B. A profit equal to the difference between the retail price of the clothes received Elma repurchased the inventory, Jewel used the proceeds to repay its bank loan.
and the car This transaction is known as.
C. A profit equal to the difference between the retail price and the cost of the car A. Consignment C. Assignment for the benefit of
D. A profit equal to the difference between the fair value and the cost of the car creditors
B. Installment sale D. Product financing arrangement
Presentation & Disclosure Requirements

60. When a company uses LIFO for external reporting purposes and FIFO for internal
reporting purposes, an allowance to reduce inventory to LIFO account is used. This
account should be reported
A. On the income statement in the other revenues and gains section.
B. On the income statement in the cost of goods sold section.
C. On the income statement in the other expenses and losses section.
D. On the balance sheet in the current asset section.
61. The cost of inventory pledged as collateral for 90-day loan should be reported in the
balance sheet as
A. A deduction from the related loan payable in the noncurrent liabilities section
B. A deduction from the related loan payable in the current liabilities section
C. A current asset
D. A noncurrent asset
22. If a material amount of inventory has been ordered through a formal purchase
contract at the balance sheet date for future delivery at firm prices
A. This fact must be disclosed.
B. Disclosure is required only if prices have declined since the date of the order.
C. Disclosure is required only if prices have since risen substantially.
D. An appropriation of retained earnings is necessary.
33. When a portion of inventories has been pledged as security on a loan

A. The value of the portion pledged should be subtracted from the debt.
B. An equal amount of retained earnings should be appropriated,
C. The fact should be disclosed but the amount of current assets should not be
affected.
D. The cost of the pledged inventories should be transferred from current assets to A. For a security transferred from trading securities, the unrealized gain or loss at
noncurrent assets. the date of transfer will already have been recognized in earnings and shall not
be reversed.
TRADING SECURITIES, AFS & HTM SECURITIES B. For a security transferred into trading securities, the unrealized gain or loss at the
Basic Concepts date of transfer shall be recognized un earnings immediately.
64. An effective capital allocation process C. For a debt security transferred into available for sale securities from investments
A. Promotes productivity. in bonds and other debt instruments (IBODI), the unrealized gain or loss on the
B. Encourages innovation. date of transfer shall be reported as a separate component of stockholders’
C. Provides an efficient market for buying and selling securities. equity.
D. All of these. D. For a debt security transferred into IBODI from available for sale and
underwriting accounts, the unrealized gain or loss at the date of transfer shall be
Investment in Debt & Marketable Equity Securities of Banks included in earnings.
60. Which is incorrect concerning debt and equity securities by bank?
A. Unrealized gains and losses on trading securities are recognized in income. Valuation
B. Realized gains and losses on trading securities are included in earnings. Marketable Equity Securities
C. Unrealized gains and losses on underwriting accounts are presented as separate 18. A Company has a marketable equity securities portfolio. The aggregate market value
component of stockholders’ equity. exceeds the aggregate cost. This difference should
D. Unrealized and realized gains and losses on available for sale securities are A. Be accounted for as a valuation allowance in the asset section of the balance
excluded from earnings and presented as a separate component of stockholders’ sheet
equity. B. Be accounted for separately in the stockholders' equity section of the balance
sheet
47. The following statement relate to accounting for investments in debt and marketable C. Be accounted for as an unrealized gain is the income statement
equity securities of banks. Which statement is incorrect? D. Not be accounted for in the financial statements.
A. At acquisition, a bank shall classify debt and marketable equity securities into
trading account securities, investment in bonds and other debt instruments, 46. Which of the following conditions generally exists before market value can be used as
available for sale securities and underwriting accounts. the basis for valuation of a company's marketable equity security?
B. Realized and unrealized gains and losses on trading account securities are A. Market value must approximate historical cost.
recognized in income and classified in the income statement with trading gains B. Management's intention must be to dispose of the security within one year
and losses. C. Market value must be less man cost for each security held in the company's
C. Realized and unrealized gains and losses on available for sale securities shall be marketable equity security portfolio
excluded from earnings and reported as a separate component of stockholders’ D. The aggregate valuation of a company's marketable equity security portfolio
equity. must be less than the aggregate cost of the portfolio.
D. Unrealized gains and losses on underwriting accounts shall be excluded from
earnings and reported as component of stockholders’ equity. Marketable Securities – Current & Noncurrent
15. The following statements relate to marketable equity securities held as current and
48. The following statements relate to the transfers between categories of investments in noncurrent investments. Which statement is not valid?
debt and marketable equity securities by banks. Which is not a valid accounting A. Realized gains and losses on both current and noncurrent securities are included
procedure? in the determination of net income
B. The amount of any realized gain or loss is the difference between the selling them in the "near term" or very soon.
price and the historical cost of the security.
C. Unrealized gains on current securities previously written down to market are Measurement Criteria
included in net income provided they do not exceed cost. 47. Trading securities are carried at
D. Unrealized losses on noncurrent equity securities are recognized and included in A. Cost
the determination of net income. B. Cost, adjusted for permanent market decline
C. Lower cost or market value
Comprehensive D. Fair value
20. Under ASC SFAS No. 19A, which investments are carried at market value?
I. Trading securities Presentation & Disclosure Requirements
II. Available for sale securities Gain or loss
III. Underwriting accounts 21. Under ASC SFAS No. 19A, any unrealized gain or loss is a component of income for
IV. Investments in bonds and other debt instruments (IBODI) what securities?
A. I, II, III and IV C. I and III A. Trading securities C. Underwriting accounts
B. I and II D. I, II and III B. Available for sale securities D. IBODI
Trading Securities Temporary Decline

Nature 40. Eve Company has a portfolio of trading securities. None of the holdings qualify for the
32. Assuming all the following marketable securities are readily marketable, which one use of the equity method in accounting for investments in common stock. As of
would not be classified as a short-term investment? December 31, of the current year, the aggregate cost of the portfolio exceeds its
A. Debt securities maturing in five years, representing an investment of temporary aggregate market value. The decline is temporary and should be reported as
idle cash funds. A. Valuation allowance in the equity section of the balance sheet
B. Commercial papers which will be converted into cash when it matures in six B. Realized loss in the income statement
months. C. Unrealized loss in the income statement
C. Equity securities which the company intends to convert into cash when needed D. Valuation allowance in the current liability section of the balance sheet
for working capital purposes, but which have been held for several years without
conversion. 44. Eve Corporation has a current marketable equity securities portfolio. None of the
D. Equity securities which will be converted into cash within three months to finance holdings qualify for the use of the equity method in accounting for investments in
the construction of a building. common stock. As of December 31, 2003, the aggregate cost of the portfolio
exceeds its aggregate market value. The decline is temporary and should be reported
35. "Trading securities" are as
A. Debt and equity securities that are purchased and held indefinitely and will be A. Valuation allowance in the equity section of the balance sheet
available to be sold in response to liquidity needs. B. Realized loss in the income statement
B. Debt securities acquired with the positive intent and ability of holding them until C. Unrealized loss in the income statement
maturity. D. Valuation allowance in the current liability section of the balance sheet
C. Financial assets with fixed or determinable payments that are not quoted in an
active market. After-Balance Sheet Date Events
D. Debt and equity securities acquired by the enterprise with the intent of selling 41. Significant changes in the market value of trading securities occurring after the
balance sheet date should

A. Be considered in the valuation of the securities at balance sheet date and
disclosed in the notes to financial statements. 49. How is the premium or discount on bonds purchased as a temporary investment
B. Be treated as a prior period adjustment in next year's financial statements. generally reported in published financial statements?
C. Not be considered in the valuation of the securities at balance sheet date but A. As an integral part of the cost of the asset acquired and amortized over the
disclosed in the notes to financial statements. remaining life of the bond issue
D. Result in an adjustment of the market values used in the lower of cost or market B. As an integral part of the cost of the asset acquired until such time as the
valuation at balance sheet date. investment is sold
C. As expense or revenue in the period the bonds are purchased.
Marketable Securities Contributed by a Stockholder D. As an integral part of the cost of the asset acquired and amortized over the
14. Investment in shares of marketable securities contributed by a stockholder to the period the bonds are expected to be held.
enterprise should be credited to
A. additional paid in capital based on the cost of the securities to the stockholder. Presentation & Disclosure
B. income based on the fair value of the marketable securities, Unrealized gain or loss
C. additional paid in capital based on the fair value of the marketable securities. 48. Unrealized gains and losses for available for sale securities are included in
D. income based on the cost of the securities to the stockholder. A. income
B. equity
41. Investment in equity securities contributed by a stockholder to the enterprise should C. income for unrealized gains and included in equity for unrealized losses
be credited to D. income for unrealized losses and included in equity for unrealized gains
A. additional paid in capital based on the cost of the securities to the stockholder
B. income based on the fair value of the equity securities Available-for-Sale Securities - Noncurrent
C. additional paid in capital based on the fair value of the equity securities. Presentation & Disclosure Requirements
D. income based on the cost of the securities to the stockholder. 17. Lola company has a portfolio of marketable equity securities which it does not intend
to sell in the near term. How should Lola classify these securities and how should it
Available-for-Sale Securities - Current report unrealized gains or losses from these securities?
Nature A. Trading securities and any unrealized gains or losses are reported as component
46. These are debt securities purchased and held indefinitely and will be sold in response of income
to liquidity needs, reduction of legal reserves, and allowable alternative investments. B. Available for sale securities and any unrealized gains or losses are reported as
A. Trading account securities. component of income
B. Investment in bonds and other debt instruments. C. Trading securities and any unrealized gains or losses are reported as component
C. Available for sale securities. of equity
D. Held-to-maturity securities D. Available for sale securities and any unrealized gains or losses are reported as
component of equity.
27. What are the debt securities which are purchased and held indefinitely and will be
sold in response to liquidity needs, reduction of legal reserves and allowable Valuation Allowance
alternatives investments? 39. The valuation allowance for a long-term marketable equity securities portfolio should
A. Trading securities C. Underwriting account securities be a component of
B. Available for sale securities D. Held to maturity securities A. Current assets C. Noncurrent liabilities
B. Noncurrent assets D. Net income C. Increased by accrued interest from June 1 to November 1
D. Increased by accrued interest from May 1 to June 1
Temporary Decline
34. Lunar Company has a marketable equity securities portfolio classified as noncurrent. 23. A bond purchased on June 1, 2003 has interest payment dates of April 1 and October
None of the holdings enables Lunar to exercise significant influence over an investee. 1. Bond interest income for the year ended December 31, 2003 is for
The aggregate cost exceeds its aggregate market value. The decline is considered A. 3 months C. 6 months
temporary and should be reported as B. 4 months D. 7 months
A. Unrealized loss in the income statement
B. Realized loss in the income statement Purchased at a Discount
C. Valuation allowance in the noncurrent liability section of the balance sheet 52. An investor purchased a bond as a long-term investment on January 1. Annual
D. Valuation allowance in the asset section of the balance sheet interest was received on December 31. The investor’s interest income for the year
would be higher if the bond was purchased at
Other than Temporary Decline A. Par C. A discount
20. On both December 31, 2004 and 2005, Karen Company’s only marketable equity B. Face value D. A premium
security had the same market value, which was below cost. Karen considered the
decline in value to be temporary in 2004 but other than temporary in 2005. Karen Purchased at a Premium
considers the investment as available for sale. At the end of both years, the security 40. An investor purchased a bond as a long-term investment between interest dates at a
was classified as a noncurrent asset. What should be the effects of the determination premium. At the purchase date, the cash paid to the seller is
that the decline was other than temporary on Karen’s 2005 noncurrent assets and net A. The same as the face amount of the bond
income? B. The same as the face amount of the bond plus accrued interest
A. No effect on both noncurrent assets and net income C. More than the face amount of the bond
B. No effect on noncurrent assets and decrease in net income D. Less than the face amount of the bond
C. Decrease in noncurrent assets and no effect on net income
D. Decrease in both noncurrent assets and net income 50. On April 15, 2003, Moon Company sold a bond, which Sun Corporation purchased as
a long-term investment between interest dates at a premium. Ignoring documentary
Held-to-Maturity Investments stamp charges, broker's commission and other expenses for the sale, how much
Nature cash should Sun pay to Moon?
Measurement Criteria A. More than the face value of the bond
66. Investments in debt securities are generally recorded at B. The same as the face value of the bond plus accrued interest
A. Cost including accrued interest. C. Less than the face value of the bond
B. Maturity value. D. The same as the face value of the bond
C. Cost including brokerage and other fees.
D. Maturity value with a separate discount or premium account. 40. An investor purchased a bond as long-term investment on January 1. Annual interest
was received on December 31. The investor's interest income for the year would be
38. When the interest payment dates of a bond are May 1 and November 1, and bond is lower if the bond was purchased at
purchased on June 1, the amount of cash paid by the investor will be A. A discount C. Par
A. Decreased by accrued interest from June 1 to November 1 B. A premium D. Face value
B. Decreased by accrued interest from May 1 to June 1
64. When a bond is purchased at a premium, amortization of the premium causes component of equity for unrealized gain.
periodic interest revenue to
A. Remain the same C. Decrease IBODI to AFS
B. Increase D. Become zero 30. When a debt security is transferred from IBODI to available for safe, any unrealized
gain or loss at the date of transfer shall be
Presentation & Disclosure Requirements A. Included in retained earnings.
37. Hazel Company purchased bonds at a discount on the open market as an investment B. Included in earnings.
and intends to hold these bonds to maturity. Hazel Company should account for C. Reported as a component of stockholders' equity.
these bonds at D. Reported as a component of stockholders' equity and subsequently amortized
A. Cost C. Fair value through interest income over the remaining life of the debt security.
B. Amortized cost D. Lower of cost or market
AFS to IBODI
19. For a marketable debt securities portfolio classified as “held to maturity”, which of the 31. When a debt security is transferred from available for sale to IBODI, any unrealized
following amounts should be included in the period’s net income? gain or loss at the date of transfer shall be
I. Unrealized temporary losses during the period A. Included in earnings.
II. Realized gains during the period B. Included in retained earnings.
III. Changes in the valuation allowance during the period C. Reported as a component of stockholders' equity without amortization.
A. III only C. I and II D. Reported as a component of stockholders' equity and subsequently amortized
B. II only D. I, II and III through interest income over the remaining life of the debt security.
Reclassification of Investments AFS to HTM

Current to Noncurrent 36. "Available for sale securities” transferred into held to maturity securities shall be
23. A marketable equity security is transferred from its current portfolio to the noncurrent accounted for at fair value. What is correct treatment of the security's unrealized gain
portfolio. At the transfer date, the security's cost exceeds its market value. What or loss at the date of transfer?
amount is used at the transfer date to record the security in the noncurrent portfolio? A. The unrealized gain or loss at the date of transfer shall continue to be reported
A. Market value, regardless of whether the decline is considered permanent or as a component of stockholders' equity but shall be amortized through interest
temporary. income over the remaining life of the debt security using the straight-line method
B. Market value, only if the decline is considered permanent of amortization.
C. Cost, if the decline is considered temporary B. The unrealized gain or loss at the date of transfer shall be recognized as a
D. Cost, regardless of whether the decline is considered permanent or temporary. component of income.
C. The unrealized gain or loss at the date of transfer shall continue to be reported
AFS or IBODI to Trading as a component of stockholders' equity and shall be recognized as a component
29. When a debt security is transferred from available for sale or IBODI to trading of income at the date of maturity of the debt security.
securities, any unrealized gain or loss at the date of transfer shall be D. The unrealized gain or loss at the date of transfer shall continue to be reported
A. Recognized in earnings immediately. as a component of stockholders’ equity but shall be amortized through interest
B. Included in retained earnings. income over the remaining life of the debt security using the effective interest
C. Reported as a component of equity. method.
D. Recognized in earnings immediately for unrealized loss and reported as
LONG-TERM INVESTMENTS A. Deferred charge C. Long-term investment

Cost Method B. Current asset D. Contra item under capital
Nature
79. The following statements relate to stock dividends and stock rights from the viewpoint 33. Zee Corporation's 2003 dividend income included only part of the dividend received
of the investor. Which is false? from its Irma Company investment. The balance of the dividend reduced Zee's
A. When stock rights are received on investment shares, an entry is required to carrying amount for its Irma investment. This reflects that Zee accounts for its Irma
transfer a portion of the cost of the original investment to a separate account for investment by the
the investment in stock rights A. Cost method, and only a portion of Irma's 2003 dividends represent earnings
B. A stock dividend received on an investment reduces the per share cost of the after Zee's acquisition
investment. B. Cost method, and its carrying amount exceeded the proportionate share of
C. From the date stock rights are issued until the date they expire, shares of stock Irma's market value
of the issuing corporation are said to be selling ex-rights. C. Equity method, and Irma incurred a loss in 2003
D. Theoretically, the total market value of shares held which have been subject to a D. Equity method, and its carrying amount exceeded the proportionate share of
stock dividend should be the same as it was before the dividend. Irma's market value
Measurement Criteria 47. As of December 31, 2003, Pink Company has a receivable from Red Company, Pink
41. An investor uses the cost method to account for investment in common stock. A uses the cost method of accounting for its 15% ownership of Red. How should the
portion of the dividends received this year were in excess of the investor's share of receivable be reported in Pink's December 31, 2003 balance sheet?
investee's earnings subsequent to the date of investment. The amount of dividend A. The total receivable would be included as part of Pink's investment in Red,
revenue that should be reported in the investor's income statement for this year without separate disclosure
would be B. The total receivable should be offset against Red's payable to Pink, without
A. Zero separate disclosure
B. The total amount of dividends received this year C. Eighty-five percent (85%) of the receivable should be reported separately, with
C. The portion of the dividends received this year that were in excess of the the balance offset against Red's payable to Pink
investor's share of investee's earnings subsequent to the date of investment D. The total receivable should be reported separately
D. The portion of the dividends received this year that were not in excess of the
investor's share of investee's earnings subsequent to the date of investment. 35. For the last 10 years, Verde Company owned cumulative preferred stock issued by
Valle Company. During 2003, Valle declared and paid both the 2003 dividend and the
Presentation & Disclosure Requirements 2002 dividend in arrears. How should Verde report the 2002 dividend in arrears that
42. Shares of stocks in other corporations held for investment, valued at cost but could was received in 2003?
not be quickly sold other than at a sacrifice price should be classified on the balance A. As a reduction in cumulative preferred dividends receivable
sheet as a B. As a retroactive change of prior period financial statement
A. Deferred charge C. Long-term investment C. Include in 2003 as extraordinary item
B. Current asset D. Contra item under capital D. Include in 2003 income from continuing operations
46. Shares of stocks in other corporations held for investment, valued at cost but could Investment in Associate - Equity Method
not be quickly sold other than at a sacrifice price should be classified on the balance 52. The equity method is a method of accounting whereby
sheet as a I. The investment is initially recorded at cost and adjusted thereafter for the post
acquisition change in the investor’s share in the net assets of the investee. D. The existence of significant influence is usually evidenced by representation on
II. The investment is recorded at cost and the income statement reflects income the board of directors, participation in policy making process, material
from the investment only to the extent that the investor receives distributions transactions between the investor and the investee, interchange of managerial
from accumulated net profits of the investee arising subsequent to the date of personnel and provisions of essential technical information.
acquisition.
A. I only. C. I and II. 23. Which statement is incorrect concerning significant influence?
B. II only. D. Neither I nor II. A. Significant influence is the power to participate in the financial and operating
policy decisions of the investee but not control over those policies.
Recognition Criteria B. If an investor holds, directly or indirectly through subsidiaries, 20% or more of the
66. The equity method of accounting for an investment in equity securities should be voting power of the investee, it is presumed that the investor does have
used when the investment significant influence, unless it can clearly demonstrated that this is not the case.
A. Includes preferred stock C. If the investor holds, directly or indirectly through subsidiaries, less than 20% of
B. Is acquired in exchange for assets the voting power of the investee, it is presumed that the investor does not have
C. Enables the investor to exercise significant influence over the investee significant influence, unless such influence can be clearly demonstrated.
D. Insures a payment of annual dividends D. A substantial or majority ownership by another investor does necessarily
preclude an investor from having significant influence.
50. Significant influence is the power to
I. Participate in the financial and operating policy decisions of the investee but not 42. Which statement is incorrect concerning significant influence?
control over those policies. A. Significant influence is the power to participate in the financial and operating
II. Govern the financial and operating policies of an enterprise so as to obtain policy decisions of the investee but not control over those policies.
benefits from its activities. B. A substantial or majority ownership by an investor does necessarily preclude the
A. I only. C. I and II. investor from having significant influence.
B. II only. D. Neither I nor II. C. If the investment is 20% or more of the voting power of the investee, it is
presumed that the investor does have significant influence, unless it can be
39. The enterprise in which the investor has significant influence is known technically as clearly demonstrated that this is not the case.
A. Subsidiary C. Acquiree D. If the investment is less than 20% of the voting power of the investee, it is
B. Investee D. Associate presumed that the investor does not have significant influence, unless such
influence can be clearly demonstrated.
51. The following statements relate to significant influence. Which statement is incorrect?
A. If an investor holds, directly or indirectly through subsidiaries, 20% or more of the Measurement Criteria
voting power of the investee, it is presumed that the investor does have Income
significant influence, unless it can be clearly demonstrated that this is not the 50. Under the equity method of accounting for investment, an investor recognizes its
case. share of the earnings in the period in which the
B. If the investor holds, directly or indirectly through subsidiaries, less than 20% of A. Investor sells the investment
the voting power of the investee, it is presumed that the investor does not have B. Investee declares a dividend
significant influence, unless such influence can be clearly demonstrated. C. Investee pays dividend
C. A substantial or majority ownership by another investor does necessarily D. Earnings are reported by the investee in its financial statements
preclude an investor from having significant influence.
Decrease in equity interest Preferred Shares

48. Company A holds a 30% investment in the common stock of Company B which is 54. If an associate has outstanding cumulative preferred shares, held by outside
accounted for by the equity method. During the year, Company B issued additional interests, the investor computes its share of profits or losses.
shares of stock at an amount that is more than the book value of Company B's A. After adjusting for the preferred dividends, whether or not the dividends have
shares. Company A did not subscribe to Company B's additional issuance of shares. been declared.
In applying the equity method, Company A should B. After adjusting for the preferred dividends only when declared.
A. not recognize in its financial statements Company B's issuance of additional C. Without regard for the preferred dividends.
shares because this has no effect on Company B's income. D. After adjusting for the preferred dividends which were actually paid during the
B. only disclose in the notes to its financial statements the fact of Company B's year.
issuance, of additional shares.
C. recognize in its financial statements the effect of Company B's additional Presentation & Disclosure Requirements
issuance of shares because this affects its share of Company B's net assets. Acquisition Cost Exceeds Market Value
D. recognize in its financial statements Company B’s additional issuance of 24. Park Company uses the equity method to account for its January 1. 2002 purchase of
Arc Company's common stock. On January 1, 2002 the fair value of Arc's FIFO
Increase in equity interest inventory and land exceeded their carrying amounts. How do these excesses of fair
45. On September 1, 2004, Philips Company issued common stock in exchange for 20% value over carrying amounts affect Park's reported equity in Arc's 2002 earnings?
of Sago Company's outstanding common stock. On July 1, 2005, Philips issued A. B. C. D.
common stock for an additional 75% of Sago's outstanding common stock. Sago Inventory excess Decrease Decrease Increase Increase
continues in existence as Philips' subsidiary. How much of Sago's 2005 net income Land excess Decrease No effect Increase No effect
should be reported as accruing to Philips?
A. 20% of Sago's net income to June 30 and all of Sago's net income from July 1 to Receivables from Associates
December 31 40. In its financial statements, Manila Company uses the equity method of accounting for
B. 20% of Sago's net income to June 30 and 95% of Sago's net income from July 1 its 30% ownership of Baguio Company. At December 31, 2004, Manila has a
to December 31 receivable from Baguio. How should the receivable be reported in Manila's 2004
C. 95% of Sago's net income financial statement?
D. All of Sago's net income A. None of the receivable should be reported, but the entire receivable should be
offset against Baguio's payable to Manila
19. On January 1, 2004, Divine Company purchased 10% of Alona Company's common B. Seventy percent of the receivable should be separately reported, with the
stock. Divine purchased additional shares bringing its ownership up to 40% of Alona's balance offset against 30% of Baguio’s payable to Manila
common stock outstanding on August 1, 2004. During October 2004, Alona declared C. The total receivable should be disclosed separately
and paid cash dividend on all of its outstanding common stock. How much income D. The total receivable should be included as part of the investment in Baguio,
from the Alona investment should Divine's 2004 income statement report? without separate disclosure
A. 10% of Alona's income from January 1 to July 31, plus 40% of Alona's income
from August 1 to December 31. Discontinue Use of the Equity Method
B. 40% of Alona's income from August 1 to December 31 only. 51. When the investor properly discontinue the use of the equity method
C. 40% of Alona's 2004 income. A. The carrying value of the investment should be regarded as cost and no
D. Amount equal to cash dividends received from Alona adjustment is required
B. The investment account is adjusted as if the cost method is used from the
beginning and any adjustment is included in the determination of income 42. Under the equity method, if the investor’s share of losses of associate equals or
C. The investment account is adjusted as if the cost method was used from the very exceeds investment
beginning and any adjustment is made to the beginning retained earnings I. Investment is reported at nil.
D. The carrying value of the investment is adjusted to conform with its recoverable II. Additional losses are provided to the extent that the investor has incurred
amount obligations or made payments on associate’s obligations that it has guaranteed
or otherwise committed (advances for and in behalf of associate)
53. An investor should discontinue the use of the equity method in consolidated financial A. Both I and II C. I only
statements from the date that B. Neither I nor II D. II only
I. The investor ceases to have significant influence but retains either in whole or in
part, its investment. Resume Use of the Equity Method
II. The associate operates under severe long-term restrictions that significantly 43. If under the equity method, an investor's share of losses of an associate equals or
impair its ability to transfer funds to the investor. exceed the carrying amount of an investment and the investor's advances to the
A. I only. C. I and II. associate, the investor discontinues the use of the equity method and report the
B. II only. D. Neither I nor II. investment at zero or NIL value. What is the appropriate accounting procedure if the
investee subsequently reports profits?
49. Company A has a 25% investment in the common stock of (carrying value of P1 A. No entry is required because the investor is now using the cost method.
million), and advances to (amounting to P0.5 million), Company B. Company B has B. The investor shall resume its share of those profits without regard to the share of
been incurring significant losses in the past years. Company A uses the equity net losses not previously recognized.
method to account for this investment but has no commitment to support Company C. The investor shall resume its share of those profits only after its share of the
B's operation. Company A should profits equals the share of net losses not previously recognized.
A. Discontinue applying the equity method when the remaining balance of the D. The investor shall treat its share of those profits as fundamental error.
investment is P1 Million.
B. Discontinue applying the equity method when the investment and advances 62. If under the equity method, an investor’s share of losses of an associate equals or
accounts are reduced to zero. exceed the carrying amount of an investment and the investor’s advances to the
C. Discontinue applying the equity method when the investment account is reduced associate, the investor’s discontinues the use of the equity method and report the
D. Recognize a provision for its share of the losses of Company B when its investment at zero or NIL value. What is the appropriate accounting procedure if the
investment account is reduced to zero. investee subsequently reports profits?
A. No entry is required because the investor is now using the cost method.
55. If under the equity method, an investor’s share of losses of an associate equals or B. The investor shall resume its share of those profits without regard to the share of
exceeds the carrying amount of an investment, which of the following is not valid? net losses not previously recognized.
A. The investor ordinarily discontinues its share of further losses. C. The investor shall resume its share of those profits only after its share of the
B. The investment is reported at NIL value. profits equals the shares of net losses not previously recognized.
C. Additional losses are provided for to the extent that the investor has incurred D. The investor shall treat its share of those profits as fundamental error.
obligations or made payments on behalf of the associate to satisfy obligations of
the associate that the investor has guaranteed or otherwise committed. Comprehensive
D. If the associate subsequently reports profits, the investor resumes its share of 32. Which statement is incorrect concerning investments in common stock?
these profits without regard to the share of net losses not previously recognized. I. If an associate has outstanding cumulative preferred shares held by outside
interests, the investor computes its shares of profits or losses after adjusting for
the preferred dividends whether or not the dividends have been declared. B. The difference between the premium payment and the resulting increase in cash
II. An investment in associate should be accounted for under the equity method surrender value.
when the investment is acquired exclusively with a view to its subsequent C. The difference between the premium payment and the loan value.
disposal in the near future, or when the associate operates under severe long- D. The increase in cash surrender value.
term restrictions that significantly impair its ability to transfer funds to the
investor. 53. Upon the death of an officer, Divine Company received the proceeds of a life
A. I only C. Both I and II insurance policy held by Divine on the officer. The proceeds were not taxable. The
B. II only D. Neither I nor II policy’s cash surrender value had been recorded on Divine’s books at the time of
payment. What amount of revenues should Divine report in its statements?
Other Investments A. Proceeds received
Equity or debt securities held to finance future construction or additional plants B. Proceeds received less cash surrender value
65. Equity or debt securities held to finance future construction of additional plants should C. Proceeds received plus cash surrender value
be classified on a balance sheet as D. None
A. Current assets
B. Property, plant, and equipment '^ Measurement Criteria
C. Intangible assets 19. Under ASC SFAS No. 10, which investments are carried at LCM?
D. Long-term investments I. Current marketable equity securities
II. Short-term cash investments of funds such as temporary investments in bonds,
Stock Rights commercial papers, government obligations and certificates of deposits
13. Gio Company owns 10% of the common stock of Gora Company throughout the year. III. Noncurrent marketable equity securities
Gora Company has no preferred stock outstanding. Gio's stock gives the right to A. I only C. I and III
A. Be paid 10% of the firm's profits in cash each year. B. I and II D. I, II and III
B. Receive dividends equal to 10% of the par value each year.
C. Receive dividends equal to 10% of the total dividends paid by Gora Company for Comprehensive
the year to common stockholders. 39. Which is incorrect concerning trading and available for sale debt and equity
D. Keep Gora Company from issuing any additional stock unless Gio is willing to securities?
buy 10% of the newly issued shares. A. Unrealized gains and losses on trading securities are recognized in income.
B. Realized gains and losses on trading securities are included in earnings.
Life Insurance Policy C. Unrealized gains and losses on available for sale securities are presented as
52. An increase in the cash surrender value of a life insurance policy owned by a separate component of stockholders' equity.
company would be recorded by D. Unrealized and realized gains and losses on available for sale securities are
A. Decreasing annual insurance expense C. Recording a memorandum entry excluded from earnings and presented as a separate component of stockholders'
only equity.
B. Increasing investment income D. Decreasing a deferred charges
25. Which statement is incorrect concerning investments in common stock?
36. When a company is the beneficiary of the life insurance of its executives, it should A. The equity method means that the investment is initially recorded at cost and
charge to expense adjusted thereafter for the post acquisition change in the investor’s share in the
A. The total premium from year to year. net assets of the investee
B. The cost method means that the investment is recorded at cost and the income A. Building that is vacant but is held to be leased out to an operating lessee.
statement reflects income from the investment only to the extent that the investor B. Property that is being constructed or developed on behalf of third parties.
receives distribution from accumulated net profits of the investee arising C. Property that is being constructed and developed as investment property.
subsequent to the date of acquisition D. Property held for future development and subsequent use as owner-occupied
C. If an associate has outstanding cumulative preferred shares held by outside property.
interests, the investor computes its shares of profits or losses after adjusting for
the preferred dividends whether or not the dividends have been declared Measurement Criteria
D. An investment in associate should be accounted for under the equity method 23. Directly-attributable expenditures related to investment property include
when the investment is acquired exclusively with a view to its subsequent A. Start up costs
disposal in the near future, or when the associate operates under severe long- B. Initial operating losses
term restrictions that significantly impair its ability to transfer funds to the C. Abnormal amounts of wasted material, labor and other resources incurred in
investors constructing the property.
D. Professional fees for legal services, property transfer taxes and other transaction
INVESTMENT PROPERTY costs.
Nature
43. It is defined as property (land or building or part of building or both) by an owner or 25. Subsequent to initial recognition, the investment property shall be measured at
finance lessee to earn rentals or for capital appreciation or both. A. Fair value
A. Investment property C. Mining property B. Cost less any accumulated depreciation and any accumulated impairment losses
B. Owner-occupied property D. Rental property C. Either fair value or cost less any accumulated depreciation and any accumulated
impairment losses.
22. Investment property includes all of the following, except D. Revalued amount.
A. Land held for long-term capital appreciation
B. Land held for currently undetermined use PROPERTY, PLANT & EQUIPMENT
C. Building owned by the reporting enterprise or held by a finance lessee leased out Nature
under one or more operating leases. 37. Which is not an essential characteristic of property, plant and equipment?
D. Property held for sale in the ordinary course of business or in the process of A. The property, plant and equipment are tangible assets
construction for such sale. B. The property, plant and equipment are used in production or supply of goods and
services, for rental purposes and for administrative purposes
33. Investment property includes all of the following, except C. The property, plant and equipment are expected to be used over a period of
A. Land held for the short-term sale in the ordinary course of business rather than more than one year
for long-term capital appreciation. D. The property, plant and equipment are subject to depreciation.
B. Land held for a currently undetermined use.
C. Building owned by the reporting enterprise, or held by the enterprise under a 48. It is the cost of an asset or other amount substituted for cost in the financial
finance lease, and leased out under one or more operating leases. statements, less its residual value
D. Building that is vacant, but is held to be leased out under one or more operating A. Depreciable amount C. Fair value
leases. B. Carrying amount D. Depreciated replacement cost
24. Owner-occupied property includes all of the following, except Recognition Criteria
56. The following statements relate to the recognition of property, plant and equipment.
Which statement is incorrect? 52. Directly attributable costs include all of the following, except
A. Property, plant and equipment may be acquired for safety or environmental A. Cost of site preparation, initial delivery, handling and installation
reasons. B. Professional fees such as for architects and engineers
B. Most spare parts and servicing equipment are usually carried as inventory and C. Estimated cost of dismantling and removing the asset and restoring the site, to
recognized as expense as consumed. the extent that it is recognized as a provision
C. Major spare parts and stand-by equipment qualify as property, plant and D. Initial operating losses incurred prior to an asset achieving planned performance
equipment when the enterprise expects to use them during more than one
period. Land
D. If spare parts and equipment and their use is expected to be irregular, they are 38. If a corporation purchases a lot and building and subsequently tears down the
accounted for as property, plant and equipment and are depreciated over the building and uses the property as a parking lot, the proper accounting treatment of
useful life of the asset. the cost of the building would depend on
A. The significance of the cost allocated to the building in relation to the common
29. When payment for an item of property, plant and equipment is deferred beyond cost of the lot and building.
normal credit terms, the difference between the cash price and the total cash B. The length of time for which the building was held prior to its demolition.
payments should be recognized as C. The contemplated future use of the parking lot.
A. Interest expense over the credit period D. The intention of management for the property when the building was acquired.
B. Interest expense over the life of the asset
C. Cost of the property 68. Proceeds from salvage from the demolition of the building should be recorded as
D. Interest expense of the current year A. A reduction in the price of the new building constructed
B. A reduction in the price of the land
Measurement Criteria C. An ordinary gain from operations
Initial Measurement D. A non-operating revenue
In general
46. The cost of an item of property, plant and equipment should include all of the 43. The company purchased land to be used as the site for the construction of a plant.
following, except Timber was cut from the timber site so that construction of the plant could begin. The
A. Initial operating losses incurred prior to an asset achieving planned performance. proceeds from the sale of the timber should be
B. Purchase price, including import duties and nonrefundable purchase taxes A. Classified as other income
C. Initial delivery and handling costs B. Netted against the costs to clear the land and expensed as incurred
D. Installation costs C. Deducted from the cost of the plant
D. Deducted from the cost of land
44. The cost of an item of property, plant and equipment comprises its purchase price,
including import duties and nonrefundable purchase taxes, and 45. Land was purchased to be used as the site for the construction of plant. A building on
A. The implied interest on the debt to finance the purchase the property was sold and removed by the buyer so that construction on the plant
B. The market value of any noncash asset surrendered to acquire the asset could begin. The proceeds from the sale of the building should be
C. The estimated residual value of the asset A. Netted against the costs to clear the land and expensed as Incurred
D. All directly attributable costs necessary to bring the asset to working condition for B. Netted against the costs to clear the land and amortized over the life of the plant
its intended use C. Deducted from the cost of the land
D. Deducted from the cost of the plant 66. In a “basket” or “lump-sum” purchase of assets, which of the following best describes
the process by which the historical cost of the various assets acquired should be
47. When a company purchases land with a building on it and immediately tears down determined?
the building so that the land can be used for the construction of a plant, the cost A. Allocation of the total cost to the individual assets on the basis of the historical
incurred to tear down the building should be cost of the individual assets to their original owner
A. Expensed as incurred B. Allocation of the total cost to the individual assets on the basis of the fair market
B. Added to the cost of the plant value of the individual assets at the time of the basket purchase
C. Added to the cost of the land C. Recording of the individual assets at their current value with recognition of a gain
D. Amortized over the estimated time period between the tearing down of the or loss for the difference between the price paid for the assets and the total value
building and the completion of the plant of the individual assets
D. Recording of the individual assets at their original historical cost to the seller with
67. The cost of grading and filling on the land after the old building has been destroyed a gain or loss recognized at the difference between the total of the original
should be recorded as historical cost figures and the price paid in the basket purchase
A. An addition to the cost of the land
B. An addition to the cost of the building Leasehold Improvements
C. An addition to a separate account Land Improvements and depreciated over the 71. A lessee incurred costs to construct walkways and landscaping costs to improve
life of the building leased property. The estimated useful life of the walkways and landscaping costs is
D. An expense in the period incurred fifteen years. The remaining term of the nonrenewable lease is twenty years. The
walkways and landscaping costs should be
Self-Constructed Assets A. Capitalized as leasehold improvements and depreciated over twenty years.
39. Which of the following expenditures may properly be capitalized? B. Capitalized as leasehold improvements and depreciated over fifteen years.
A. Expenditure for massive advertising campaign C. Capitalized as leasehold improvements and expensed in the year in which the
B. Insurance on plant during construction lease expires
C. Research and development related to a long-term asset which is giving the D. Expensed as incurred.
company a competitive market advantage
D. Title search and other legal costs related to a piece of property which was not Deferred Payment
acquired 44. On November 1, 2001, a company purchased a new machinery that it does not have
to pay for until November 1, 2003. The total payment on November 1, 2003, will
48. The cost of self-constructed asset includes all of the following, except include both principal and interest. Assuming interest at a 10% rate, the cost of the
A. Direct materials and direct labor incurred in connection with the construction of machine would be the total payment multiplied by what time value of money concept?
the asset. A. Present value of annuity of 1 C. Future amount of annuity of 1
B. Systematic allocation of fixed and variable production overhead. B. Present value of 1 D. Future amount of 1
C. Abnormal amounts of wasted materials, labor and other resources incurred in the
production of the asset. 65. When a plant asset is acquired by deferred payment, which of the following
D. Normal amounts of wasted materials, labor and other resources incurred in the conditions generally does not indicate the need to consider the imputation of interest
production of the asset. cost in the transaction price?
A. The interest rate stated on the deferred obligation is significantly different from
Basket Purchases current market interest rates.
B. The cash price of the plant asset is significantly different from the deferred be added to the carrying amount of the asset when it is
obligation assumed by the buyer of the asset. A. probable that future economic benefits will flow to the enterprise.
C. The instrument representing the deferred obligation is non-interest bearing. B. possible that future economic benefits will flow to the enterprise.
D. The face amount of the instrument representing the deferred obligation is equal C. probable that future economic benefits in excess of the originally assessed
to the market value of the plant asset exchanged. standard of performance of the existing asset will flow to the enterprise.
D. possible that future economic benefits in excess of the originally assessed
Comprehensive standard of performance of the existing asset will flow to the enterprise.
39. The cost of property, plant and equipment comprises all of the following except:
A. Its purchase price, including import duties and non-refundable purchase taxes, Betterments
alter deducting trade discounts and rebates. 47. The term “betterment” refers to an expenditure made
B. Cost of opening a new facility or introducing a new product or service. A. for new facilities which increase “capacity”
C. Any cost directly attributable to bringing the asset to the condition or location B. to restore “capacity” after abandonment or retirement
necessary for it to be capable of operating in the manner intended by C. improve existing facilities by increasing “capacity”
management. D. help insure continuity of service capacity.
D. The initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located and for which the entity has a present 26. Which type of expenditure occurs when a company installs a higher capacity boiler to
obligation. heat its plant?
A. Replacement C. Addition
59. The following statements relate to the initial measurement of property, plant and B. Ordinary repair and maintenance D. Betterment
equipment. Which statement is false?
A. When payment for an item of property, plant and equipment is deferred beyond Improvements
normal credit terms, its cost is the cash price equivalent. 49. An improvement made to a machine increased its fair market value and its production
B. If an asset is self-constructed, the cost of normal amounts of wasted material, capacity by 25 percent without extending the machine's useful life. The cost of the
labor or other resources incurred in the production of the self-constructed asset improvement should be
is not included in the cost of the asset. A. Expensed
C. If an item of property, plant and equipment is acquired in exchange or part B. Debited to accumulated depreciation
exchange for a dissimilar item of property, plant and equipment, the cost of such C. Capitalized in the machine account
item is measured at the fair value of the asset received, which is equivalent to D. Allocated between accumulated depreciation and the machine account
the fair value of the asset given up adjusted by the amount of any cash or cash
equivalents transferred. 27. Pat Company incurred costs to modify its building and rearrange its production line.
D. If an item of property, plant and equipment is acquired in exchange for a similar As a result, an overall reduction in production costs is expected. However, the
asset that has a similar use in the sale line of business and which has a similar modifications did not increase the building's market value and the rearrangement did
value, the cost of the new asset is the carrying amount of the asset given up and not extend the production line's life. What is the treatment of the costs incurred?
no gin or loss is recognized on the transaction since the earnings process is A. Expensed immediately
incomplete. B. Capitalized
C. This modification costs are capitalized and the rearrangement costs are
Additions, Betterments & Improvements expensed
55. Subsequent expenditure relating to an item of property, plant and equipment should D. The rearrangement costs are capitalized and the modification costs are
expensed 69. An addition that is an integral part of an older asset normally would be depreciated
over
16. A P300,000 improvement made to a machine at Orient Company increased its fair A. The useful life of the addition.
value and Its production capacity "by 30%, without extending the machine's useful life B. The useful life of the addition or the original asset, whichever is shorter.
in years. The cost of the improvement should be treated in the books by C. The useful life of the original asset.
A. Debiting P300,000 to expense. D. Either the useful life of the addition or life of the original asset, as a matter of
B. Debiting P300,000 to accumulated depreciation. professional judgment.
C. Capitalizing P300,000 in the machinery account.
D. Capitalizing and allocating P150,000 in the accumulated depreciation account Disposal
and the other P150,000 in the machinery account. 60. Gains or losses arising from the retirement or disposal of an item of property, plant
and equipment should be determined as the difference between the
56. Improvements which result to increased future economic benefits include all of the A. Net disposal proceeds and the carrying amount of the asset.
following, except B. Net disposal proceeds and the cost of the asset.
A. Modification of an item to extend its useful life, including an increase in its C. Fair value of the asset on balance sheet date and its carrying amount.
capacity. D. Net realizable value of the asset on balance sheet date and its carrying amount.
B. Upgrading of machine parts to achieve a substantial improvement in the quality
of output. Nonmonetary Exchange
C. Adoption of new production process enabling a substantial reduction in Similar exchange
previously assessed operating costs. 54. The cost of an item of property, plant and equipment acquired in a nonmonetary
D. Cost of servicing and overhauling to restore or maintain the originally assessed exchange for a similar asset that has a similar use and similar fair value is measured
standard of performance. at the
A. Carrying amount of the asset given up C. Carrying amount of the asset
Revenue Expenditures received
74. Which of the following would ordinarily be treated as a revenue expenditure rather B. Fair value of the asset given up D. Fair value of the asset received
than a capital expenditure?
A. Repair and maintenance on buildings Dissimilar Exchange
B. The replacement of a major component of a building 40. When an item of property, plant and equipment is acquired by Issuing debt securities,
C. An addition to an existing building which is the best basis for establishing the historical cost of the acquired asset?
D. Rearrangement costs that are identifiable, material, and are expected to provide A. Face value of the bonds issued C. Fair value of he asset received
discernible future benefits B. Historical cost of the asset to the seller D. Fair value of the bond issued
35. Which type of expenditure occurs when an enterprise incurs cost of servicing or 40. Aye Company and Bee Company exchanged similar plots of land with fair values in
overhauling an item of property, plant end equipment? excess of carrying amounts. In addition, Aye received cash from Bee to compensate
A. Replacement C. Addition for the difference in land values. As a result of the exchange, Aye should recognize
B. Betterment D. Ordinary repair and maintenance A. A gain equal to the difference between the fair value and the carrying amount of
the land given up
Depreciation & Amortization B. A gain in an amount determined by the ratio of cash received to total
Additions consideration
C. A loss in an amount determined by the ratio of cash received to total accumulated depredation and accumulated impairment losses.
consideration
D. Neither gain nor a loss Book Value
68. The accounting term “book value” is best described as which of the following?
Fire Loss A. A measure of the market value of the asset at the time book value is determined
51. A building suffered uninsured fire damage. The damaged portion of the building was B. A measure of the market value, less estimated salvage value, of the asset at the
refurbished with higher quality materials. The cost and related accumulated time book value is determined
depreciation of the damaged portion are identifiable. To account for these events, the C. A measure of the difference between the historical cost of the asset and the
owner should accumulated depreciation recognized to the time book value is determined
A. Capitalize the cost of refurnishing and record a loss in the current period equal to D. A measure of the difference between the historical cost of the asset and the total
the carrying amount of the damaged portion of the building of the estimated salvage value and the accumulated depreciation recognized to
B. Capitalized the cost of refurbishing by adding the cost to the carrying amount of the time book value is determined
the building
C. Record a loss in the current period equal to the cost of refurnishing and continue Condemned Property
to depreciate the original cost of the building. 30. Lana Company's forest land was condemned for use as a national park.
D. Record a loss in the current period equal to the sum of the cost of refurnishing Compensation for the condemnation exceeded the forest land's carrying amount.
and the carrying amount of the damaged portion of the building Lana purchased similar but larger replacement forest land for an amount greater than
the condemnation award. As a result of the condemnation and replacement, what is
Valuation the net effect on the carrying amount of forest land reported in Lana's balance sheet?
Benchmark treatment A. Increased by the excess of the replacement forest land's cost over the
45. As a benchmark treatment, an item of property, plant and equipment should be condemned land's carrying amount
carried at B. Increased by the replacement forest land's cost
A. Revalued amount minus accumulated depreciation and any accumulated C. Increased by the excess of the replacement forest land's cost over the
impairment loss condemnation award
B. Fair value D. No effect
C. Depreciated replacement cost
D. Cost minus accumulated depreciation and any accumulated impairment loss. Retired Assets
52. During 2003, the management of West Company decided to dispose of some of its
38. The "benchmark" valuation of property, plant and equipment in the balance sheet of older equipment and machinery. By year end December 31, 2003, these assets had
an enterprise is not been sold although the company was negotiating their sale to another company.
A. At revalued amount, which equal to the fair value at the date of revaluation less On December 31, 2003 balance sheet of West Company, such equipment and
any subsequent accumulated depreciation and subsequent accumulated machinery should be reported at
impairment loss. A. Fair value
B. Cost of the asset, or other amount substituted for cost in the financial statements B. Carrying amount
less its residual value. C. Lower of carrying amount of fair value
C. Amount of cash or cash equivalent paid or the fair value of other consideration D. Lower of carrying amount of fair value less cost sell
given to acquire the asset at the time of its acquisition or construction.
D. Amount which the asset is recognized in the balance sheet after, deducting any 61. An item of property, plant and equipment that is retired from active use and held for
disposal is carried at its B. Assets intended for sale or lease that are produced as discrete projects,
A. Carrying amount. C. Assets financed through the issuance of long-term debt.
B. Net realizable value, meaning fair value less cost to sell. D. Assets not currently undergoing the activities necessary to prepare them for their
C. Carrying amount or net realizable value, whichever is lower. intended use.
D. Carrying amount or net realizable value, whichever is higher.
Measurement Criteria
41. When an item of property, plant and equipment is retired or disposed of, the gain or 39. An asset is being constructed for an enterprise’s own use. The asset has been
loss from the disposal is the difference between the financed with a specific new borrowing. The interest cost incurred during the
A. Gross disposal proceeds and the cost of the asset. construction period as a result of expenditures for the asset is
B. Gross disposal proceeds and the carrying amount of the asset. A. Interest expense in the construction period
C. Net disposal proceeds and the cost of the asset. B. A prepaid asset to be written off over the estimated useful life of the asset
D. Net disposal proceeds and the carrying amount of the asset. C. A part of the historical cost of acquiring the asset to be written off over the
estimated useful life of the asset
Capitalized Interest D. A part of the historical cost of acquiring the asset to be written off over the term
Qualifying Asset of the borrowing used to finance the construction of the asset
57. For purposes of capitalizing borrowing cost, a qualifying asset is an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale. 46. Which funds are borrowed generally and used for the purpose of obtaining a
Which of the following is not a qualifying asset? qualifying asset, the amount of borrowings costs eligible for capitalization should be
A. Manufacturing plant equal to
B. Power generation facility A. Actual borrowing costs incurred
C. Investment property B. Actual borrowing costs incurred less any investment income on the temporary
D. Inventory that is routinely manufactured or otherwise produced in large quantity investment of those borrowings
on a repetitive basis over a short period of time C. Average expenditures on the asset multiplied by a capitalization rate or actual
borrowing cost incurred, whichever is higher
Avoidable Interest D. Average expenditures on the asset multiplied by a capitalization rate or actual
70. When computing the amount of interest cost to be capitalized, the concept of borrowing cost incurred whichever is lower.
“avoidable interest” refers to
A. The total interest cost actually incurred. Capitalization Period
B. A cost of capital charge for stockholders' equity. 43. The period of time during which capitalization of interest begins and when
C. That portion of total interest cost which would not have been incurred if capitalization of interest ends is
expenditures for asset construction had not been made. A. From the time funds are borrowed until the asset is substantially complete and
D. That portion of average accumulated expenditures on which no interest cost was ready for its Intended use.
incurred. B. From the time the first expenditures are incurred until the asset is substantially
complete and ready for its intended use.
Recognition Criteria C. From the time the first expenditures are incurred until no further interest cost is
69. Which of the following assets do not qualify for capitalization of interest costs incurred being incurred.
during construction of the assets? D. From the time the first expenditures are incurred until activities necessary to get
A. Assets under construction for an enterprise's own use. the asset for its intended use have begun.
20. This represents the approximation of the exchange price in transfers in which money
68. The period of time during which interest must be capitalized ends when or promises to pay money are not involved.
A. The asset is substantially complete and ready for its intended use. A. Fair value C. Selling price
B. No further interest cost is being incurred. B. Estimated value D. Transfer price
C. The asset is abandoned, sold, or fully depreciated.
D. The activities that are necessary to get the asset ready for its intended use have 57. The fair value of items of property, plant and equipment is usually their market value.
begun. When there is no evidence of market value because of the specialized nature of the
plant and equipment and because these items are rarely sold, they are revalued at
Maximum Capitalizable Interest A. Replacement cost
71. Which of the following statements is, true regarding capitalization of interest? B. Depreciated replacement cost
A. Interest cost capitalized in connection with the purchase of land to be used as a C. Net realizable value
building site should be debited to the land account and not to the building D. Present value of cash inflows from the use of the asset
account.
B. The amount of interest cost capitalized during the period should not exceed the 62. What is the basis of revaluation of property, plant and equipment?
actual interest cost incurred. I. Fair value which is usually the market value determined by appraisal undertaken
C. When excess borrowed funds not immediately needed for construction are by professionally qualified valuers.
temporarily invested, any interest earned should be offset against interest cost II. Depreciated replacement cost, in the absence of evidence of market value.
incurred when determining the amount of interest cost to be capitalized. A. I only. C. II only.
D. The minimum amount of interest to be capitalized is determined by multiplying a B. I and II. D. Neither I nor II.
weighted average interest rate by the amount of average accumulated
expenditures on qualifying assets during the period. Frequency of Revaluation
54. The frequency of revaluations of property, plant and equipment depends upon the
Revaluation of Property, Plant & Equipment movements in the fair value of the items of property, plant and equipment. If the items
Measurement Criteria of property, plant and equipment experience insignificant movements in fair value,
Basis of Revaluation revaluation may be sufficient if made every
53. As a benchmark treatment, the revaluation of property, plant and equipment should A. Three to five years C. Ten years
be based on B. Five years D. Five to ten years
A. Fair value which is usually the market value determined by appraisal undertaken
by professionally qualified valuers. 63. The following statements relate to the frequency of revaluation of property, plant and
B. Current replacement cost equipment. Which statement is incorrect?
C. Current reproduction cost A. Revaluations should be made with sufficient regularity such that the carrying
D. Depreciated replacement cost amount does not differ materially from that which would be determined using the
fair value on balance sheet date. The frequency of revaluations depends upon
51. It is the amount for which an asset could be exchanged between knowledgeable, the movements in the fair value of the items of property, plant and equipment
willing parties in an arm's length transaction, being revalued.
A. Fair value C. Replacement cost B. The frequency of revaluations depends upon the movements in the fair value of
B. Depreciated replacement cost D. Appraised value the items of property, plant and equipment being revalued.
C. Some items of property, plant and equipment may experience significant and
volatile movements in fair value, thus necessitating annual revaluation. 52. Under Philippine GAAP, revaluation of property, plant and equipment is an
D. Frequent revaluations are unnecessary for items of property, plant and acceptable alternative to historical cost. Which statement is incorrect?
equipment with only insignificant movements in fair value and instead, A. Frequent revaluations are unnecessary for items of property, plant and
revaluation every 5 to 10 years may be sufficient. equipment with only insignificant movements in fair value and instead,
revaluation every 5 to 10 years may be sufficient
Accumulated depreciation B. Depreciation to be charged to operations should be based on revalued amount
64. When an item of property, plant and equipment is revalued, any accumulated C. The revaluation surplus should be shown in the stockholders' equity.
depreciation at the date of the revaluation is D. Appropriate disclosures should be made in the financial statements.
I. Restated proportionately with the change in the gross carrying amount of the
asset so that the carrying amount of the asset after revaluation equal its revalued 43. The following statements relate to revaluation of property, plant and equipment.
amount. Which statement is incorrect?
II. Eliminated against the gross carrying amount of the asset and the net amount A. The basis of revaluation is the fair value of the asset or the depreciated
restated to the revalued amount of the asset. replacement cost in the absence of fair value.
A. I only. C. I and II. B. When an asset's carrying amount is increased as a result of a revaluation, the
B. II only. D. Neither I nor II. increase should be credited to revaluation surplus.
C. When an asset's carrying amount is decreased as a result of revaluation, the
63. What is the method in the treatment of the accumulated depreciation on the date of decrease should be recognized as expense.
revaluation? D. The items within a class of property, plant and equipment are revalued
I. Restated proportionately with the change in the gross carrying amount of the selectively.
asset so that the carrying amount after revaluation equals the revalued amount
II. Estimated against the gross carrying amount of the asset and the net amount 63. Which statement is incorrect concerning the class of property, plant and equipment to
restated to the revalued amount of the asset be revalued?
A. I only C. Either I or II A. When an item of property, plant and equipment is revalued, the entire class of
B. II only D. Neither I nor II property, plant and equipment to which that asset belongs should be revalued.
B. A class of property, plant and equipment is a grouping of assets of a similar
Comprehensive nature and use in an enterprise's operations.
65. The following statements relate to revaluation of property, plant and equipment. C. The items within a class of property, plant and equipment are revalued
Which statement is not valid? selectively.
A. When an item of property, plant and equipment is revalued, the entire class of D. A class of assets may be revalued on a rolling basis provided revaluation of the
property, plant and equipment to which that asset belongs should be revalued. class of assets is completed within a short period of time and provided the
B. When an asset’s carrying amount is increased as a result of a revaluation, the revaluations are kept up to date.
increase should be directly credited to equity under the heading revaluation
surplus. 51.Which of the following statements is not valid when an item of PPE is revalued?
C. When an asset’s carrying amount is decreased as a result of a revaluation, the A. It is required that the entire class of PPE to which the asset belongs should be
decrease should be debited to revaluation loss, a contra equity account. revalued.
D. The revaluation surplus included in equity may be transferred directly to retained B. Any accumulated depreciation at the date of revaluation is either restated
earnings when the surplus is realized. proportionately with the change in the gross carrying amount of the asset so that
the carrying amount after revaluation equate its revalued amount, or eliminated
against the gross carrying amount of the asset and the net amount restated to
the revalued amount. 77. The method of accounting for plant asset cost allocation over time can best described
C. The basis of revaluation of property, plant and equipment is the fair value which as
is usually the market value determined by appraisal undertaken by professionally A. Systematic and rational C. Based on external market value
qualified valuers, or the depreciated replacement cost, in the absence of B. Measuring the decline in utility overtime D. Providing a fund for asset
evidence of market value. replacement
D. Revalued property, plant and equipment retired from use and held for disposal
should be reclassified to other assets and carried at their net realizable value or 78. Depreciation applies in which of the following?
net carrying value whichever is higher. A. Land C. Mineral deposits
B. Equipment D. Goodwill
Depreciation & Depletion
Basic Concepts Useful life
58. It is the systematic allocation of the depreciable amount of an item of property, plant 67. Useful life of property, plant and equipment is
and equipment I. The period of time over which an asset is expected to be used by the enterprise.
A. Depreciation C. Amortization II. The number of production or similar units expected to be obtained from the asset
B. Depletion D. Realization by the enterprise.
A. I and II. C. II only.
40. This is a process, basically gradual in occurrence, whereby property, because of B. Neither I nor II. D. I only.
causes other than physical deterioration, loses its economic usefulness and is
attributable to many causes, including technological improvements and reasonably 68. All of the following factors are considered in determined the useful life of an asset,
foreseeable economic changes. except
A. Depreciation C. Obsolescence A. Residual value.
B. Depletion D. Amortization B. Expected usage of the asset.
C. Expected wear and tear.
73. Depletion expense D. Technical obsolescence arising from changes or improvements in production or
A. Is usually part of cost of goods sold. from change in the market demand for the product or service output of asset.
B. Includes tangible equipment costs in the depletion base.
C. Excludes intangible development costs from the depletion base. 67. An addition that is an integral part of an older asset normally would be depreciated
D. Excludes restoration costs from the depletion base. over
A. The useful life of the addition
76. Depreciation is best described as a method of B. The useful life of the addition or the original asset, whichever is shorter
A. Asset valuation C. Cost allocation C. The useful life of the original asset
B. Current value allocation D. Useful life determination D. Either the useful life of the addition or the original asset, as a matter of
professional judgment
75. The process of depreciation is based primarily on which of the following accounting
principles? 42. The following statements relate to depreciation. Which statement is correct?
A. Revenue realization C. Conservatism I. The residual value of an asset is estimated at the date of acquisition and may not
B. Asset/liability measurement D. Matching be increased for changes in prices.
II. Technical obsolescence is a factor in estimating the useful life of an asset and accounting estimate.
arises from changes or improvements in production or change in the market A. I only C. Both I and II
demand for the product which the asset produces. B. II only D. Neither I nor II
A. l onely C. Both l and II
B. II only D. Neither I nor II Straight-line Depreciation
51. Which of the following statements is the assumption on which straight-line
Residual Value depreciation is based?
50. Which is incorrect concerning the residual value for purposes of computing A. The operating efficiency of the asset decreases in later years
depreciation? B. Service value declines as a function of time rather than use
A. The residual value is deducted from the cost of an asset to determine its C. Service value declines as a function of obsolescence rather than time
depreciable amount. D. Physical wear and tear are more important than economic obsolescence
B. The residual value is determined at the date of acquisition and may be increased
but may not be decreased for changes in prices. 49. The straight-line method of depreciation is not appropriate for
C. The residual value is determined at the date of acquisition and may be A. A company that is neither expanding nor contracting its investment in equipment
decreased but may not be increased for changes in prices. because it is replacing equipment as the equipment depreciates
D. When the allowed alternative treatment is adopted, meaning revaluation, a new B. Equipment on which maintenance and repairs increase substantially with age
estimate of the residual value is made at the date of revaluation of the asset. C. Equipment with useful life that is not affected by the amount of use
D. Equipment used consistently every period
Comprehensive
69. The following statements relate to depreciation. Which statement is incorrect? Composite Depreciation Method
A. The depreciable amount of an asset is determined after deducting its residual 36. A company using the composite depreciation method for its fleet of trucks, cars and
value and should be allocated on a systematic basis over its useful life. campers retired one of its trucks and received cash from a salvage company. The net
B. When the benchmark is adapted and the residual value is likely to be significant, carrying amount of these composite asset accounts would be decreased by the
the residual value is estimated at the date of acquisition and may be A. Cash proceeds received and original cost of the truck
subsequently increased for changes in prices. B. Cash proceeds received
C. The depreciation method should reflect the pattern in which the asset’s economic C. Original cost of the truck less the cash proceeds
benefits are consumed by the enterprise. D. Original cost of the truck
D. The depreciation charge for the period should be recognized as an expense
unless it is included in the carrying amount of another asset. Sum-of-Years-Digits Method
29. A machine with a 5-year useful life and 10% salvage value was acquired on January
Depreciation Methods 1, 2002. On December 31, 2005, accumulated depreciation using the SYD would be
39. The following statements relate to the depreciation method. Which statement is A. Original cost less salvage value multiplied by 1/5
incorrect? B. Original cost less salvage value multiplied by 14/15
I. The depreciation method used should not reflect the pattern in which the asset's C. Original cost multiplied by 1/15
economic benefits are consumed by the enterprise. D. Original cost multiplied by 14/15
II. The depreciation method applied to property, plant and equipment should be
reviewed periodically and if there has been a significant change in the expected Double declining Method
pattern of economic benefits, the change should be accounted for as change in 59. A method which excludes salvage value from the base for the depreciation
calculation is 18. A Company and B Company purchased identical equipment having an estimated
A. Straight-line C. Double declining balance service life of 5 years with no salvage value. A uses the straight-line depreciation
B. Sum of digits D. Productive output method and B uses the sum-of-the-years-digits method. Assume that the companies
are identical in all other respects.
Production Method A. If both companies keep the asset for five years, B Company's 5-year total for
70. This method of depreciation results in a charge based on the expected use or output depreciation will be greater than A Company's 5-year total.
of the asset. B. If the asset is sold alter three years, A Company is more likely to report a gain on
A. Straight-line method. C. Sum of units method. the transaction than B Company.
B. Diminishing balance method. D. Annuity method. C. A Company's depreciation expense will be higher during the first year than B
Company's.
50. The most common method of recording depletion for accounting purposes is the D. A Company’s net income will be lower during the 4th year than B Company's.
A. Percentage depletion method C. Straight-line
B. Decreasing charge method D. Production or output method Accounting Changes & Change in Estimate
38. The depreciation method should be reviewed periodically and if there is a significant
28. In which of the following situations is the production method of depreciation most change in the expected pattern of economic benefits, the change should
appropriate? A. Not be accounted for
A. An asset service potential declines with use B. Be accounted for as a change in accounting estimate
B. An asset service potential declines with passage of time C. Be accounted for as a change in accounting policy
C. An asset is subject to rapid obsolescence D. Be accounted for as a prior error
D. An asset incurs increasing repairs and maintenance with use
41. The effect of a change in the expected pattern of consumption of economic benefits
70. Under which of the following depreciation methods could depreciation expense of a depreciable asset should be included in the
increase from one period to the next? A. determination of income or loss in the period of change only.
A. Straight-line C. Service quantity B. determination of income or loss in the period of change and future periods.
B. Sum-of-the-years’-digits D. Declining balance C. statement of retained earnings as an adjustment of the beginning balance.
D. statement of retained earnings with the net income for the period.
61. What factor must be present to use the units-of-production method of depreciation?
A. Total units to be produced can be estimated Change in Useful Life
B. Production is constant over the life of the asset 71. Which statement is true concerning the revision of useful life of an asset and change
C. Repair costs increase with use in the depreciation method?
D. Obsolescence is expected I. The useful life of an item of property, plant and equipment should be reviewed
periodically, and if expectations are significantly different from previous
48. For income statement purposes, depreciation is a variable expense if the depreciation estimates, the depreciation charge for the current and future periods should be
method used for the book purposes is adjusted.
A. Units of production C. Sum of digits II. When a change in depreciation method is necessary to reflect the new pattern of
B. Straight line D. Declining balance economic benefits, the change should be accounted for as a change in
accounting estimate and the depreciation charge for the current and future
Sensitivity Analysis periods should be adjusted.
A. I only. C. I and II. B. Be recognized as expense D. Debited to revaluation surplus

B. II only. D. Neither I nor II.
Increase in Carrying Amount
42. The useful life of an item of properly, plant and equipment should be reviewed 43. When an asset's carrying amount is increased as a result of a revaluation, the
periodically and if expectations are significantly different from previous estimates, the increase should be credited directly to
depreciation charge for the A. Capital surplus C. Income
A. Current period only should be adjusted B. Retained surplus D. Revaluation surplus
B. Future period only should be adjusted
C. Prior periods should be adjusted 50. When property, plant and equipment are recorded at revalued amount, charging
D. Current and future periods should be adjusted. depreciation on the appraisal increase to the revaluation surplus is not acceptable
because
Comprehensive A. Taxable income will be overstated.
52. The following statements relate to the depreciation of property, plant and equipment. B. There will be no proper matching of revenue and costs.
Which statement is incorrect? C. There will be no systematic allocation of the appraisal increase.
A. The sum of units method results in a charge based on the expected use or D. Depreciation charges in the income statement will not be consistent with the
output of the asset. valuation of property, plant and equipment in the balance sheet.
B. The useful life of an item of property, plant and equipment should be reviewed
periodically and if expectations are significantly different from previous estimates, 53. If a depreciable property is revalued in the middle of the current fiscal year how is the
the depreciation charge for the current and future periods should be adjusted. depreciation expense for the year (assuming the company has a calendar year-end)
C. The change in the expected pattern of consumption of economic benefits of a determined?
depreciable asset should be accounted for as a change in accounting estimate A. Depreciation for the year is based on the average of the depreciation based on
and the effect is included in the determination of income or loss in the period of cost and on revalued amount of the property
change and future periods. B. Depreciation for the entire year is based on the cost
D. The change in the expected pattern of consumption of economic benefits of a C. Depreciation for the entire year is based on revalued amount
depreciation asset should be accounted for as a change in accounting policy and D. Depreciation for the first half of the year is based on cost and for the second half,
the effect is included in retained earnings. on revalued amount
Journal Entries 44. When the revaluation surplus is realized because of the use of the asset by the
Donated Assets enterprise or disposal of the asset, it may be transferred directly to
67. When an enterprise is the recipient of a donated asset, the account credited may be A. Retained earnings C. Retained earnings appropriated
A. Capital stock account C. Deferred revenue account B. Income D. Deferred income
B. Revenue account D. Retained earnings account
Comprehensive
Revaluation of Property, Plant & Equipment 35. Which statement is incorrect concerning revaluation of property, plant and
Decrease in Carrying Amount equipment?
43. When an asset's carrying amount is decreased as a result of a revaluation, the A. Any accumulated depreciation at the date of revaluation is restated
decrease should proportionately with the change in the gross carrying amount of the asset so that
A. Not be recognized C. Debited to retained earnings the carrying amount of the asset after revaluation should equal its revalued
amount, or the accumulated depreciation is eliminated against the gross carrying Contingencies
amount and the net amount is restated to the revalued amount 53. ABC Company, operates a plant in a foreign country, it is probable that the plant will
B. Any increase in the carrying amount of the asset should be credited directly to be expropriated. However, the foreign government has indicated that ABC will receive
equity under revaluation surplus a definite amount of compensation for the plant. The amount of compensation is less
C. The revaluation surplus may be transferred directly to retained earnings when than the fair market value but exceeds the carrying amount of the plant. The
the surplus is realized contingency should be reported
D. Any decrease in the carrying amount of the asset is debited to revaluation loss, a A. As a valuation allowance as part of stockholders' equity
contra equity account B. As a fixed asset valuation allowance account
C. In notes to financial statements
Balance Sheet Classification D. In the income statement
53. Major spare parts and standby equipment which are expected to be used over a
period of more than one year should be classified as Not a Required Disclosure
A. Property, plant and equipment C. Noncurrent investment 66. Enterprises are encouraged to disclose all of the following amounts, except
B. Inventory D. Expense A. The carrying amount of temporarily idle property, plant and equipment.
B. The gross carrying amount of any fully depreciated property, plant, and
41. Major spare parts and standby equipment which are expected to be used over a equipment that is still in use.
period of more than one year should be classified as C. The carrying amount of property, plant and equipment retired from active use
A. Inventory C. Supplies and held for disposal.
B. Property, plant and equipment D. Expense D. When the benchmark treatment is used, the fair value of the property, plant, and
equipment when this is not materially different from the carrying amount.
Disclosure Requirements
Depreciation Methods Used 34. Enterprise are encouraged to disclose all of the following, except
72. A general description of the depreciation methods applicable to major classes of A. Fair value of property when this is not materially different from the carrying
depreciable assets amount of the asset
A. Is not a current practice in financial reporting. B. Idle property, plant and equipment
B. Is not essential to a fair presentation of financial position. C. Property, plant and equipment retired from active use and held for disposal
C. Is needed in financial reporting when company policy differs from income tax D. Fully depreciated property, plant and equipment still in use
policy.
D. Should be included in corporate financial statements or notes thereto. Comprehensive
34. Which statement is incorrect concerning property, plant and equipment?
52. A client should be advised that a general description of the depreciation methods A. The useful life of property, plant and equipment is the period of time over which
applicable to major classes of depreciable assets an asset is expected to be used by the enterprise or the number of production or
A. Is not a current practice in financial reporting similar units expected to be obtained from the asset.
B. Is not essential to a fair presentation of financial position B. Fair value is the amount for which an item of property, plant and equipment could
C. Is needed in financial reporting when company policy differs from income tax be exchanged between knowledgeable willing parties in an arm's length
policy transaction.
D. Should be included in the notes to financial statements. C. The amount at which an asset is recognized in the balance sheet after deducting
any accumulated depreciation and accumulated impairment losses thereon is
known as the depreciable amount. restrict the access of others to those benefits.
D. An item of property, plant and equipment should be recognized as an asset when B. The capacity of the enterprise to control the economic benefits from an intangible
it is probable that future economic benefits will flow to the enterprise and the cost asset would normally stem from legal rights that are enforceable in a court of law.
of the asset can be measured readily. C. Market and technical knowledge may give rise to future economic benefits which
can be controlled by the enterprise if the knowledge is protected by legal rights
INTANGIBLE ASSETS such as copyright.
Nature D. The skill of employees arising out of the benefits of training costs can be
47. Which is not an essential element in the definition of an intangible asset? recognized as intangible asset.
A. An identifiable nonmonetary asset without physical substance.
B. A resource controlled by an enterprise as a result of past events. 67. Identifiable intangible assets include all of the following except
C. A resource from which future economic benefits are expected to flow to the A. Computer software C. Copyright
enterprise. B. Patent D. Goodwill
D. Money held and asset to be received in fixed or determinable amount of money.
48. Which statement is incorrect concerning recognition of an intangible asset?
Recognition Criteria I. Internally generated goodwill may be recognized as an asset
44. One criterion in defining an intangible asset is that it is an identifiable nonmonetary II. Internally generated brands, mastheads, publishing titles, customer lists and
asset without physical substance. Which statement is incorrect concerning items similar in substance should not be recognized as intangible assets.
identifiability? A. I only C. Both I and II
I. If an intangible asset is acquired through purchase there is a transfer of legal B. II only D. Neither I nor II
right that would make the asset identifiable.
II. An intangible asset may be identifiable if it is separable and thus, separability is a Measurement
necessary condition for identifiability. 39. The cost of an internally generated intangible asset includes (choose the incorrect
Ill. The skill of employees arising out of the benefits of training costs can be one)
recognized as an intangible asset. A. Expenditure on training staff to operate the asset.
A. I and II only C. II only B. Expenditure on materials and services used or consumed in generating the
B. I and III only D. II and III only intangible asset.
C. Salaries, wages and other employment related costs of personnel directly
36. The following statements relate to an intangible asset. Which statement is incorrect? engaged in generating the asset.
A. An intangible asset should be identifiable to distinguish it from goodwill. D. Overheads that are necessary to generate the asset and that can be allocated on
B. An intangible asset is identifiable if it is acquired through purchase because there a reasonable and consistent basis to the asset.
is a transfer of legal right.
C. An intangible asset is identifiable if it could be rented or sold separately. 49. Which is incorrect concerning separate acquisition of an intangible asset?
D. Separability is a necessary condition for identifiability. A. If an intangible asset is acquired separately, the cost of the Intangible asset can
usually be measured reliably.
66. Which is incorrect concerning the criterion of control by the enterprise of the B. The cost of an intangible asset comprises its purchase price and any directly
intangible asset? attributable expenditure on preparing the asset for its intended use.
A. An enterprise controls an asset if the enterprise has the power to obtain the C. If payment for an intangible asset is deferred beyond normal credit terms, its cost
future economic benefits flowing from the underlying resource and also can is equal to the total payments over the credit period.
D. If an intangible asset is acquired in exchange for equity instruments of the 55. The value derived from a firm's ability to earn more than a normal rate of return on its
reporting enterprise, the cost is the fair value of the equity instruments, which is specific identifiable net assets is called
equal to the fair value of the intangible asset. A. A franchise C. Patent
B. Goodwill D. Organization cost
46. The following statements relate to intangible assets. Which statement is correct?
I. Subsequent to initial recognition, an intangible asset is measured at cost less 53. Goodwill represents the excess of the cost of an acquired company over the
accumulated amortization and any accumulated impairment loss. A. Sum of the fair values assigned to identifiable assets acquired less liabilities
II. Subsequent expenditure on an intangible asset may be capitalized when it is assumed
probable that this expenditure will generate future economic benefits in excess of B. Sum of the fair values assigned to tangible assets acquired less liabilities
the originally assessed standard of performance and the expenditure can be assumed
measured reliably and attributed directly to the intangible asset. C. Sum of the fair values assigned to intangible assets acquired less liabilities
A. I only C. Both I and II assumed
B. II only D. Neither I nor II D. Sum of the fair values assigned to plant assets less liabilities assumed
47. Which statement is correct concerning the residual value of an intangible asset? 58. Internally generated goodwill is
A. The residual value of an intangible asset is always zero. A. Recognized as an asset because the inflow of future economic benefits is highly
B. The residual value of an intangible asset is assumed zero, unless there is a probable and the cost of the goodwill can be measured reliably.
commitment by a third party to purchase the asset at the end of its useful life, or B. Not recognized as an asset because the cost cannot be measured reliably
there is an active market for the asset and residual value can be determined by although the inflow of future economic benefits is highly probable
reference to that market and it is probable that such market will exist at the end C. Recognized as expense
of the asset's useful life. D. Recognized as revenue
C. The residual value may be subsequently increased for the changes in prices.
D. If the intangible asset is revalued, a new estimate of residual value is not made 45. The cost of generating goodwill among customers and potential clients is
at the date of each revaluation. A. Recognized as an asset because the inflow of future economic benefits is highly
probable and the cost of the goodwill can be measured reliable.
79. The unallocated cost of plant or intangible asset is called B. Not recognized as an asset because the cost cannot be measured reliably
A. Market value C. Net realizable value although the inflow of future economic benefits is highly probable.
B. Carrying value D. Value in use C. Recognized as an expense
D. Recognized as revenue
Franchise Fee
55. Which of the following should be expensed as incurred by the franchisee for a Patents
franchise with an estimated useful life of ten years? 54. Which of the following statements concerning patents is correct
A. Amount paid to the franchisor for the franchise A. Legal costs incurred to successfully defend an internally developed patent should
B. Payment to a company, other than the franchisor, for that company’s franchise. be capitalized and amortized over the patent’s remaining economic life
C. Legal fees paid to the franchisee’s lawyers to obtain the franchise. B. Legal fees and other direct costs incurred in registering a patent should be
D. Periodic payments to the franchisor based on the franchisee’s revenue capitalized and amortized on a straight line basis over a five-year period
C. Research and development contract services purchased from others and used to
Goodwill develop a patented manufacturing process should be capitalized and amortized
over the patent’s economic life A. The technical feasibility of completing the intangible asset so that it will be
D. Research and development costs, incurred to develop a patented item should be available for use or safe.
capitalized and amortized on a straight-line basis over 17 years B. An enterprise's intention to complete the intangible asset and use or sell it.
C. The ability of an enterprise to use or sell the intangible asset.
Research & Development Costs D. It is possible that future economic benefits will flow to the enterprise and the cost
52. The general rule in the accounting treatment of research and development costs is of completing the project can be measured with reliability.
A. Capitalize all costs as assets when incurred and amortized when revenue is
earned. Software
B. Treat all costs as current expenses as incurred. 74. The proper accounting for the costs incurred in creating computer software products
C. Capitalize selectively, and predetermine the conditions that would require that are to be sold, leased, or otherwise marketed to external parties, is to
capitalization as well as those that would be written off as current expenses. A. Capitalize ail costs until the software is sold to external parties.
D. Accumulate all costs in a special intangible asset account until a determination B. Charge research and development expense when incurred until technological
can be made as to the degree of future benefits. feasibility has been established for the product.
C. Charge research and development expense only if the computer software has
58. Which is not considered a research and development activity? alternative future uses.
A. Routine on-going efforts to refine, enrich or improve quality of existing product D. Capitalize all costs as incurred until a detailed program design or working model
B. Laboratory research aimed at discovery of new knowledge is created.
C. Conceptual formulation and design of possible product or process
D. Design, construction and operation of a pilot plant 56. On December 31, 2002, Newton Company had capitalized costs for a new computer
software product with an economic life of four years. Sales for 2003 were ten percent
55. A research and development activity for which the cost would be expensed as of expected total sales of the software. At December 31, 2003, the software had a net
incurred is realizable value equal to eighty percent of the capitalized costs. The Unamortized
A. Modification of the design of a product or conceptual formulation and design of a cost reported on the December 31, 2003 balance sheet should be
possible product alternative. A. Net realizable value C. Seventy five percent of
B. Trouble shooting in connection with breakdowns during commercial production. capitalized cost
C. Routine design of tools B. Ninety percent of net realizable value D. Ninety percent of capitalized cost
D. Engineering follow-through in an early phase of commercial production.
Organization Costs
67. Which of the following research and development related costs should be capitalized 80. Which of the following should not be included in “organization costs”?
and amortized over current and future periods? A. Legal fees for drafting the corporate charter and by law
A. Research and development general laboratory building B. Compensation to promoters of the enterprise and other promotional costs
B. Inventory used for a specific research project C. Initial stock issuance costs
C. Administrative salaries allocated to research and development D. Operating losses during the early years of operations
D. Research findings purchased from another company to aid a particular research
project currently in process Amortization
50. It is the systematic allocation of the cost or revalued amount of an intangible asset,
46. An intangible asset arising from the development phase of an internal project should less any residual value, as an expense over the asset's useful life.
be recognized if the entity can demonstrate all of the following except A. Realization C. Amortization
B. Allocation D. Expiration physical existence are intangible assets.

B. Under current accounting practice intangible assets may-be classified into those
Estimating Useful Life with limited lives such as patents and copyrights, and those with unlimited lives
51. The factors that need to be considered in determining the useful life of an intangible such as goodwill.
asset include all of the following, except C. Research and development costs should be expensed in the year in which the
A. Technical obsolescence costs are incurred for financial reporting purposes even thought the costs may
B. Expected action of competitors provide benefits to future periods.
C. Expected usage of the asset by the enterprise D. Only when intangible assets are acquired from other entities can they be
D. Residual value recognized as assets.
31. Which of the following is not considered in estimating the useful life of an intangible IMPAIRMENT OF ASSETS
asset? Basic Concepts
A. Expected usage of the asset by the enterprise 57. Assets intended to be held and used for productive purposes may suffer from
B. Stability of the industry in which the intangible asset operates impairment in each of the following circumstances except
C. Salvage value of the asset A. A change in the way assets are used or physical change in the assets
D. Level of maintenance expenditure required to obtain the future economic benefit B. Asset costs incurred exceed the original amounts planned
form the asset C. Discounted expected future cash flows are less than the carrying amount of the
assets
57. What is the proper time or time period over which to match the cost of an intangible D. A significant adverse change in legal factors that might affect the fair value of the
asset with revenue if it is likely that the benefit of the asset will last for an assets
indeterminate period of time?
A. Twenty years 61. It is the smallest identifiable group of assets that generate cash inflows from
B. Fifty years continuing use that are largely independent of the cash inflows from other assets or
C. Immediately group of assets.
D. At such time as diminution in value can be quantitatively determined A. Cash generating unit C. Corporate asset
B. Goodwill D. The enterprise as a whole
Comprehensive
37. Which statement is incorrect concerning an intangible asset? 50. A cash generating unit (CGU) is the smallest identifiable group of assets that
I. The skill of employees arising out of benefits of training costs can be recognized generate cash inflows from continuing use that are largely independent of cash
as intangible asset. inflows form other assets or group of assets. In testing impairment of a CGU, the
II. Market and technical knowledge may give rise to future economic benefits which "bottom up" test is used. This means that
can be controlled by the enterprise if the knowledge is protected by legal right I. Goodwill can be allocated to the CGU and an impairment has occurred if the
such as copyright. recoverable amount of the CGU is less than its carrying amount plus the
A. I only C. Both I and II allocated goodwill.
B. II only D. Neither I nor II II. Goodwill can be allocated to the CGU and an impairment has occurred if the
recoverable amount of the CGU is less than its carrying amount excluding the
55. The following statements relate to intangible assets. Which statement is false? goodwill.
A. All intangible assets have no physical existence, but not all assets having no A. I only C. Both I and II
B. II only D. Neither I nor II in an active market, whichever is higher.

B. Fair value in an active market
Bottom-up Test for Impairment C. Best estimate of knowledgeable and willing parties in an arm’s length transaction
6. The "bottom up" test for impairment means that D. Sales price in binding sale agreement in an arm’s length transaction
A. Goodwill can be allocated to the CGU and an impairment has occurred if the
recoverable amount of the CGU is less than its carrying amount plus the Value in Use
allocated goodwill. 59. Value in use of an asset is equal to the
B. Goodwill can be allocated to the CGU and an impairment has occurred if the A. Undiscounted future net cash flows from the use of the asset
recoverable amount of the CGU is less than its carrying amount excluding the B. Undiscounted future net cash flows from the use of the asset and the eventual
goodwill. disposition of the asset
C. Goodwill cannot be allocated to the CGU and an impairment has occurred if the C. Discounted future net cash flows from the use of the asset
recoverable amount of the enterprise as a whole is less than its carrying amount D. Discounted future net cash flows from the use and eventual disposition of the
plus the goodwill. asset
D. Goodwill cannot be allocated to the CGU and an impairment has occurred if the
recoverable amount of the enterprise as a whole is less than its carrying amount Estimated Future Cash Flow
excluding the goodwill. 3. The estimates of future cash flows in calculating value in use include all of the
following, except
Net Recoverable Amount A. Future cash flows for capital expenditure that will improve the asset
58. What is the recoverable amount of an asset? B. Cash inflows from the use of the asset
A. Net selling price C. Cash outflows incurred to generate cash inflows from the use of the asset
B. Value in use D. Net cash flows from the disposal of the asset
C. Net selling price or value in use, whichever is higher
D. Net selling price or value in use, whichever is lower 4. Which statement is incorrect concerning an estimate of future cash flows?
A. The discount rate used in the estimate should be the current rate after tax
Net Selling Price B. Foreign currency future cash flows should be forecast in the currency in which
48. In testing impairment, the recoverable amount of an assets is equal to the net selling they will arise and discounted at appropriate rate.
price or value in use, whichever is higher. Net selling price means the. C. Future cash flows should be based on reasonable and supportable assumptions.
A. Discounted or present value of future net cash flows form the use and eventual D. Future cash flows should be based on the most recent budgets or financial
disposition of the asset. forecast up to a maximum of 5 years.
B. Undiscounted future net cash flows form the use and eventual disposition of the
asset. 49. The following statements relate to the estimates of cash flows in calculating value in
C. Discounted future net cash flows form the use 6f the asset. use. Which statement is correct?
D. Amount obtainable from the sale of an asset in an arm's length transaction I. The estimates of future cash flows in calculating value in use should include
between knowledgeable, willing parties, less costs of disposal which is usually future cash outflows for capital expenditure that will improve the asset beyond
the sales price in a binding sale agreement. the standard of performance originally assessed.
II. The discount rate used in estimating the future cash flows should be the current
31. What is the best evidence of net selling price? rate after tax.
A. Sales price in binding sale agreement in an arm’s length transaction or fair value A. I only C. Both I and II
B. II only D. Neither I nor II exceeds its recoverable amount and should be recognized as an ordinary loss.
II. After the recognition of an impairment loss, depreciation of the asset for the
Carrying Amount future periods should be equal to the revised carrying amount less its residual
60. Which statement is correct about the carrying amount of a long-lived asset after an value allocated on a systematic basis over its original life.
impairment loss has been recognized? Assume the asset is being held for use in A. Both I and II C. I only
business and the asset is depreciable. B. Neither I nor II D. II only
I. The reduced carrying amount of the asset may be increased in subsequent years
if the impairment loss has been recovered CURRENT LIABILITIES, PROVISIONS & CONTINGENCIES
II. The reduced carrying amount of the asset represents the amount that should be Current Liabilities
depreciated over the asset's remaining useful life. Trade Payables
A. I only C. Both I and II 68. Which obligations are classified as current even if they are due to be settled after
B. II only D. Neither I nor II more than twelve months from balance sheet date?
A. Trade payables and accruals for employee and other operating costs
Journal Entries B. Bank overdrafts
75. Blue Company determines that a printing press used in its operations has suffered a C. Dividends payable
permanent impairment in value because of technological changes. An entry to record D. Income taxes payable
the impairment should
A. Recognize an extraordinary loss for the period. Note Payable
B. Include a credit to the equipment accumulated depreciation account. 62. XYZ Company issued a note solely in exchange for cash. Assuming that the items
C. Include a credit to the equipment account. listed below differ in amount the present value of the note at issuance is equal to the
D. Net be made if the equipment is still being used. A. Face amount
B. Face amount discounted at the prevailing interest rote for similar notes
Comprehensive C. Proceeds received
5. The following statements pertain to recognition and measurement of an impairment D. Proceeds received discounted at the prevailing interest rate for similar notes
loss. Which statement is incorrect?
A. An impairment loss is the amount by which the carrying amount of an asset 58. A company issued a short-term note payable with a stated 12 percent rate of interest
exceeds its recoverable amount. to a bank. The bank charged a .5% loan origination fee and remitted the balance to
B. After the recognition of an impairment loss, depreciation of the asset for the the company. The effective interest rate paid by the company in this transaction
future periods should be equal to the revised carrying amount less its residual should be
value allocated on a systematic basis over its original life. A. Equal to 12.5% C. Less than 12.5%
C. An impairment loss should be recognized as expense in the income statement B. More than 12.5% D. Independent of 12.5%
immediately.
D. If the recoverable amount of an asset is less than its carrying amount, the Accrued Liability
carrying amount of the asset should be reduced to its recoverable amount. 46. An accrued expense can be best described as an amount
A. Paid and currently matched with earnings
34. The following statements pertain to recognition and measurement of an impairment B. Paid and not currently matched with earnings
loss. Which statement is incorrect? C. Not paid and not currently matched with earnings
I. An impairment loss is the amount by which the carrying amount of an asset D. Not paid and currently matched with earnings
42. On March 31, 2003, Texas Company received an advance payment of 60% of the
59. Which of the following is an accrued liability? sales price for special order goods to be manufactured and delivered within five
A. Cash dividends payable months. At the same time, Texas subcontracted for production of the special order
B. Wages payable goods at a price equal to 40% of the main contract price. What liabilities should be
C. Rent revenue collected one month in advance reported in Texas’ March 31, 2003, balance sheet?
D. Portion of long-term debt payable in current year A. None
B. Deferred revenue equal to 60% of the main contract price and payable to
82. Which of the following represents a current liability that results in recognition of an subcontractor equal to 40% of the main contract price
expense? C. Deferred revenue equal to60% of the main contract price and no payable to
A. Customer advances C. Interest payable subcontractor
B. Short-term note payable D. Dividend payable D. No deferred revenue but payable to subcontractor is reported at 40% of the main
contract price
Compensated Absences
33. If the payment of employees' compensation for future absences is probable, the Refinancing Short-term Debt
amount can be reasonably estimated and the obligation relates to rights that 67. A long-term debt falling due within one year should be reported as noncurrent liability
accumulate, the compensation should be if the following conditions are met (choose the correct one)
A. Accrued if attributable to employees' services not rendered A. The original term is for a period of more than one year
B. Accrued if attributable to employees' services already rendered B. The enterprise intends to refinance the obligation on a long-term basis
C. Accrued if attributable to employees' services whether already rendered or not C. The intent to refinance is supported by an agreement to refinance which is
D. Recognized when paid completed before the issuance of the financial statements
D. The intent to refinance is supported by an agreement to refinance which is
Unearned Income completed after the issuance of the financial statements
60. Rent collected in advance by the lessor is
A. Accrued liability C. Accrued revenue 78. Which of the following statements is correct?
B. Deferred asset D. Deferred revenue A. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis.
35. For P5,000 a month, Stark Company visits its customers' premises and performs B. A company may exclude a short-term obligation from current liabilities if the firm
insect control services. If customers experience problems between regularly can demonstrate an ability to consummate a refinancing.
scheduled visits. Stark Company makes service calls at no additional charge. Instead C. A company may exclude a short-term obligation from current liabilities if it is paid
of paying monthly, customers may pay an annual fee of P55,000 in advance. For off after the balance sheet date and subsequently replaced by long-term debt
customers who pay the annual fee in advance. Stark should recognize the related before the balance sheet is issued.
revenue D. The company must both intend to refinance the obligation on a long-term basis
A. When the cash is collected and demonstrate the ability to consummate the refinancing to exclude a short-
B. At the end of the fiscal year term obligation from current liabilities.
C. At the end of the contract year after all of the services have been performed
D. Evenly over the contract year as the services are performed Provisions
Basic Concepts
Advances from Customers 70. It is an existing liability of uncertain timing or uncertain amount
A. Provision C. Accrued liability and measurable loss?

B. Contingent liability D. Contingent asset A. Substance over form C. Conservatism
B. Neutrality D. Completeness
62. What is an obligation that definitely exists but the amount of which is uncertain?
A. Contingent liability C. Provision 36. In June 2002, Lora Company sold refundable merchandise coupons. Lora received
B. Unearned revenue D. Discount on note payable P100 for each coupon redeemable from July 1 to December 31, 2002, for the
merchandise with retail price of P110. At June 30, 2002, how should Lora report
69. What is present obligation? these coupon transactions?
A. Legal obligation only C. Both legal and constructive A. Unearned revenue at the merchandise's retail price
obligation B. Unearned revenue at the cash received
B. Constructive obligation only D. Neither Segal nor constructive C. Revenue at the merchandise's retail price
obligation D. Revenue at the cash received
74. What accounting principle supports the recognition of an estimated liability for 37. ABC Company sells appliances that include a 3-year warranty. Service calls under,
warranties in the accounting period in which the products under warranty are sold? the warranty are performed by an independent mechanic under a contract with ABC.
A. Materiality C. Conservatism Based on experience, warranty costs are estimated at P300 for each machine sold.
B. Full disclosure D. Matching When should ABC recognize the warranty costs?
A. Evenly over the life of the warranty
48. XYZ Company sells appliances that include a three-year warranty. Service needed B. When the service, calls are performed
under the warranty are performed by an independent mechanic under a contract with C. When payments are made to the mechanic
XYZ. Based on experience, warranty costs are estimated at P300 for each appliance D. When the machines are sold
sold. When should XYZ recognize the warranty costs?
A. Evenly over the life of the warranty 63. An estimated loss from a loss contingency should be accrued when
B. When the services are performed A. It is probable at the date of the financial statements that an asset has been
C. When the appliances are sold impaired or a liability has been incurred and the amount of the loss can be
D. When payments are made to the mechanic reasonably estimated
B. The loss has been incurred on the date of the financial statements and the
12. Which statement is incorrect when a provision is expected to be reimbursed by amount of the loss may be material
another party? C. It is probable that a loss will be incurred in a future period and the amount of the
A. The expense relating to the provision may be presented net of the loss can be reasonably estimated
reimbursement. D. It is probable at the date of the financial statements that a loss has been incurred
B. The amount of reimbursement may exceed the provision. and the amount of the loss may be material
C. The reimbursement should not exceed the provision.
D. The reimbursement should be recognized when it is virtually certain that the 65. A provision should be recognized as liability when (choose the incorrect one)
reimbursement will be received if the enterprise settles the provision. A. An enterprise has a present obligation as a result of a past event
B. It Is probable that an outflow of resources embodying economic benefits will be
Recognition required to settle the obligation.
10. What is the underlying concept that supports the immediate recognition of probable C. It is possible that an outflow of resources embodying economic benefits will be
required to settle the obligation. the current best estimate.

D. The amount of the obligation can be measured reliably. B. Gains from expected disposal of assets should be taken into account in
measuring a provision.
75. For 2001, Pac Company estimated its two-year equipment warranty costs based on C. Where some or all of the expenditure required to settle a provision is expected to
P100 per unit sold in 2001, Experience during 2001 indicated that the estimate should be reimbursed by another party, the amount of the reimbursement may exceed
have been based on P110 per unit. The effect of this P10 difference from the the amount of the provision.
estimate is reported D. Provisions should be recognized for future operating losses.
A. In 2002 income from continuing operations
B. As an accounting change, net of tax, below 2002 income from continuing Comprehensive
operations 11. Which statement is not valid in the measurement of a provision?
C. As an accounting change requiring 2001 financial statements to be restated A. Gain from the expected disposal of an asset should be taken into account.
D. As a correction of an error requiring 2001 financial statements to be restated B. The risks and uncertainties that inevitably surround many events and
circumstances should be considered in making the best estimate.
Measurement C. The amount of the provision should be the present value of the expenditure
55. A provision is a liability of uncertain timing and amount. If a provision is recognized expected to settle the obligation.
the amount of liability is equal to D. Future events that may affect the settlement of a provision should be reflected in
A. Midpoint of the range C. Maximum of the range the provision where there is objective evidence that the future events will occur.
B. Minimum of the range D. Best estimate
13. Which is not correct about a provision?
4. The statistical method of estimation where the provision involves a large population of A. If an enterprise has an onerous contract, the present obligation under the
items and the obligation is estimated by “weighting” all possible outcomes by their contract should be measured as a provision.
associated probabilities is known as B. A provision should be used only for expenditures for which the provision was
A. Current value method C. Extrapolation originally recognized.
B. Present value method D. Expected value method C. Provisions should be reviewed at each balance sheet date and adjusted to reflect
the current best estimate
5. Which statement is correct concerning the measurement of a provision? D. Provisions should be recognized for future operating losses.
A. Gains from expected disposal of assets should be taken into account in
measuring a provision. Contingencies
B. Where some or all of the expenditure required to settle a provision is expected to 70. An outflow of resources embodying economic benefit is regarded as "probable" when
be reimbursed by another party, the amount of the reimbursement may exceed A. The probability that the event will occur is greater than the probability that the
the amount of the provision. event will not occur.
C. Provisions should be recognized for future operating losses. B. The probability that the event will not occur is greater than the probability that the
D. The statistical method of estimation where the provision involves a large event will occur.
population of items and the obligation is estimated by “weighting” all possible C. The probability that the event will occur is the same as the probability that the
outcomes by their associated probabilities is known as “expected value” method. event will not occur.
D. The probability that the event will occur is 50% likely.
3. Which statement is correct concerning the measurement of a provision?
A. Provisions should be reviewed at each balance sheet date and adjusted to reflect Contingent Liability
48. Which of the following statements is true concerning contingent liabilities? B. Should show the said appropriation of retained earnings within the stockholders'
A. Such liabilities should include obligations of known existence but of unknown equity section of the balance sheet
amount C. Could charge costs or losses to the said appropriated retained earnings.
B. If a definite amount is involved, it is not a contingent liability D. May transfer to income a part of said retained earnings so appropriated.
C. Such liabilities are generally reported and totaled with other liabilities to make up
the liability section of most balance sheets Journal Entries
D. Such liabilities should include obligations known in amount but unknown in 63. An estimated loss from a loss contingency that is probable and for which the amount
existence of the loss can be reasonably estimated should
A. Not be accrued but should be disclosed in the notes to the financial statements.
56. Which is incorrect concerning a contingent liability? B. Be accrued by debiting appropriated retained earnings and crediting a liability
A. A contingent liability is either probable or measurable but not both. account or an asset account
B. An enterprise should not recognize a contingent liability in the financial C. Be accrued by debiting an expense account and crediting appropriated retained
statement. earnings
C. A contingent liability is disclosed only. D. Be accrued by debiting an expense account and crediting a liability account or an
D. If a contingent liability is remote, disclosure is also required. asset account.
Contingent Asset Presentation & Disclosure Requirements

57. It is a possible asset that arises from past event and whose existence will be Note Payable
confirmed only by the occurrence or nonoccurrence of one or more uncertain future 77. Among the short-term obligations of Lani Company as of December 31, the balance
events not wholly with the control of the enterprise. sheet date, are notes payable totaling P500,000 with National Bank. These are 90-
A. Suspense account C. Other asset day notes, renewable for another 90-day period. These notes should be classified on
B. Intangible asset D. Contingent asset the balance sheet of Lani Company as
A. Current liabilities C. Noncurrent liabilities
Retained Earnings Appropriated for Loss Contingencies B. Deferred charges D. Intermediate debt
38. Divine Company has a self-insurance plan. Each year, retained earnings are
appropriated for contingencies in an amount equal to insurance premiums saved less 64. On September 1, 2003 a company borrowed cash and signed a one-year interest
recognized losses from lawsuits and other claims. As a result of a 2002 accident, bearing note on which both the principal and interest are payable on September 1,
Divine is a defendant in a lawsuit in which it will probably have to pay damages of 2004. How will the note payable and the accrued interest be classified in the
P200,000. What are the effects of this lawsuit's probable outcome on Divine 2002 December 31, 2003 balance sheet?
financial statements? Note payable Accrued interest
A. An increase in expenses and no effect on liabilities A. Current liability Noncurrent liability
B. An increase in both expenses and liabilities B. Noncurrent liability Current liability
C. No effect on expenses and an increase liabilities C. Current liability Current liability
D. No effect an either expenses or liabilities D. Noncurrent liability No entry
58. Gem Company classifies a portion of its retained earnings as appropriated for loss Advances from Customers
contingencies. Consequently, the company 81. Advance payments made to suppliers should normally be
A. Should not identify said appropriation as an appropriation of retained earnings. A. Included in current assets
B. Included in current liabilities be expropriated. However, the foreign government has indicated that West will
C. Included in inventories receive a definite amount of compensation for the plant. The amount of compensation
D. Reported in the notes to the financial statements is less than the fair market value but exceeds the carrying amount of the plant. The
contingency should be reported
61. A company received an advance payment for special order goods that are to be A. As a valuation allowance as part of stockholders' equity
manufactured and delivered within six months. The advance payment should be B. As a fixed asset valuation allowance account
reported in the company’s balance sheet as a C. In notes to financial statements
A. Deferred charge C. Current liability D. In the income statement
B. Contra asset account D. Noncurrent liability
57. On December 31, 2003, Fox Company sued Blim Company for breach of the contract
56. Zebra Company receives an advance payment in the amount of P120,000 for a water of carriage in the amount of P1 million. Fox's financial statements should report the
purification unit which is to be fabricated and installed within nine months. The probable expected award of P1 million as a
P120,000 should be reported in Zebra's balance sheet as A. Receivable and revenue C. Receivable and deferred
A. Deferred charge C. Noncurrent liability payments
B. Current liability D. Contra asset account B. Revenue D. Disclosure by footnote only
Estimated Liabilities 65. When the occurrence of a gain contingency is probable and its amount can be
19. An appropriate disclosure of estimated liabilities involves reasonably estimated, the gain contingency should be
A. Their inclusion among the liabilities without extending the corresponding amount A. Recognized in the income statement and disclosed
to the liability total. B. Classified as an appropriation of retained earnings
B. An appropriation of retained earnings. C. Disclosed, but not recognized in the income statement
C. Their proper classification as regular liabilities, whether current or noncurrent D. Neither recognized in the income statement nor disclosed.
D. Footnote disclosure only.
LONG-TERM LIABILITIES
Contingent Losses Notes Payable
64. ABC Company did not record an accrual for a contingent loss, but disclose the nature Measurement
of the contingency and the range of the possible loss. How likely is the loss? Issued at Face Value
A. Remote C. Probable 42. At issuance date, the present value of a promissory note will be equal to its face
B. Reasonably possible D. Certain amount if the note
A. Bears a stated rate of interest which is realistic.
84. Unasserted claims that are both probable of being asserted in the future and are B. Bears a stated rate of interest which is less than the prevailing market rate for
reasonably possible to result in a loss should similar notes.
A. Be disclosed as a footnote C. Is noninterest bearing and the implicit interest rate is less than the prevailing
B. Be accrued as a contingent liability market rate for similar notes.
C. Be accrued as a deferred credit D. Is noninterest bearing and the implicit interest rate is equal to the prevailing
D. Not be disclosed since the claims are unasserted market rate for simpler notes.
58. West Company operates a plant in a foreign country. It is probable that the plant will 50. A two-year note was issued in an arm's length transaction at face value for cash at
the beginning of this year. There were no other rights or privileges exchanged. The the beginning of this year. There were no other rights or privileges exchanged. The
interest rate is specified at 12% per year. Principal and interest are payable at interest rate is specified at 10 percent per year. Principal and interest are payable at
maturity. The prevailing rate of interest for a loan of this kind is 15% per year. What maturity. The prevailing rate of interest for a loan of this type is 15 percent per year.
amount of interest rate should be used to record interest expense for this year and What annual interest rate should be used to record interest expense for this year and
next year respectively? next year?
A. 12 percent and 15 percent C. 12 percent and 12 percent A. B. C. D.
B. 15 percent and 15 percent D. 15 percent and 12 percent This year 10 percent 10 percent 15 percent 15 percent
Next year 15 percent 10 percent 10 percent 15 percent
Issued at a Discount
85. XYZ Company sold and issued a P1,000,000, 6% bond at 94. Therefore, the bond Effect of Transactions
was sold 51. The issuance of long-term bonds payable is a transaction which affects
A. P1,000,000 less accrued interest of P60,000 A. Current asset and current liability
B. for P1,000,000 plus accrued interest of P60,000 B. Noncurrent account only
C. at a discount because the stated interest rate was lower than the market rate of C. Current liability only
interest D. Current asset and nonworking capital account
D. at a discount because the stated interest rate was higher than the market rate of
interest Bonds Payable
Basic Concepts
65. If the present value of a note issued in exchange for a plant asset is less than its face 59. When all bonds mature on a single date, they are called
amount, the difference should be A. Term bonds C. Debenture bonds
A. Included in the cost of the asset B. Serial bonds D. Callable bonds
B. Amortized as interest expense over the life of the note
C. Amortized as interest expense over the life of the asset 79. The covenants and other terms of the agreement between the issuer of bonds and
D. Included in interest expense in the year of issuance the lender are set forth in the
A. Bond indenture C. Registered bond
Accrued Interest B. Bond debenture D. Bond coupon
68. On September 1, 2001 a company borrowed cash and signed a two-year-interest-
bearing note on which both the principal and interest are payable on September 1, 80. The interest rate written in the terms of the bond indenture is known as the
2003. How many months of accrued interest would be included in the liability for A. Coupon rate C. Stated rate
accrued interest at December 31, 2001 and December 31, 2002? B. Nominal rate D. Coupon rate, nominal rate, or
A. B. C. D. stated rate
December 31, 4 months 4 months 12 months 20 months
2001 81. The rate of interest actually earned by bondholders is called the
December 31, 16 months 4 months 24 months 8 months A. Stated rate C. Effective rate
2002 B. Yield rate D. Effective, yield or market rate
Interest Expense Recognition

49. A two-year note was issued in an arm’s length transaction at face value for cash at 9. The printing costs and legal fees associated with the issuance of bonds should
A. Be expensed when incurred

B. Be reported as a deduction from the face amount of bonds payable. 72. The proceeds from a bond issued with non-detachable stock purchase warrants
C. Be accumulated in a deferred charge account and amortized ever the life of the should be accounted for as
bonds. A. Entirely bonds payable
D. Not be reported as an expense until the period the bonds mature or are retired. B. Entirely stockholders’ equity
C. Partly bonds payable and partly unearned revenue
Measurement D. Partly bonds payable and partly stockholders’ equity
45. In current accounting practice, the valuation method used for bonds payable is
A. Historical cost 76. How should the value of nondetachable warrants attached to a debt security be
B. Discounted cash flow valuation at current yield rates accounted for?
C. Maturity amount A. No value assigned C. An appropriation of retained
D. Discounted cash flow valuation at yield rates at issuance earnings
B. A separate portion of paid-in capital D. A liability
67. In theory the proceeds from the sale of a bond will be equal to
A. The face amount of the bond 46. The proceeds from a bond issued with detachable stock purchase warrants should be
B. The present value of the principal amount due at the end of the life of the bond accounted for
plus the present value of the interest payments made during the life of the bond A. Entirely as bonds payable
C. The face amount of the bond plus the present value of the interest payments B. Entirely as stockholders’ equity
made during the life of the bond C. Partially as unearned revenue and partially as bonds payable
D. The sum of the face amount of the bond and the periodic Interest payments. D. Partially as stockholders’ equity and partially as bonds payable
66. The market price of a bond issued at a discount is the present value of its principal 40. Kay Company issued bonds with detachable common stock warrants. Only the
amount at the market (effective) rate of interest warrants had a known market value. The sum of the fair value of the warrants and the
A. Less the present value of all future interest payments at the market rate of face amount of the bonds exceeds the cash proceeds. This excess is reported as
interest A. Discount on bonds payable C. Common stock subscribed
B. Less the present value of all future interest payments at the rate of interest stated B. Premium on bonds payable D. Contributed capital in excess of
on the bond. par
C. Plus the present value of all future interest payments at the market rate of
interest 68. An issuer of bonds is required by its bond indenture agreement to use a sinking fund
D. Plus the present value of all future interest payments at the rate of interest stated for the retirement of the bonds. Cash was transferred to the sinking fund. The sinking
on the bond. fund cash was then used to purchase investments. The sinking fund
A. Increases when the investments are purchased
72. When the interest payment dates of a bond are May 1 and November 1, and a bond B. Decreases when the investments are purchased.
issue is sold on June 1, the amount of cash received by the issuer will be C. Increases when revenue is earned on the investments.
A. Decreased by accrued interest from June 1 to November 1 D. Is not affected by revenue earned on the investments.
B. Decreased by accrued interest from May 1 to June 1
C. Increased by accrued interest from June 1 to November 1 Bond Issued Cost
D. Increased by accrued interest from May 1 to June 1 60. The issuance of long-term bonds is a transaction which affects
A. Current asset and current liability. C. A decreasing amount of interest expense and a decreasing carrying amount for
B. Current asset and nonworking capital account. the bonds payable.
C. Noncurrent account only D. An increasing amount of interest expense and an increasing carrying amount for
D. Current liability only the binds payable.
50. A company issued ten-year term bonds at a discount in 2003. Bond issue costs were Call Provision
incurred at that time. The company uses the effective interest method to amortize 53. A ten-year term bond was issued at a discount with a call provision to retire the
bond issue costs. Reporting the bond issue costs as a deferred charge would result in bonds. When the bond issuer exercised the call provision on an interest date, the
A. More of a reduction in net income in 2003 than reporting the bond issue costs as carrying amount of the bond was less than the call price. The amount of bond liability
reduction of the related debt liability removed from the accounts should have equaled the
B. The same reduction in net income in 2003 as reporting the bond issue costs as a A. Call price
reduction of the related debt liability B. Call price less unamortized discount
C. Less of a reduction in net income in 2003 than reporting the bond issue costs a C. Face amount less unamortized discount
reduction of the related debt liability D. Face amount plus unamortized discount
D. No reduction in net income in 2003
Bonds Refunded
Effective Interest Method of Amortization of Discount & Premium 47. What is the preferred method of handling unamortized discount, issue cost, and
11. When the effective interest method is used to amortize bond premium or discount, the redemption premium on bonds refunded?
periodic amortization will A. Expense them in the period the bonds are refunded
A. Increase if the bonds were issued at a discount. B. Amortize them over the life of the new issue
B. Decrease if the bonds were issued at a premium. C. Amortize them over the remaining life of the issue retired
C. Increase if the bonds were issued at a premium. D. Charge them to retained earnings
D. Increase if the bonds were issued at either a discount or premium.
Conversion of Bonds
52. Which of the following is true for a bond maturing on a single date when the effective 82. The conversion of bonds is most commonly recorded by the
interest method of amortizing bond discount is used? A. Incremental method C. Market value method
A. Interest expense as a percentage of the bond’s book value varies from period to B. Face value method D. Book value method
period
B. Interest expense increases each six-month period 11. During the current year, Ashley Company’s bondholders exchanged their convertible
C. Interest expense remains constant each six-month period bonds for common stock. The carrying amount of these bonds in Ashley’s books was
D. Nominal interest rate exceeds effective interest rate less than the market value but greater than the par value of the common stock
issued. If Ashley used the book value of accounting for the conversion, which of the
49. The use of the effective interest method in amortizing a premium on bonds payable following statements correctly states an effect of this conversion?
would result in A. Stockholders’ equity is increased C. Retained earnings is increased
A. An increasing amount of interest expense and a decreasing carrying amount for B. Additional paid-in capital is decreased D. An extraordinary loss is
the bonds payable. recognized
B. A decreasing amount of interest expense and an increasing carrying amount for
the bonds payable. Early Extinguishment of Debt
8. The generally accepted method of accounting for gains or losses from the early arises from excess of the
extinguishment of, debt is based on the assumption that any gain or loss on the A. fair value of the asset over its cost or book value
transaction reflects B. carrying value of the debt over the fair value of the asset
A. Adjustment to the cost basis of the asset obtained by the debt issue. C. carrying value of the debt plus any related interest over the fair value of the
B. Amount that should be considered a cash adjustment to the cost of any other asset.
debt obtained over the remaining life of the old debt instrument. D. carrying value of the debt plus any related interest over the book value of the
C. Amount received or paid to obtain a new debt agreement and, as such, should asset.
be amortized over the life of the new debt.
D. Change in the market rate of interest, which should be recognized in the period 54. In a debt restructuring that is considered an asset swap, the extraordinary gain is the
of extinguishment. excess of the
A. fair value of the asset over its cost or book value
Troubled Debt Restructuring B. carrying value of the debt over the fair value of the asset
85. A troubled debt restructuring will generally result in a C. fair value of the asset over the carrying value of the debt
A. Loss by the debtor and a gain by the creditor D. carrying value of the debt over the cost or book value of the asset
B. Loss by both the debtor and the creditor
C. Gain by both the debtor and the creditor 55. For a debt restructuring involving only modification of terms, it is appropriate for a
D. Gain by the debtor and a loss by the creditor debtor to recognize a gain when the carrying amount of the debt
A. Exceeds the total future cash payments specified by the new terms
86. In a troubled debt restructuring in which the debt is settled by ^transfer of assets with B. Is less than the total future cash payments specified by the new terms
a fair market value less the carrying amount of the debt, the debtor would recognize C. Exceeds the present value specified by the new terms
A. No gain or loss on the settlement. C. An extraordinary loss on the D. Is less than the present value specified by the new terms
settlement.
B. An ordinary gain on the settlement D. An extraordinary gain on the Presentation & Disclosure Requirements
settlement. Long-term Debt
84. Note disclosures for long-term debt generally include all of the following except
87. In a troubled debt restructuring in which the debt is continued with modified terms, a A. Assets pledged as security C. Restrictions imposed by the
gain should be recognized at the date of restructure, but no interest expense should creditor
be recognized over the remaining life of the debt, whenever the B. Call provisions and conversion privileges D. Names of specific creditors
A. Carrying amount of the pre-restructure debt is less than the total future cash
flows. Notes Payable
B. Carrying amount of the pre-restructure debt is greater than the total future cash 59. The discount resulting from the determination of a note payables present value
flows. should be reported on the balance sheet as
C. Present value of the pre-restructure debt is less than the present value of the A. Deterred credit separate from the note.
future cash flows. B. Direct deduction from the face amount of the note.
D. Present value of the pre-restructure debt is greater than the present value of the C. Deferred charge separate from the note.
future cash flows. D. Addition to the face amount of the note.
52. In a debt restructuring that is considered as asset swap, the gain from restructuring Accrued Interest
54. On October 1, 2001 Aye Company borrowed cash and signed a three-year interest- C. A reduction of stockholders' equity
bearing note on which both the principal and interest are payable on October 1, 2004. D. Both an asset and a liability
At December 31, 2003 accrued interest should
A. Be reported on the balance sheet as a current liability Discount on Bonds Payable
B. Be reported on the balance sheet as a noncurrent liability 71. Discount on bonds payable should be reported as
C. Be reported on the balance sheet as part of long-term note payable A. Direct deduction from the face value of bonds payable
D. Not be reported on the balance sheet as a liability B. Direct deduction from the present value of bonds payable
C. Deferred charge
64. How will the annual interest or dividend affect total liabilities each year? D. Part of bond issue cost
A. Interest is a current liability each year until paid.
B. Cumulative preferred dividends in arrears are a current liability each year until Breach of Covenant
paid 73. Some borrowing agreements incorporate covenants which have the effect that the
C. Both interest and cumulative preferred dividends in arrears are current liabilities liability becomes payable on demand if certain conditions related to the covenants are
each year until paid. breached, in these circumstances, the liability is classified as noncurrent only when
D. Interest and cumulative preferred dividends in arrears are noncurrent liabilities I. The lender has agreed, prior to the approval of the financial statements, not to
each year until paid. demand payment as a consequence of the breach or violation.
II. It is not probable that further breaches or violations will occur within twelve
74. On October 1, 2004, an enterprise borrowed cash and signed a three-year interest months of the balance sheet date
bearing note in which both the principal and interest are payable on October 1, 2007. A. I only C. Both I and II
At December 31, 2004 accrued interest should B. II only D. Neither I nor II
A. Be reported as current liability C. Be reported as part of the note
payable Refinanced Debt
B. Be reported as noncurrent liability D. Not to be reported 73. An enterprise should continue to classify its long-term interest bearing liabilities as
noncurrent even when they are due to be settled within twelve months of the balance
Convertible Bonds sheet date of certain conditions are met. Which of the following conditions is
67. Cash proceeds from the issuance of the convertible bonds should be reported as incorrect?
A. Contributed capital for the entire proceeds A. The original term was for a period of more than twelve months
B. Contributed capital for the portion of the proceeds attributed to the conversion B. The enterprise intends to refinance the obligation on a long-term basis
feature and as a liability for the balance C. The intention is supported by an agreement to refinance or to reschedule
C. A liability for the face amount of the bonds and contributed capital for the payments, which is completed after the financial statements are approved
premium over the face amount D. The intention is supported by an agreement to refinance or to reschedule
D. A liability for the entire proceeds payments, which is completed before the financial statements are approved
Treasury Bonds BORROWING COSTS

83. Treasury bonds should be shown on the balance sheet as 45. Borrowing costs are interest and other costs incurred by an enterprise in connection
A. An asset with borrowing of funds. Borrowing costs include (choose the incorrect one)
B. A deduction from bonds payable issued to arrive at net bonds payable and A. Interest on short term and long term borrowings
outstanding B. Amortization of discounts or premiums relating to borrowings
C. Amortization of ancillary costs incurred in connection with the arrangement of D. Reduce deferred tax assets by the amount of tax benefits expected to be
borrowings realized.
D. Stock issue costs
Taxable Income & Accounting Income
69. What is the benchmark treatment for borrowing costs? Taxable Income
A. Borrowing costs should be recognized as expense in the period in which they are 69. ____ is the excess of taxable revenues over tax deductible expenses and exemptions
incurred regardless of how borrowings are applied for the year as defined by the Bureau of Internal Revenue
B. Borrowing coats that are directly attributable to the acquisition, construction or A. Taxable income C. Financial income subject to tax
production of a qualifying asset may be capitalized as cost of that asset. B. Financial income per book D. Comprehensive income
C. Borrowing costs should be deferred and subsequently amortized.
D. Borrowing costs should be capitalized regardless of how borrowings are applied. 88. Taxable income of a corporation
A. Differs from accounting income due to differences in intraperiod allocation
ACCOUNTING FOR INCOME TAXES between the two methods of income determination.
Objectives of Income Tax Accounting B. Differs from accounting income due to differences in interperiod allocation and
54. The objective of accounting for income taxes is permanent differences between the two methods of income determination.
A. Objectivity in the calculation of periodic expense. C. Is based on generally accepted accounting principles.
B. Recognition of assets and liabilities. D. Is reported on the corporation's income statement.
C. Proper matching of periodic expense to periodic revenue.
D. Consistency of tax expense measurement with tax planning strategies. Intraperiod & Interperiod Tax Allocation
Intraperiod Tax Allocation
29. Which is not valid concerning the objectives of income tax accounting? 89. Which of the following is true about intraperiod tax allocation?
A. The measurement of current and deferred tax liability is based on the enacted A. It arises because certain revenue and expense items appear in the income
tax law. statement either before or after they are included in the tax return.
B. A current tax liability or asset is recognized for the estimated tax payable or B. It is required for extraordinary items but not for prior period adjustments.
refundable based on the tax return for the current year. C. Its purpose is to allocate income tax expense evenly over a number of
C. The measurement of deferred tax asset is reduced if necessary by the amount of accounting periods.
tax benefit that based on available evidence is not expected to be realized. D. Its purpose is to relate the income tax expense to the items which affect the
D. A deferred tax liability or asset is recognized for the estimated future tax effect amount of tax.
attributable to permanent differences and operating loss carryforward,
Interperiod Tax Allocation
20. Which of the following principles should not be applied if the purpose is to achieve the 91. The rationale for interperiod income tax allocation is to
objective of accounting for income taxes at the date of the financial statements? A. Recognize a tax asset or liability for the tax consequences of temporary
A. Measure current and deferred tax liabilities based on provisions of the enacted differences that exist at the balance sheet date.
tax laws. Future changes in tax laws or rates are not anticipated. B. Recognize a distribution of earnings to the taxing agency.
B. Recognize a current tax liability for the estimated tax payable on tax returns for C. Reconcile the tax consequences of permanent and temporary differences
the current year. appearing on the current year's financial statements.
C. Recognize a deferred tax liability for the estimated future tax effects attributable D. Adjust income tax expense on the income statement to be in agreement with
to temporary differences. income taxes payable on the balance sheet.
90. Interperiod income tax allocation causes 63. A temporary difference which would result in a deferred tax asset is
A. Tax expense shown on the income statement to equal the amount of income A. Interest received on time deposit
taxes payable for the current year plus or minus the change in the deferred tax B. Dividend received on stock investment
asset or liability balances for the year. C. Proceeds received from life insurance policy
B. Tax expense shown in the income statement to bear a normal relation to the tax D. Rent received in advance included in taxable income but deferred for financial
liability. accounting purposes
C. Tax liability shown in the balance sheet to bear a normal relation to the income
before tax reported in the income statement. Resulting in a deferred tax liability
D. Tax expense in the income statement to be presented with the specific revenues 70. A temporary difference which would result in a deferred tax liability is
causing the tax. A. Interest revenue on government bonds
B. Accrual of warranty expense
Permanent Difference & Temporary Difference C. Excess of tax depreciation over financial accounting depreciation
Permanent Difference D. Subscription received in advance
59. Differences between taxable income and pretax accounting income arising from
transactions that, under applicable tax laws and regulations, will not be offset by 56. A temporary difference which would result in a deferred tax liability is
corresponding differences or "turn around" in future periods is a definition of A. Accrual of estimated litigation loss
A. Intraperiod tax allocation C. Timing differences B. Accrual of estimated warranty cost
B. Interperiod tax allocation D. Permanent differences C. Subscription received in advance
D. An installment sale which is included in financial income at the time of sale and
Temporary Difference included in taxable income when collected
Completion Method vs Cost Recovery Method of Revenue Recognition
62. For the first taxable year 2003, ABC Company, a nonpublic construction company, 20. A temporary difference which would result in deferred tax liability is
follows the percentage of completion method for financial reporting and the cost I. An installment sale which is included in financial income at the time of sale and
recovery method for tax purposes. Its liabilities amount to P50 million. included in taxable income when collected.
A. The taxable income may be lower or higher than the pretax financial income for II. Rent received in advance included in taxable income at the time of receipt but
the year deferred for financial accounting purposes.
B. It is not required to apply deferred tax accounting. A. I only C. Both I and II
C. The use of the two methods creates a temporary difference. B. II only D. Neither I nor II
D. Its income on the contract should be treated as deferred income.
Deferred Tax Asset & Liabilities
Resulting in a deferred tax asset Deferred Tax Asset
57. A temporary difference which would result in a deferred tax asset is 70. It is the deferred tax consequence attributable temporary difference and operating
A. Tax, penalty or surcharge loss carryforward
B. Dividend received on stock investment A. Deferred tax liability C. Current tax liability
C. Excess tax depreciation over financial depreciation B. Deferred tax asset D. Noncurrent deferred tax liability
D. Rent received in advance included in taxable income at the time of receipt but
deferred for financial accounting purposes 61. The deferred tax consequence attributable to a deductible temporary difference and
operating loss carryforward is known as a deferred D. The deferred tax liability as a current liability
A. Tax expense C. Tax benefit
B. Tax asset D. Tax liability Cash Basis vs. Accrual Basis
41. ABC Company, cash basis taxpayer, prepares accrual basis financial statements. In
Deferred Tax Liabilities its 2002 balance sheet, ABC Company's deferred tax liabilities increased compared
Accounting Depreciation Exceeds Tax Depreciation to 2001. Which of the following changes would cause this increase in deferred tax
62. ABC Company's financial reporting basis of its plant assets exceeded the tax basis liabilities?
because it uses a differed method of reporting depreciation for financial reporting I. An increase in prepaid insurance
purposes and tax purposes. If it has no other temporary differences, ABC should II. An increase in rant receivable
report a III. An increase in warranty obligation
A. Current tax asset C. Deferred tax liability A. I only C. II and III
B. Deferred tax asset D. Current tax payable B. I and II D. III only
65. A machine with a 10-year life is being depreciated on a straight line basis for financial Accounting Loss vs. Taxable Loss
statement purposes and over 5 years for income tax purposes under the accelerated 50. Which of the following differences would result in future taxable amounts?
method. Assuming that the company is profitable and that there are no other timing A. Expenses or losses that are deductible after they are recognized in financial
differences, the related deferred income tax reported on the balance sheet at the end income.
of the first year of the estimated useful life is a B. Revenues or gains that are taxable before they are recognized in financial
A. Current liability C. Current asset income.
B. Noncurrent asset D. Noncurrent liability C. Expenses or losses that are deductible before they are recognized in financial
income.
42. Because XYZ Company uses different methods to depreciate equipment for financial D. Revenues or gains that are recognized in financial income but are never included
statement and income tax purposes, XYZ has temporary differences that will reverse in taxable income.
during the next year and add to taxable income. Deferred income taxes that are
based on these temporary differences should be classified in XYZ Company's Unrealized Foreign Exchange Losses
balance sheet as 77. When the deferred method of income tax accounting is followed, no deferred tax
A. Contra account to current assets C. Current liability assets or liabilities should be provided for
B. Contra account to noncurrent assets D. Noncurrent liability A. Unrealized foreign exchange losses
B. Provision for doubtful accounts
44. At the most recent year-end, XYZ Company had a deferred tax liability arising from C. Estimated losses arising from inventory obsolescence
accelerated depreciation that exceeded a deferred tax asset relating to rent received D. Provision for estimate warranty costs
in advance which is expected to reverse in the next year. Which of the following
should be reported in the company's most recent year-end balance sheet? Valuation Allowance
A. The excess of the deferred tax liability over the deferred tax asset as a 56. Valuation allowance is the portion of a deferred tax asset for which
noncurrent liability A. It is more likely than not that a tax benefit will be realized.
B. The excess of the deferred tax liability over the deferred tax asset as a current B. It is more likely than not that a tax benefit will not be realized.
liability C. It is possible that a tax benefit will be realized.
C. The deferred tax liability as a noncurrent liability D. It is possible that a tax benefit will not be realized.
Comprehensive
64. ASC SFAS 23 states that a deferred tax asset shall be reduced by a valuation 61. Which statement is true pertaining to accounting for income taxes?
allowance if it is A. Interperiod tax allocation in corporate financial statements can best be justified
A. Probable that some portion will be realized by the accounting principle of conservatism.
B. Reasonably possible that some portion will not be realized B. Permanent and timing differences create the need for interperiod tax allocation.
C. More likely than not that some portion will not be realized C. The term "timing difference" refers to amounts that are reported for financial
D. Likely that some portion will not be realized. accounting purposes but are never reported for income tax purposes.
D. Deferred income taxes that are not related to a specific asset or liability should
Deferred Tax Expense be classified as current or noncurrent based on expected reversal date of the
60. Justification for the method of determining periodic deferred tax expense is based on timing difference.
the concept of
A. Matching of periodic expense to periodic revenue 19. The following statements relate to deferred tax accounting. Which statement is
B. Objectivity in the calculation of periodic expense incorrect?
C. Recognition of assets and liabilities A. A temporary difference is a difference between the tax basis of an asset or
D. Consistency of tax expense measurement with actual tax planning strategies liability and its reported amount that will result in future taxable or deductible
amount when the reported amount of the asset or liability is recovered or settled
92. The deferred tax expense is the respectively.
A. Increase in balance of deferred tax asset minus the increase in balance of B. A deferred tax asset is the deferred tax consequence attributable to a deductible
deferred tax liability temporary difference and operating loss carryforward.
B. Increase in balance of deferred tax liability minus the increase in balance of C. Taxable income is the excess of taxable revenues ever tax deductible expenses
deferred tax asset. and exemptions for the year as defined by the BIR.
C. Increase in balance of deferred tax asset plus the increase in balance of deferred D. A deferred tax liability or asset is recognized for the estimated future tax effect
tax liability. attributable to permanent differences and operating loss carry-forwards.
D. Decrease in balance of deferred tax asset minus the increase in balance of
deferred tax liability. ACCOUNTING FOR LEASES
Lessee Accounting - Operating Lease
Change of Tax Status Nature
63. An enterprise lost its tax-exempt status as a result of a new tax law. Which of the 66. Leases may be accounted for by the operating method. Under this method
following should not be done? A. Periodic payment of rental is recognized amply as expense on the part of the
A. It should include in income from continuing operations, the effect of recognizing lessee and income of the part of the lessor.
the deferred tax liability. B. Periodic depredation of the leased properly is to be reported and the periodic
B. It should recognize the effect of the loss of its tax-exempt status at the end of the rental payment is to be treated as payment for the liability and interest.
taxable year. C. The lease is a method of financing as a consequence of which the lessee is able
C. It should recognize a deferred tax liability for temporary differences at the date it to acquire the property leased.
becomes a taxable enterprise. D. The lessor conceives the lease as a source of a receivable and a revenue as it
D. It should recognize the effect of the change in its tax status on the enactment involves a sale of property.
date of the new tax law.
Lease Payments 64. Maxx Company, leased a factory site for a period of fifteen years. The lease contract
67. Lease payments under an operating lease should be recognized as an expense in provided for, among others, a 10% increase in annual payments every five years.
the income statement using Maxx classified the lease as an operating lease. Which of the following would be the
A. Straight line method over the lease term unless another systematic method is result on Maxx's expenses in the sixth year compared to the fifth?
representative of the time pattern of the user's benefit. A. Rent and interest expense will both increase
B. Accelerated method B. No increase in rent or interest expense
C. "As incurred" method C. Interest expense will increase but rent expense will not
D. Decreasing method D. Rent expense will increase but not interest expense
Free Rent Lessee Accounting - Finance Lease

51. As an inducement to enter a lease, Grace Company, a lessor, granted Zona Basic Concepts
Company, a lessee, twelve months of free rent under a five year operating lease. The Minimum Lease Payment
lease was effective on January 1, 2003 and provides for monthly rental payments to 72. The minimum lease payments include all the following, except
begin January 1, 2004. Zona made the first rental payment on December 30, 2003. In A. Rental payments over the lease term
its 2003 income statement, Grace should report rental revenue in an amount equal to B. Any amount guaranteed by the lessee or by a party related to the lessee
A. Zero C. Payment required to exercise an option on the part of the lessee to purchase the
B. Cash received during 2003 asset at a price which is expected to be sufficiently lower than its fair value at the
C. One-fourth of the total cash to be received over the life of the lease option exorcise date
D. One-fifth of the total cash to be received over the life of the lease D. Contingent rent
Nonrefundable Lease Bonus 69. In a finance lease on the part of the lessee, the minimum lease payments include all
62. When should a lessor recognize as income a nonrefundable lease bonus paid by a the following, except
lessee on signing an operating lease? A. Rental payments over the lease term C. Contingent rent
A. When received C. At the expiration of the lease B. Guaranteed residual value D. Bargain purchase option
B. At the inception of the lease D. Over the life of the lease
Unguaranteed Residual Value
Presentation & Disclosure Requirements 70. It is that portion of the residual value of the leased asset the realization of which by
Lease Payment the lessor is not assured or is guaranteed solely by a party related to the lessor.
12. On January 1, 2003, Mall Company signed a 7-year lease for equipment having a 10- A. Carrying value C. Unguaranteed residual value
year economic life. The present value of the monthly lease payments equaled 80% of B. Book value D. Guaranteed residual value
the equipment's fair value. The lease agreement provides for neither a transfer of title
to Mall nor a bargain purchase option. On its 2003 income statement Mall should 13. Unguaranteed residual value is the
report A. Portion of the residual value of the leased asset the realization of which by the
A. Rent expense equal to the 2003 lease payments lessor is not assured or is guaranteed solely by a party related to the lessor.
B. Rent expense equal to the 2003 lease payments less interest expense B. Portion of the residual value which is guaranteed by the lessee or by a party
C. Lease amortization equal to one-tenth of the equipment's fair value related to the lessee.
D. Lease amortization equal to one -seventh of 80% of the equipment's fair value C. Amount for which an asset could be exchanged or a liability settled, between
knowledgeable and will parties in an arm’s length transaction.
D. Payment required to exercise an option on the part of the lessee to purchase the value of the minimum lease payments and the unguaranteed residual value to
leased asset at a price which is expected to be sufficiently lower than its fair equal the fair value of the leased asset.
value at the option exercise date. II. Rate of interest the lessee would have to pay on a similar lease or if that is not
determinable, the rate that at the inception of the lease the lessee would incur to
Gross Investment in the Lease borrow over a similar term.
20. Gross investment in the lease is the A. I only C. Both I and II
A. Present value of the minimum tease payments under a finance lease. B. II only D. Neither I nor II
B. Present value of the minimum lease payments plus any unguaranteed residual
value. Nature
C. Minimum lease payments under a finance lease. 68. Generally accepted accounting principles require that certain lease contracts be
D. Minimum lease payments under a finance lease plus any unguaranteed residual accounted for as finance lease. The theoretical basis for this treatment is that a lease
value. of this type
A. Effectively conveys all of the benefits and risks incident to the ownership of
14. It is the aggregate of the minimum lease payments under a finance lease of the property.
lessor and any unguaranteed residual value accruing to the lessor. B. Is an example of form over substance.
A. Gross investment in the lease C. Provides the use of the leased asset to the lessee for a limited period of time.
B. Gross rentals over the lease term D. Must be recorded in accordance with the concept of cause and effect.
C. Net investment in the lease
D. Gross rentals over the lease term plus the present value of the unguaranteed 75. It is a lease that transfers substantially all the risks and rewards incident to ownership
residual value of an asset.
I. Finance lease
Net Investment in the Lease II. Operating lease
71. Net investment in the lease is equal to the A. I only C. Both I and Il
A. Gross investment in the lease less unearned finance income B. II only D. Neither I nor II
B. Cost of the leased asset
C. Gross rentals over the lease term Recognition Criteria
D. Gross rentals over the lease term plus unguaranteed residual value 77. The situations which would normally lead to a lease being classified as a finance
lease include all the following, except
Implicit Interest Rate A. The lease transfers ownership of the asset to the lessee by the end of the lease
22. It is the discount rate that at the inception of the lease causes the sum of the present term
value of the minimum tease payments and the unguaranteed residual value to equal B. The lessee has the option to purchase the asset at a price which is expected to
the fair value of the leased asset. be sufficiently higher than its fair value at the date the option becomes
A. Incremental borrowing rate C. Legal rate exercisable
B. Effective rate D. Implicit interest rate C. The lease term is for the major part of the economic life of the asset even if title
is not transferred
Implicit Rate D. The present value of the minimum lease payments amounts to at least
15. The implicit rate in the finance lease is the substantially all of the fair value of the leased asset at the inception of the lease
I. Discount rate that at the inception of the lease causes the aggregate present
71. At its inception, the lease term of Lease X is 50% of the estimated remaining Initial Liability
economic life of the leased property. This lease contains a bargain purchase option. 72. For a capital lease, the amount recorded initially by the lessee as a liability should
The lease should record Lease X as normally
A. Neither an asset nor a liability C. An asset and a liability A. Exceed the total of the minimum lease payments
B. An asset but not a liability D. An expense B. Exceed the present value of the minimum lease payments at the beginning of the
lease
21. A noncancelable lease in which equity in the property accumulates should be C. Equal the total of the minimum lease payments
regarded as a purchase when the D. Equal the present value of the minimum lease payments at the beginning of the
A. Property is acquired by the lessor for the needs of the lessee and other lease
prospective lessees.
B. Lessee guarantees the obligations of the lessor for the property leased. 63. For a finance lease, the amount recorded initially by the lessee as a liability should
C. Term of the lease is less than the estimated useful life of the property, and the A. Exceed the present value at the beginning of the lease term of minimum lease
lessor pays taxes, insurance, and maintenance on the property. payments during the lease term
D. Lessee treats the lease as a rental for tax purposes. B. Exceed the total of the minimum lease payments during the lease term
C. Not exceed the fair value of the leased property at the inception of the lease
22. Bee Company leased a tractor and a truck. The tractor lease does not contain a D. Equal the total of the minimum lease payments during the lease term
bargain purchase option but the lease term is equal to 90% of the tractor's estimated
economic life. The truck lease does not transfer ownership of the truck to Bee Reduction of Lease Liability
Company by the end of the lease term, but the lease term is equal to 75% of the 53. A lessee had a ten-year capital lease requiring equal annual payments. The reduction
truck's estimated economic life. How should Bee Company classify these leases? of the lease liability in year 2 should equal
A. Both leases should be classified as finance leases. A. The current liability shown for the lease at the end of year 1
B. An operating lease for the tractor lease and as a finance lease for the truck B. The current liability shown for the lease at the end of year 2
lease. C. The reduction of the lease obligation in year 1
C. Both the tractor and the truck leases should be classified as operating leases. D. One-tenth of the original lease liability
D. The tractor lease should be classified as a finance lease and the truck lease as
an operating lease. Lessor Accounting – Operating Lease
59. Initial direct costs incurred by the lessor in an operating lease shall be
18. Which is incorrect concerning the classification of the lease as a finance lease? A. Added to the carrying amount of the leased asset and recognized as expense
A. The lease term is for the major part of the economic life of the asset. over the lease term on the same basis as the lease income
B. The present value of the minimum lease payments amounts to at least B. Deferred and allocated to income over the lease term in proportion to the
substantially ail of the fair value of the leased asset at the inception of the lease. recognition of the rent income.
C. The lease transfers ownership of the asset to the lessee by the end of the lease C. Recognized as expense in the income statement in the period in which they are
term. incurred.
D. The lessee has the option to purchase the asset at a price which is expected to D. Deferred and allocated to income over the lease term or immediately recognized
be sufficiently higher than the fair value at the date the option becomes as expense at the option of the lessor
exercisable
Lessor Accounting – Direct Financing Lease
Measurement Criteria 23. Using the financing method of accounting for leases, the excess of aggregate rentals
over the cost of leased property should be recognized as revenue of the lessor. 23. What is the treatment of an unguaranteed residual value in determining the cost of
A. After the cost of leased property has been fully recovered through rentals. sales under a sales type lease?
B. In decreasing amounts during the term of the lease. A. The unguaranteed residual value is deducted from the cost of the leased asset at
C. Inconstant amounts during the term of the lease. present value.
D. In increasing amounts during the term of the lease. B. The unguaranteed residual value is deducted from the cost of the teased asset at
absolute amount.
58. In a lease that is recorded as a direct-financing lease by the lessor, interest revenue C. The unguaranteed residual value is completely disregarded,
A. Does not arise D. The unguaranteed residual value is added to the cost of the leased asset at
B. Should be recognized over the period of the lease in an increasing rate present value.
C. Should be recognized over the period of the lease in a decreasing rate
D. Should be recognized in full as revenue at the lease's inception Lessor Accounting – Sale and Leaseback Transaction
Gain from Sales and Leaseback
16. Which statement is incorrect concerning a finance lease on the part of lessors? 72. If the sale and leaseback transaction results in a finance lease, any gain from the sale
I. The unguaranteed residual value is deducted from the cost of the leased asset at and leaseback should
present value in determining the cost of sales under a sales type lease. A. Be recognized in income immediately
II. Lessors should recognize assets held under a finance lease in their balance B. Be deferred and amortized over the lease term
sheets and present them as a receivable at an amount equal to the gross C. Be deferred and amortized over the shorter between the lease term and the life
investment in the lease. of the asset
A. I only C. Both I and II D. Not be recognized
B. II only D. Neither I nor II
Comprehensive
Lessor Accounting – Sales-Type Lease 73. The following statements relate to lessor accounting? Which statement is not in
Dealer’s Profit conformity with GAAP?
73. The excess of the fair value of leased property at the inception of the lease over its A. Lessors should record finance leases as receivables at an amount equal to the
cost or carrying amount should be classified by the lessor as net investment in the lease
A. Unearned income from a sales-type lease B. Manufacturer or dealer lessors should recognize selling profit or loss as income
B. Unearned income from a direct-financing lease for the period in accordance with their policy for outright sales.
C. Manufacturer's or dealer's profit from a sales-type lease C. Lessors should present in their balance sheets and depreciate assets subject to
D. Manufacturer's or dealer's profit from a direct financing lease finance leases.
D. Lease payments from operating leases should be recognized in income by the
Interest Revenue lessor in the period earned.
60. In a lease that is recorded as a sales-type lease by the lessor, interest revenue
A. Does not arise 15. The following statements relate to a finance lease. Which statement is incorrect?
B. Should be recognized over the period of the lease using the interest method A. The implicit interest rate is the discount rate that at the inception of the lease
C. Should be recognized over the period of the lease using the straight-line method causes the aggregate present value of the minimum lease payments and the
D. Should be recognized in full as revenue at the lease’s inception unguaranteed residual value to equal the fair value of the leased asset.
B. When the lessee has the option to purchase the asset at a price which is
Unguaranteed Residual Value expected to be sufficiently lower than the fair value at the date the option
becomes exercisable would normally lead to a lease being classified as a finance A. The increase in the present value of the defined benefit obligation resulting from
lease. employee service in the current period.
C. The depreciable asset recognized by the lessee under a finance lease should be B. The increase during a period in the present value of a defined benefit obligation
depreciated over the useful life of the asset if there is reasonable certainty that which arises because the benefits are one period closer to settlement
the lessee will obtain ownership by the end of the lease term. C. The increase in the present value of the defined benefit obligation for employee
D. Lessors should recognize assets held under a finance lease in their balance service in prior periods resulting from the adoption or amendment of a defined
sheets and present them as receivable at an amount equal to the gross benefit plan.
investment in the lease. D. The present value of a defined benefit obligation:
ACCOUNTING FOR EMPLOYEE BENEFITS Past Service Cost

Unfunded Contribution Plan 62. It is the cost to an enterprise under a retirement benefit plan for services rendered by
73. Under some retirement benefit plans, the enterprise retains the obligation for the employees in prior periods resulting from the introduction of the retirement benefit
payment of retirement benefits under the plan without the establishment of a separate plan or amendment of an existing plan
fund. Such retirement benefit plans are described as A. Current service cost C. Experience adjustment
A. Funded C. Contributory B. Past service cost D. Actuarial assumption
B. Unfunded D. Noncontributory
62. Under a defined benefit plan, past service cost is
Defined Contribution Plan A. Increase in the present value of the defined benefit obligation resulting from
Basic Concepts employee service in the current period.
Vested Benefits B. The increase during a period in the present value of the defined benefit obligation
76. These are employee benefits that are not conditional on future employment. which arises because the benefits are one period closer to settlement.
A. Vested benefits C. Accumulated benefits C. Service rendered in prior periods resulting from the introduction of a retirement
B. Benefits not vested D. Projected benefits benefit plan or amendment of an existing plan.
D. Present value of expected future payments required to settle the obligation
54. The vested benefits of an employee represent benefits arising from employee service in the current and prior periods.
A. to be paid to the retired employee in the current year.
B. to be paid to the retired employee in the subsequent year. Accrued Benefit Obligation (Accumulated Benefit Obligation)
C. accumulated in the hands of an independent trustee. 47. The cost of providing retirement benefits under a defined benefit plan should be
D. that are not contingent on the employee’s continuing in the service of the determined using
employer. A. Unfunded accumulated benefit obligation
B. Accrued benefit obligation (accumulated benefit obligation)
Current Service Cost C. Projected benefit obligation
78. It is the increase in the present value of the defined benefit obligation resulting from D. Unfunded vested benefit obligation
employee service in the current period
A. Current service cost C. Past service cost Unfunded Accrued Retirement Benefit Cost
B. Interest cost D. Unrecognized actuarial loss 49. Ace Company that maintains a defined plan for its employees reports an unfunded
accrued retirement benefit cost. This cost represents the amount that the
75. Current service cost is A. Cumulative accrued retirement benefit cost exceeds contributions to the plan
B. Cumulative accrued retirement benefit cost exceeds vested benefit obligation and retired employees covered by a pension plan is dependent on all of the following
C. Vested benefit obligation exceeds plan assets factors, except
D. Vested benefit obligation exceeds contributions to the plan A. The benefit provisions of the plan.
B. Characteristic of the employee group.
Nature C. Actuarial assumptions.
74. Under a defined contribution plan D. The income level of the entity setting up the plan.
I. The enterprise's legal or constructive obligation is limited to the amount it agrees
to contribute to the fund. Past Service Costs
II. The enterprise's obligation is to provide the agreed benefits to current and former 24. When a pension plan is first adopted, the costs based on past services of the
employees. employees should be
A. I only C. Both land II A. Carried on the books indefinitely as long as the pension plan is in existence.
B. II only D. Neither I nor II B. Charged to income in the years in which they are paid.
C. Charged to operations of the current and future periods on a systematic
Recognition Criteria amortization basis.
Corridor D. Charged to retained earnings because the services have been rendered in the
77. The "corridor" in the recognition actuarial gains and losses is equal to 10% of the past.
A. Accrued benefit obligation at the beginning of the year.
B. Fair value of the plan assets at the beginning of the year. 66. When the employee benefits provided in a pension plan are amended to increase the
C. Higher between the accrued benefit obligation and fair value of plan assets at the benefits, the actuarially determined past service cost is
beginning of the year. A. Amortized to income over a number of years.
D. Lower between the accrued benefit obligation and fair value of plan assets at the B. Charged in full to retained earnings on the date of the plan amendment.
beginning of the year. C. Charged to income based on amounts funded by the employer.
D. Charged to income in full on the date of the plan amendment
Projected Unit Credit Method Interest cost
77. What is the mandated method of determining the present value of the defined benefit 33. Interest cost included in the net pension cost recognized by an employer sponsoring
obligation? a defined benefit plan represents
A. Projected unit credit method C. Individual level premium method A. Amortization of past service cost.
B. Entry age normal method D. Aggregate method B. Increase in fair value of plan assets due to passage of time
C. Increase in defined benefit obligation due to passage of time.
75. The service cost component of an enterprise's net periodic pension cost is measured D. Shortage between the expected and actual returns on plan assets
using
A. Unfunded accumulated benefit obligation Comprehensive
B. Unfunded vested benefit obligation 22. The following statements relate to employee benefits. Which statement is incorrect?
C. Projected unit credit method A. Postemployment employee benefits include retirement benefits such as
D. Expected return on plan assets pensions.
B. The defined benefit plan must be fully funded.
25. The present value of the prospective benefit that with have to be paid to both active C. The projected unit credit method is the mandated method of determining the
present value of the defined benefit obligation.

D. The past service cost should be expensed immediately when additional benefits Presentation and Disclosure Requirements
vest immediately but if the benefits are not vested, the past service cost is 50. Which of the following defined benefit plan disclosure should be made in a company's
amortized on a straight line basis over the period until the benefits become financial statements?
I. The amount of the retirement benefit cost for the period
61. Which is incorrect concerning the measurement of a defined contribution plan? II. The fair value of plan assets.
A. The contribution should be recognized as expense in the period it is payable. A. I only C. Both I and II
B. Any unpaid contribution at the end of the period should be recognized as B. II only D. Neither I nor II
accrued liability
C. An enterprise should disclose the amount recognized as an expense for a STOCKHOLDERS’ EQUITY
defined contribution plan Basic Concepts
D. The enterprise pays fixed contributions into a separate entity known as a fund, 78. Which of the following is not a characteristic of the corporate form of organization?
and will have a legal or constructive obligation to pay further contributions if the A. Double taxation C. Limited life
fund does not have sufficient assets to pay ail employee benefits B. Limited liability D. Easily transferable ownership
interest
30. Which is incorrect concerning a defined contribution plan?
A. The contribution should be recognized as expense in the period It is payable. 64. A common stockholder does not possess which of the following?
B. An entity shall not disclose the amount recognized as expense. A. The right to share in the earnings of the corporation when dividends are
C. Any unpaid contribution at the end of the period should be recognized as declared.
accrued liability. B. The right to vote in the election of the board of directors of the corporation.
D. Any excess contribution should be recognized as prepaid expense. C. The right to direct ownership of the corporate assets.
D. The right to share proportionately in corporate assets in case of liquidation if
31. Which statement is not valid concerning a defined benefit plan? such assets exceed the claims of creditors.
A. The defined benefit plan must be fully funded.
B. The defined benefit obligation is measured on a discounted basis. 89. A shareholder’s right to maintain a pro-rata ownership share in the event of a new
C. The expense recognized is not necessarily the amount of contribution. issue is called
D. Actuarial assumptions are required to measure the defined benefit obligation. A. Right to corporate property C. Stock preference
B. Right to management D. Preemptive right
74. Which is incorrect concerning the recognition and measurement of a defined
contribution plan? 97. The preemptive right of a common stockholder the right to
A. The contribution should be recognized as expense in the period it is payable. A. Share proportionately in corporate assets upon liquidation.
B. An unpaid contribution at the end of the period should be recognized as accrued B. Share proportionately in any new issues of stock of the same class.
ii ability. C. Receive cash dividends before they are distributed to preferred stockholders.
C. Any excess contribution should be recognized as prepaid expense but only to the D. Exclude preferred stockholders from voting rights.
extent that the prepayment will lead to a reduction in future payments or a cash
fund. 59. Which of the following is not an example of an equity security?
D. An enterprise should not disclose the amount recognized as expense for a A. Warrants C. Preferred stock
defined contribution plan. B. Stock options D. Convertible bonds
of the purchase and subsequent sale of treasury stock?

63. Which of the following closing procedures is unique to a corporation? A. Retained earnings may never be increased, but sometimes decreased
A. Close each revenue account to the income summary account B. Retained earnings may never be increased or decreased
B. Close each expense account to the income summary C. Retained earnings sometimes is increased, but may ever be decreased
C. Close the income summary account to the retained earnings account D. Retained earnings is always affected unless the selling price is exactly equal to
D. Close the owner’s drawing account to the owner’s capital account cost
93. Total stockholders' equity represents 72. What will be the effect on earnings per share and stockholders' equity with the
A. A claim to specific assets contributed by the owners. reacquisition by Galant Company of its own stock and reporting the transaction in the
B. The maximum amount that can be borrowed by the enterprise. theoretically correct manner?
C. A claim against a portion of the total assets of an enterprise. A. Decrease in earnings per share and decrease in stockholders' equity
D. Only the amount of earnings that have been retained in the business. B. No effect in earnings per share and increase in stockholders equity
C. Increase in earnings per share and decrease in stockholders' equity
96. The residual interest in a corporation belongs to the D. Decrease in earnings per share and increase in stockholders' equity
A. Management C. Common stockholders
B. Creditors D. Preferred stockholders 52. Green Company acquired some of its own common shares at a price greater than
then-par value and original issue price but less than their book value. Green uses the
98. A primary source of stockholders' equity is cost method of accounting for treasury stock. What is the impact of this acquisition on
A. Income retained by the corporation. total stockholders' equity and the book value per common share?
B. Appropriated retained earnings. A. B. C. D.
C. Contributions by stockholders. Stockholders’ equity Increase Increase Decrease Decrease
D. Both income retained by the corporation and contributions by stockholders. Book value per share Increase Decrease Increase Decrease
Preferred Stocks 63. Treasury stock was acquired for cash at more than its par value, and then
100.Which of the following features of preferred stock would make the security more like subsequently sold for cash at its par value. Assuming the use of the preferred
debt than an equity instrument? method, what is the effect of the subsequent sale of the treasury stock on each of the
A. Participating C. Redeemable following?
B. Voting D. Non-cumulative A. B. C. D.
Additional paid-in capital Increase Increase No effect No effect
78. A redeemable preferred stock is a preferred stock that
Retained earnings Decrease No effect Decrease Increase
A. has a mandatory redemption at a specified date.
B. can be called in for payment at the option of the issuer during a specific period.
C. can be converted into common stock of the enterprise during a specific period. Retained Earnings
D. can exchange for the enterprise’s bonds payable Retained Earnings
104.Which of the following transactions does not result in a decrease in retained
Treasury Stocks earnings?
Effect of Transactions A. Declaration and issuance of a stock dividend.
56. Which of the following statements best describes the net effect on retained earnings B. Incurrence of a net loss for the period.
C. Acquisition of treasury stock for more than par value but less than the original
issue price, when the par value method is used. C. Declaration or date of record, whichever is earlier
D. Correction of an error in which depreciation expense was understated in a prior D. Payment
period.
80. South Company owned shares in North Company. On October 1, 2003, South
Appropriated Retained Earnings declared and distributed a property dividend of North Company’s shares when their
69. For which of the following purposes should an appropriation for possible future loss fair value exceeded the carrying amount. What would be the accounting effects as a
on inventory be established? consequence of the dividend declaration and distribution?
A. To match current revenues with applicable costs A. The dividends are recorded at fair value and retained earnings increased.
B. To reduce fluctuations in net income in order to lend stability of the company B. The dividends are recorded at cost and retained earnings decreased.
C. To charge operations in periods of rising prices for the losses which may C. The dividends are recorded at fair value and retained earnings decreased.
otherwise be absorbed in periods of falling prices D. The dividends are recorded at cost and retained earnings increased.
D. To inform stockholders that a portion of retained earnings should be set aside
from amounts available for dividends because of such a contingency Liquidating Dividend
103.Dividends representing a return of capital to stockholders are not uncommon among
62. Retained earnings appropriated account is created for the purpose of companies which
A. Earmarking cash to be used for particular purposes A. Use accelerated depreciation method
B. Insuring the payment of dividends B. Use straight-line depreciation method
C. Protecting the working capital position C. Recognize both functional and physical factors in depreciation
D. Preventing losses from contingencies D. Do not expect to purchase additional property after depleting existing property
105.A retained earnings appropriation always means the company is Stock Dividend & Stock Split
A. Setting aside cash for a specific purpose. Reverse Stock Split
B. Disclosing managerial policy. 71. A company may effect a reverse stock split in order to
C. Preventing unusual losses. A. Increase the number of shares outstanding
D. Improving the debt-equity ratio. B. Raise the unit market price of its shares
C. Reduce the market price per share
Deficit D. Obtain a wider distribution of its shares
81. The following statements pertain to retained earnings. Which statement is incorrect?
A. The deficit is a debit balance in retained earnings. Comprehensive
B. The deficit may be presented as an asset. 61. Assuming the issuing company has only one class of stock, a transfer from retained
C. Retained earnings may be classified as appropriated and unappropriated. earnings to capital stock equal to the market value of the shares issued is ordinarily a
D. Dividends can be declared from unappropriated retained earnings. characteristic of
A. Either a stock dividend or a stock split
Cash Dividends & Property Dividends B. Neither a stock dividend nor a stock split
Declaration Date, Date of Record, Payment Date C. A stock split but not a stock dividend
68. The actual total amount of a cash dividend to be paid is determined on the date of D. A stock dividend but not a stock split
A. Record
B. Declaration Measurement
Common Stock 21. The following statements relate to dividends. Which statement is incorrect?
Issuance at a Price Below Par A. Nonstock dividends should be recognized as liabilities on the date of declaration
102.The purchaser of common stock at a price below par value incurs a contingent B. Dividends payable in noncash asset should be charged to retained earnings at
liability. This contingent liability the fair value of the noncash asset.
A. Is an obligation to the corporation's creditors and not to the corporation itself. C. When shareholders may elect to receive cash in lieu of stock dividend, the
B. Is automatically transferred to each subsequent holder of the stock. amount to be charged to retained earnings is equal to the optional cash dividend.
C. Must be paid to the corporation upon demand. D. Treasury shares may be reissued as dividends in which case the cost of the
D. Prevents the corporation from paying cash dividends to the holder of the stock. treasury stock should be charged to retained earnings.
Nonmonetary Exchange Stock Dividend

65. Contributions, including stock of an enterprise, received from shareholders should be Small Stock Dividend
recorded at 67. The issuer should directly charge retained earnings for the market value of the shares
A. Fair value of the items received with the credit going to additional paid in capital issued in
B. Fair value of the items received with the credit going to retained earnings A. Pooling of interests C. Employees stock bonus
C. Cost of the items received with the credit going to additional paid in capital B. 2 for 1 stock split D. 10 percent stock dividend
D. Cost of the items received with the credit going to retained earnings
77. The issuer should charge retained earnings for the market value of shares issued in a
34. Which statement is correct concerning stockholders equity? A. 1 for 5 stock dividend C. 4 for 1 stock split
I. If shares are issued for noncash consideration, the proceeds should be B. 1 for 8 stock dividend D. 2 for 1 stock split
measured by the fair value of the noncash consideration received.
II. If capital stock is issued for outstanding liability, the capital stock is recorded at Treasury Stock Reissued as Dividend
the amount of the liability set off. 36. When treasury stock is reissued as dividend, the amount changed to retained
A. I only C. Both I and II earnings is equal to
B. II only D. Neither I nor II A. Par value C. Fair value on the date of
issuance
Treasury Stock B. Fair value on the date of declaration D. Acquisition cost of the treasury
80. When treasury stock is reissued as stock dividends, the amount capitalized is equal stock
to
A. Fair value of the treasury stock on the date of declaration Cash in lieu of Stock Dividend
B. Par value of the treasury stock 37. When shareholders may elect to receive cash in lieu of stock dividend, the amount to
C. Book value of the treasury stock be charged to retained earnings is equal to
D. Cost of the treasury stock A. Fair value of stock on the date of declaration
B. Fair value of stock on the date of issuance
Property Dividends C. Par value
38. Dividends payable in noncash asset should be charged to retained earnings at D. Optional cash dividend
A. Fair value C. Revalued amount
B. Assessed value D. Cost or carrying amount Detachable Stock Warrants
51. Queen Company issued preferred stock with detachable common stock warrants.
The issue price exceeds the sum of the warrants' fair value and the preferred stock's
par value. The preferred stock's fair value was not determinable. What amount should Book Value per Share
be assigned to the warrants outstanding? 76. For a company that has only common stock outstanding, total shareholders' equity
A. Total proceeds divided by the number of shares outstanding represents the
B. Excess of proceeds over par value of preferred stock A. Return on equity C. Book value per share
C. The proportion of the proceeds mat the warrants' fair value bears to the preferred B. Stated value per share D. Price-earnings ratio
stock's par value
D. The fair value of the warrant Effect of Transactions
Stock Split Up
Stock Warrants & Options 92. A 3 for 1 stock split was issued. Which of the following statements is true concerning
39. It is a financial instrument or other contract that may entitle its holder to common the effect of the split?
shares. A. The number of shares outstanding is decreased
A. Potential common share C. Equity instrument B. There is a transfer or retained earning to contributed capital
B. Common share D. Financial instrument C. A proportionate reduction in the par value per share occurs
D. Total stockholders’ equity increases
40. It is a financial instrument that gives the holder the right to purchase common shares.
A. Convertible preferred share C. Stock appreciation right Stock Dividend
B. Convertible debt D. Warrant or option Small Stock Dividend
70. Kit Company declared a 10% stock dividend. The declaration
72. It is a financial instrument that gives the holder the right to purchase common shares. A. Would decrease both retained earnings and total stockholders' equity
A. Warrant or option B. Would decrease retained earnings but would have no effect on total
B. Debt or equity instrument convertible into common share stockholders' equity
C. Employee plan that allows employees to receive common shares as part of their C. Would have no effect on retained earnings but would decrease total
renumeration stockholders' equity
D. Contractual arrangement requiring issuance of common shares upon the D. Would have no effect both on retained earnings and total stockholders' equity
satisfaction of certain conditions
Large Stock Dividend
71. Which of the following is issued to stockholders of a corporation to acquire its 79. How will the par value and the market value of the common stock be affected by a
unissued or treasury stock within a specified time at a specified price? 100% stock dividend?
A. Stock option C. Stock dividend A. Increase, increase C. Decrease, unchanged
B. Stock warrant D. Stock subscription B. Decrease, decrease D. Unchanged, decrease
Stock Option Plan 26. The effect of recording a 100% stock dividend would be to
107.Compensation expense resulting from a compensatory stock option plan is generally. A. Decrease the current ratio, decrease working capital and decrease book value
A. Recognized in the period of exercise. per share.
B. Recognized in the period of the grant. B. Leave inventory turnover unaffected, increase earning per share, and increase
C. Allocated to the periods benefited by the employee's required service. book value per share.
D. Allocated over the periods of the employee's service life to retirement. C. Leave working capital unaffected, decrease earnings per share, and decrease
book value per share. C. To accomplish quasi-reorganization, assets should be written up by an amount
D. Leave working capital unaffected, decrease earnings per share, and decrease that eliminates the deficit in retained earnings:
the debt to equity ratio. D. A corporation must seek the approval of the Securities and Exchange
Commission before undergoing quasi-reorganization.
Stock Dividend & Stock Split
78. The following statements relate to dividends and stock splits from the viewpoint of the Journal Entries
issuer-corporation. Which statement is false? Excess of Price over Par
A. Stock dividends affect the amount of contributed capital and retained earnings. 76. When collectibility is reasonably assured, the excess of the subscription price over
B. Stock splits have no effect on the amount of contributed capital but affect the par the stated value of the no par common stock subscribed should be recorded as
or stated value of capital stock A. No par common stock
C. Both stock dividends and stock split-ups increase the number of outstanding B. Additional paid-in capital when the subscription is recorded
shares, decrease earnings per share, but have no effect on the number of C. Additional paid-in capital when the subscription is collected
authorized shares, D. Additional paid-in capital when the common stock is Issued.
D. Both stock dividends and stock splits have no effect on total stockholders' equity.
67. Faye Company issued 100,000 common shares with par value of P100 per share. If
Book Value per Share there would be changes in the par value of the shares, it should be charged or
106.Windsor Company has outstanding both common stock and nonparticipating, non- credited to additional paid-in capital. If the increase in capital stock exceeds additional
cumulative preferred stock. The liquidation value of the preferred is equal to its par paid-in capital, Faye should charge the increase to
value. The book value per share of the common stock is unaffected by A. Retained earnings C. Other capital account
A. The declaration of a stock dividend on preferred payable in preferred stock when B. Deferred charges D. Income
the market price of the preferred is equal to its par value.
B. The declaration of a stock dividend on common stock payable in common stock Retirement of Treasury Stock
when the market price of the common is equal to its par value. 69. Omar Corporation's retirement of its treasury shares resulted in the par value
C. The payment of a previously declared cash dividend on the common stock. exceeding the cost. The difference should be
D. A 2-for-1 split of the common stock. A. Debited to additional paid-in capital to the extent of the credit when the stock was
issued
Quasi-reorganization B. Debited to retained earnings
77. The accounting for a quasi-reorganization usually includes C. Credited to additional paid-in capital relating to the same issue
A. Writeup of assets and writedown of retained earnings D. Debited to additional paid-in capital from previous treasury stock transactions of
B. Writedown of assets and elimination of a deficit the same class
C. Writeup of assets and elimination of a deficit
D. Writedown of both assets and retained earnings Presentation & Disclosure Requirements
Major sections of stockholders’ equity
28. The following statements relate to quasi-reorganization. Which statement is false? 94. The owners' equity section is usually divided into what three parts?
A. After the quasi-reorganization, the dated retained earnings is not available for A. Preferred stock, common stock, treasury stock
dividends. B. Preferred stock, common stock, retained earnings
B. Dating retained earnings is usually not necessary ten years after a quasi- C. Capital stock, additional paid-in capital, retained earnings
reorganization D. Capital stock, appropriated retained earnings, unappropriated retained earnings
contributed capital of the company.

95. Stockholders' equity is generally classified into which two major categories? D. Treasury shares should be reported as a deduction, at cost, from the total
A. Contributed capital and donated capital. stockholders’ equity, and the restriction on retained earnings occasioned by their
B. Appropriated capital and retained earnings. acquisition must also be stated.
C. Retained earnings and unappropriated capital.
D. Earned capital and contributed capital. Deposit for future subscriptions
35. Deposit on subscription to a proposed increase in capital stock may be classified as
Preferred Stock A. Part of stockholders' equity C. Noncurrent liability
Non-cumulative preferred dividends in arreas B. Current liability D. Capital stock
101.Non-cumulative preferred dividends in arrears
A. Are not paid or disclosed. Retained Earnings
B. Must be paid before any other cash dividends can be distributed. 91. Which of the following is the preferred term for describing the earned equity portion of
C. Are disclosed as a liability until paid. stockholders’ equity?
D. Are paid to preferred stockholders if sufficient funds remain after payment of the A. Retained earnings C. Accumulated surplus
current preferred dividend. B. Earned surplus D. Capital surplus
Treasury Stock Appropriated Retained Earnings

66. The purchase of treasury stock 70. Appropriations of retained earnings
A. Decreases common stock authorized A. Are reflected as separate amounts in the equity section of the balance sheet
B. Decreases common stock issued B. Are noncurrent liabilities
C. Decreases common stock outstanding C. Are charged to income
D. Has no effect on common stock outstanding D. Are current liabilities
90. Treasury stock should be reported Deficit

A. As a current asset only if it will be sold within the next year or operating cycle, 46. The term “deficit” refers to
whichever is longer A. An excess of current assets over current liabilities
B. As a current asset only if it will be sold within the next year or operating cycle, B. An excess of current liabilities over current assets
whichever is shorter C. A debit balance in retained earnings
C. In the investments section of the balance sheet D. A loss that is reported as a prior period adjustment
D. As a deduction in the stockholders’ equity section of the balance sheet
Direct Adjustments to Retained Earnings
57. In the preparation of a statement of financial position, which of the following 93. Which of the following items should not be reported as either a direct increase or
statements is true? decrease in retained earnings?
A. No reference need be made to donated treasury stock since the acquisition of A. Errors from prior periods
such stock does not restrict retained earnings. B. Cumulative effect of a change from the straight line to double declining balance
B. Treasury shares and unissued shares can be reported as the total shares not method of depreciation
outstanding with no distinguishing comments. C. Losses on treasury stock transactions
C. Treasury shares should be reported as a deduction, at cost, from the total D. Dividends
Common Stock Dividend Distributable 23. The following statements relate to dividends. Which statement is incorrect?
99. The balance in Common Stock Dividend Distributable should be reported as A. When shareholders may elect to receive cash in lieu of stock dividend, the
A. A deduction from common "stock issued. C. A current liability. amount to be charged to retained earnings is equal to the optional cash dividend.
B. An addition to capital stock. D. A contra current asset. B. A stock dividend gives rise to a change in either the enterprise's assets or its
shareholders' proportionate interest therein.
Stock Rights C. Cash dividends are paid on the basis of the number of shares outstanding.
68. The grantees of stock rights who paid P10 for each right were not able to exercise the D. The actual total amount of a cash dividend to be paid is determined on the date
rights within the period given them. The P500,000 collected from the sale of the rights of record.
were credited to "stock rights outstanding". Upon lapse of the stock rights, the
P500,000 should be EARNINGS PER SHARE
A. Transferred to retained earnings Weighted-Average Number of Shares
B. Transferred to additional paid-in capital 24. In calculating weighted average number of shares, which statement is correct?
C. Retained in the stock rights outstanding account I. Common shares issued as part of pooling of interests are included in the
D. Credited to the cost of outstanding shares weighted average number of shares for all periods presented.
II. Common shares issued as part of the consideration in a business combination
Stock Warrants by purchase are included in the weighted average number of shares as of the
74. Stock warrants outstanding should be reported as date of acquisition.
A. Liabilities A. Both I and II C. I only
B. Reduction of capital contributed in excess of par value B. Neither I nor II D. II only
C. Capital stock
D. Additional paid-in capital Basic EPS
82. Earnings per share should be computed on the basis of
Contra Account A. Preferred shares outstanding at the end of the year
75. Which of the following should be reported as a stockholders' equity contra account? B. Average preferred shares outstanding during the year
A. Discount on convertible bonds C. Common shares outstanding at the end of the year
B. Premium on convertible bonds D. Average common shares outstanding during the year
C. Cumulative foreign exchange translation loss
D. Organization cost 15. Earnings per share of common stock as reported on the statement of income should
be computed on the basis of
Comprehensive A. The number of shares outstanding at the end of the year
22. Which statement is correct concerning stockholders’ equity? B. A weighted average of the number of shares outstanding during the year
I. If shares are issued for noncash consideration, the proceeds should be regardless of the extent of fluctuations
measured by the fair value of the noncash consideration received. C. A weighted average of the number of shares outstanding during the year except
II. Deposit on subscription to a proposed increase in capital stock may be classified that minor fluctuations in the number of shares may be disregarded
as part of stockholders’ equity. D. The number of shares outstanding in the middle of the year
B. II only D. Neither I nor II 42. In calculating basic EPS, the preferred dividend deducted from net income is
A. Dividend on cumulative preferred stock for the current and future periods only A. Convertible preferred stock is always dilutive.
when declared. B. Convertible bond payable is always dilutive.
B. Dividend on cumulative preferred stock for the current and future periods C. Options and warrants are dilutive if the option price is lower than the average
whether declared or not. market price.
C. Dividend on noncumulative preferred stock for the current period whether D. Options and warrants are dilutive if the option price is higher than the average
declared or not. market price.
D. Dividend on noncumulative preferred stock for the current period only when
declared. Adjustments to Income
Interest expense
Diluted EPS 85. Interest expense on convertible bond payable should be
Dilutive & Anti-Dilutive Securities A. Added back to net income at gross in computing basic earnings per share
Potential Common Share B. Added back to net income net of tax in computing diluted earnings per share
83. It is financial instrument or other contract that may entitle its holder to common C. Deducted from net income at gross in computing basic earnings per share
shares. D. Deducted from net income net of tax in computing diluted earnings per share
A. Potential common share C. Debt instrument
B. Certificate of stock D. Share of stock Comprehensive
24. Which is incorrect concerning EPS calculations?
Potentially Dilutive Shares A. EPS disclosures are required for public enterprises and encouraged for
Stock Options nonpublic enterprises.
64. The nature of diluted earnings per share involving adjustment for stock options can B. A warrant or option is a financial instrument that gives the holder the right to
be described as purchase common shares.
A. Historical because earnings are historical C. An equity instrument is any contract that evidences a residual interest in the
B. Historical because it indicates firm’s valuation assets of an enterprise after deducting all of its liabilities.
C. Pro forma because it indicates potential changes in number of shares D. Under the treasury stock method, the number of incremental common shares is
D. Pro forma because it indicates potential changes in earnings equal to the option shares.
Antidilutive Shares 23. Which is incorrect concerning EPS calculations?

108.Antidilutive securities A. EPS disclosures are required for public enterprises and nonpublic enterprises.
A. Should be included in the computation of diluted earnings per share but not basic B. A warrant or option is financial instrument that gives the holder the right to
earnings per share. purchase common shares.
B. Are those whose inclusion in earnings per share computations would cause C. An equity instrument is any contract that evidences a residual interest in the
basic earnings per share to exceed dilated earnings per share. assets of an enterprise after deducting all of its liabilities.
C. Include stock options and warrants whose exercise price is less than the average D. In calculating basic EPS, the amount of preferred dividends that is deducted from
market price of common stock. net income for the period is the amount of any dividends on noncumulative
D. Should be ignored in all earnings per share calculations. preferred stock declared in respect of the period.
Comprehensive EVENTS AFTER THE BALANCE SHEET DATE

84. Which statement is correct concerning potentially dilutive securities? 26. These are the events, whether favorable or unfavorable, that occur between the
balance sheet date and the date on which the financial statements are authorized for 72. On January 17, 2003, an explosion occurred at a Sims Company plant causing
issue extensive property damage to area buildings. Although no claims had yet been
A. Events after balance sheet date C. Past events asserted against Sims by March 10, 2004, Sims’ management and counsel
B. Current events D. Future uncertain event concluded that it is likely that claims will be asserted and that it is reasonably possible
Sims will be responsible for damages. Sims’ management believes that P1,250,000
Subsequent Events Requiring Adjustment would be a reasonable estimate of its liability. Sims’ P5,000,000 comprehensive
31. Events after balance sheet date are those which occur between the balance sheet public liability policy has a P250,000 deductible clause. In Sims’ December 31, 2003
date and the date on which the financial statements are issued. Which subsequent financial statements which were issued on March 25, 2004, how should this item be
event requires adjustment (as opposed to mere disclosure) in the financial reported?
statements? A. As an accrued liability of P250,000
A. Material decline in market value of inventory. B. As a footnote disclosure indicating the possible loss of P250,000
B. Loss of plant as a result of fire. C. As a footnote disclosure indicating the possible loss of P1,250,000
C. Material writeoff of receivables resulting from customer's major casualty alter the D. No footnote disclosure or accrual is necessary
balance sheet date.
D. Payment to BIR of disputed income tax assessment. ACCOUNTING FOR FOREIGN CURRENCY TRANSACTION & TRANSLATION
Basic Concepts
86. An example of a subsequent event which requires adjustment of financial statements, 78. The exchange rate at the date of the transaction is often referred to as
is A. Closing rate C. Forward rate
A. Settlement of litigation when the event giving rise to the claim took place B. Spot rate D. Average rate
subsequent to the balance sheet date.
B. Decline in market value of investment between the balance sheet date and date 73. What rate is used in translating both the monetary and nonmonetary assets and
on which financial statements are issued. liabilities shown on the financial statements of a foreign entity for the purpose of
C. Loss on trade receivable which is confirmed by the bankruptcy of a customer incorporation in the financial statements of an enterprise?
occurring after the balance sheet date. A. Closing rate C. Forward rate
D. Loss of inventories as a result of flood or fire. B. Guiding rate D. Spot rate
Subsequent Events Not Requiring Disclosure Foreign Currency Transaction

14. Events after balance sheet date are events that occur between the balance sheet 80. Exchange differences from foreign currency transactions are accounted for as
date and the date on which the financial statements are authorized for issue. An A. Transaction gain or loss as component of income from continuing operations.
event after balance sheet date for which an adjustment is not necessary is B. Transaction gain or loss as component of extraordinary items
A. The determination after the balance sheet date of the cost of an asset purchased C. Translation gain or loss as component of equity
or the proceeds from assets sold before the balance sheet date. D. Translation gain or loss as component of income from continuing operations.
B. Sale of inventories after the balance sheet date that may give evidence about the
net realizable value at balance sheet date. 74. In April 2003, Axis Company, an exporter sold to a foreign buyer handicrafts
C. Entering into significant commitments or contingent liabilities, for example, by amounting to US$15,000, payable in September 2003. At the time of the sale in April,
issuing guarantees. the exchange rate was US$1; P54; but at the time of payment in September 2003, it
D. Resolution after the balance sheet date of a court case. was already US$1; P55. The gain should be included as
A. Transaction gain reported as a component of income from continuing operations.
B. Transaction gain reported as a separate component of stockholders' equity. 88. Which statement is incorrect concerning the translation of financial statements of a
C. Translation gain reported as a separate component of stockholders' equity. foreign entity?
D. Translation gain reported as a component of income from continuing operations. A. Income and expenses are translated at average rate for practical reasons.
B. Monetary assets and liabilities are translated at closing rate.
82. On October 1, 2004 Wild Company, a Philippine company, purchased machinery C. Nonmonetary assets and liabilities are translated at historical rate.
from ABC Company, a US Company, with payment due on April 1, 2005. If Wild's D. Translation gain or loss is a component of equity.
2004 net income included no foreign exchange transaction gain or loss, then the
transaction could have 79. Exchange differences arising from the translation of financial statements of a foreign
A. Resulted in an extraordinary gain entity should be accounted for as
B. Been denominated in Philippine pesos A. Translation gain or loss as component of income
C. Caused a foreign currency gain to be reported as a contra account against B. Translation gain or loss as component of equity
machinery C. Transaction gain or loss as component of equity
D. Caused a foreign currency translation gain to be reported in equity D. Transaction gain or loss as component of income
81. Foreign exchange differences which result from severe devaluation of currency 67. Exchange differences arising from the translation of financial statements of a foreign
against which there is no practical means of hedging and that affect liabilities which entity should be accounted for as
cannot be settled and which arise directly on the recent acquisition of inventories A. Accumulated translation adjustment as component of stockholders’ equity.
invoiced in a foreign currency should be B. Accumulated translation adjustment as component of income
A. Deferred and amortized over the term of the obligation. C. Retained earnings
B. Recognized immediately. D. Additional paid-in capital
C. Charged to the cost of the inventories
D. Deferred and amortized over the term of the obligation if it is a foreign currency ACCOUNTING CHANGES & FUNDAMENTAL ERRORS
loss and recognized immediately if it is a foreign currency gain. Change in Accounting Policy
81. A change in accounting policy should be made only if
Foreign Currency Translation I. Required by statute.
88. Xavier Company obtained a US dollar-denominated loan at the beginning of the year. II. Required by the Accounting Standards Council.
The peso depreciated against the dollar during the year. At balance sheet date, the III. The change will result in a more appropriate presentation of events and
outstanding loan payable should be stated at transactions in the financial statements of the enterprise.
A. The rate prevailing at balance sheet date because this will measure the loan at A. I, II and III. C. I and II only.
its current equivalent peso amount resulting in a more useful presentation of the B. I and III only. D. II and III only.
financial position of the enterprise.
B. The average rate for the year because this will provide a reasonable 29. A change in accounting policy includes
approximation of the peso equivalent of the loan. I. Adoption of an accounting policy for events or transactions that differ in
C. The rate prevailing on the date the loan was obtained because this rate is as substance from previously occurring events or transactions.
good a guide as the rate at which the loan will be settled. II. The adoption of new accounting policy for events or transactions which did not
D. The rate prevailing on the date the loan was obtained because this will provide a occur previously or that were immaterial.
more factual measurement of the loan payable. III. The initial adoption of a policy to carry assets at revalued amount.
A. I and II C. I and III
B. II and III D. Ill only cumulative effect of the change in current income of the year of change only?
A. A change to the equity method from the cost method of accounting for common
67. A change in reporting entity is actually a change in stock investments.
A. Accounting policy (principle) C. Accounting assumption B. A change from the double declining balance method to the straight line method
B. Accounting estimate D. Accounting concept of depreciation.
C. A change in reporting entity.
32. A change in reporting entity is actually a change in accounting D. A change from FIFO to the average method of inventory valuation.
A. Principle or policy C. Method
B. Estimate D. Concept Change from Cost Method to Equity Method
65. Which of the following accounting changes may require the inclusion of the
79. The change in accounting policy includes all of the following except cumulative effect of the change in current income of the year of change only?
A. The initial adoption of a policy to carry assets as revalued amount. A. A change to the equity method from the cost method of accounting for common
B. The change from expensing to capitalizing borrowing costs in accordance with stock investments.
the allowed alternative treatment in ASC SFAS No. 24. B. A change from the double decline balance method to the straight line method of
C. The change in inventory valuation from FIFO to weighted-average method. depreciation.
D. The change in depreciation method from diminishing balance method to straight- C. A change in reporting entity.
line method. D. A change from FIFO to the average method of inventory valuation.
Benchmark Treatment Prospective Application

80. What is the benchmark treatment of a change in accounting policy? 30. Prospective application of a change in accounting policy is required
A. Retroactively, meaning any resulting adjustment is reported as an adjustment to A. Anytime
the opening balance of retained earnings B. When the amount of adjustment to the opening balance of retained earnings can
B. Prospectively, meaning, no adjustments to prior periods are made either to the be reasonably determined
opening balance of retained earnings or in reporting the net income or loss for C. When the amount of adjustment to the opening balance of retained earnings
the current period because existing balance are recalculated. cannot be reasonably determined
C. Currently, meaning, any resulting adjustment is included in the determination of D. When ordered by management
the net income or loss for the period.
D. Retroactively, meaning, any resulting adjustment is included in equity. Change from LIFO to FIFO
43. Mixx Company changed its method of inventory pricing from the last in, first out
24. Retrospective application means that any resulting adjustment from a change in (LIFO) method to the first in, first out (FIFO) method. The company should include the
accounting policy should be reported as cumulative effect of the change on the amount of retained earnings at the beginning
A. Correction of the opening balance of retained earnings of the period in which the change is made in the net income of
B. Separate item in the income statement as part of income from ordinary activities A. Neither future periods nor the period of change
C. Extraordinary item B. Only in the period of change but not future periods
D. Discontinuing operation C. The future pen ads but not the period of change
D. Both the future periods and the period of change
Change from FIFO to Average Method
86. Which of the following accounting changes may require the inclusion of the Comprehensive
83. Which statement is false pertaining to accounting changes? B. By reporting pro forma amounts for prior periods
A. Retroactive treatment is not appropriate for changes in estimate because these C. As a prior period adjustment to beginning retained earnings
are normal recurring adjustments that are the natural result of the use of D. In the period of change and future periods if the change affects both
estimates.
B. A change in reporting entity is effected by restating all prior period financial Specific Examples
statements in accordance with the new method of presenting the current financial Change in Depreciation Method
statements of the new reporting entity. 78. The effect of a change in the depreciation method for previously recorded assets from
C. The effect of a change in the expected pattern of consumption of economic the straight-line method to the double-declining balance method should be reported
benefits of a depreciable asset should be included in the statement of retained A. As an adjustment of the opening balance of retained earnings in the year of
earnings as an adjustment of the beginning balance change.
D. Accounting estimates change as new events occur, more experience is acquired, B. Prospectively and allocated to current and future years.
or additional information is obtained C. In income of the year of change.
D. As extraordinary item in the year of exchange.
Change in Accounting Estimates
Characteristics Change in Service Life of Fixed Assets
81. Which of the following is characteristic of a change in an accounting estimate? 82. The effect of a change in the expected pattern of consumption of economic benefits
A. It usually need not be disclosed of a depreciable asset should be included in the
B. It does not effect the financial statements of prior period A. Determination of income or loss in the period of change only.
C. It should be reported through the restatement of the financial statements. B. Determination of income or loss in the period of change and future periods.
D. It makes necessary the reporting of proforma amounts for prior periods. C. Statement of retained earnings as an adjustment of the beginning balance.
D. Statement of recognized gains and losses of the current and future periods.
Presentation and Disclosure Requirements
76. If it is difficult to distinguish a change in accounting estimate and a change in 75. When a company changes the expected service life of an asset because additional
accounting policy, the change is treated as information has been obtained, which of the following should be reported?
A. Change in accounting policy C. Fundamental error A. Cumulative effect of change in accounting policy
B. Change in accounting estimate D. Extraordinary item B. Proforma effect of retroactive application
C. Prior period adjustment
84. The effect of a change in accounting estimate should be treated D. An accounting change that should be reported in the period of change and future
A. Currently C. Retroactively periods if the change effects both
B. Prospectively D. Currently and prospectively
Comprehensive
97. For which kind of accounting change is the current and prospective method always 45. Which statement is incorrect concerning a change in accounting estimate?
appropriate? I. The effect of a change in accounting estimate should be treated currently and
A. Change in accounting policy C. Change in reporting entity prospectively if necessary.
B. Change in accounting estimate D. Correction of an error II. 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.
29. How should the effect of a change in accounting estimate be accounted for? A. I only C. Both I and II
A. By restating amounts reported in financial statements of prior periods B. II only D. Neither I nor II
B. Prior period adjustment resulting from the change in accounting principle

83. The following statements relate to a change in accounting estimate. Which statement C. Component of income after extraordinary item.
is incorrect? D. Component of income before extraordinary item.
A. As a result of uncertainties inherent in business activities, many financial
statements cannot be measured with precision but can only be estimated. Erroneous Application of Equity Method
B. An estimate may have to be revised if changes occur regarding the 76. Which of the following should be reported as a prior period adjustment?
circumstances on which the estimate was based or as a result of new A. Segment of a prior year tax assessment
information, more experience or subsequent developments. B. Adjustment in the estimated remaining lives of property plant and equipment
C. If it is difficult to distinguish between a change in accounting policy, and a change C. Adjustment of the pension benefits of existing employees
in accounting estimate, the change is treated as a change in an accounting D. Additional income arising from the past misapplication of the equity method of
policy. accounting for investments
D. The effect of a change in an accounting estimate should be included in the same
income statement classification as was used previously for the estimate. Not a Correction of Error
30. The following statements describe some situations that occur in accounting. Which
21. Which is correct concerning the proper treatment for accounting changes? does not involve correction of an error?
A. The effect of a change in the expected pattern of consumption of economic A. Change from recording research and development costs as an asset and
benefits of a depreciable asset should be included in the statement of retained amortizing them over 10 years to expensing them in the period of expenditure.
earnings as an adjustment to the beginning balance of retained earnings. B. Change in the useful life of a machine because it had mistakenly been classified
B. If it is difficult to distinguish between a change in accounting policy and a change as a truck. The firm depreciates trucks over a 4-year life and machinery over a
in accounting estimate, the change is treated as a change in accounting 10-year useful life.
estimate. C. Change in depreciation expense because the useful lives of several assets were
C. As a benchmark treatment, a change in accounting estimate should be changed.
accounted for retrospectively. D. Change in current year's net income because of an arithmetic error in recording
D. The effect of a change in accounting policy should be treated currently and interest expense in prior year.
prospectively.
Causes of Errors
Fundamental Errors 87. Which of the following errors could result in an overstatement of both current assets
Presentation and Disclosure Requirements and stockholders' equity?
48. Financial reporting on a net of tax basis is required for A. An understatement of accrued sales commissions
A. Other revenues and other expenses C. Unusual gains and losses B. Noncurrent note receivable principal is misclassified as current asset
B. Prior period adjustments D. Income from operations C. Annual depreciation on manufacturing machinery is understated
D. Holiday pay expense for administrative employees is misclassified as
Specific Example manufacturing overhead
Change from Cash Basis to Accrual Basis of Accounting
31. Aura Company changed from the cash basis of accounting to the accrual basis of 77. Which among the following errors could cause an understatement of owners' equity
accounting during the current year. The cumulative effect of this change should be and overstatement of liabilities?
reported in the financial statements as a A. Failure to record interest accrued on a note payable
A. Prior period adjustment resulting from the correction of an error. B. Making the adjusting entry for depreciation expense twice
C. Failure to make the adjusting entry to record revenue which had been earned but
not yet billed to customers Consigned Goods Erroneously Recorded as Purchases and Included in Ending Inventory
D. Failure to record the earned portion of fees received in advance 110.Dana Company received merchandise on consignment. As of March 31 Dana had
recorded the transaction as a purchase and included the goods in inventory. The
Effect of Accounting Errors effect of this on its financial statements for March 31 would be
Unrecorded Insurance => Work in Process A. No effect.
75. On December 31, 2003 Ezzy Company incurred special insurance costs which were B. Net income was correct and current assets and current liabilities were
not yet paid, hence not recorded. What is the effect of the failure to record, on overstated.
retained earnings and accrued liabilities in the December 31, 2003 balance sheet, if C. Net income, current assets, and current liabilities were overstated
the insurance costs were related to work-in-process? D. Net income and current liabilities were overstated.
A. Overstatement of retained earnings and understatement of accrued liabilities
B. Overstatement of retained earnings but no effect on accrued liabilities Customer’s Deposit Erroneously Recorded as Sales
C. No effect on retained earnings and understatement of accrued liabilities 88. During 2003, East Company collected P500,000 as advance payments from
D. No effect on both retained earnings and accrued liabilities customers. The bookkeeper credited the sales revenue account as the cash was
received. The goods were delivered in 2004. No adjusting entry was made at the end
Consigned Items Erroneous Included in Ending Inventory of 2003 on the payments made in advance. The failure to adjust the books would
96. If a company incorrectly includes consignment items in the ending inventory, the cause
effect on the next period’s cost of goods sold and net income is A. Liabilities to be understated by P500,000 on the December 31, 2003 balance
A. Understatement, overstatement C. Overstatement, overstatement sheet.
B. Overstatement, understatement. D. The next period’s account will be B. Owners' equity to be understated by P500,000 on the December 31, 2003
correct balance sheet.
C. Assets to be overstated by P600,000 on the December 31, 2003 balance sheet.
Unrecorded Ending Inventory D. Owners' equity to be not affected.
109.Cris Company accepted delivery of merchandise which it purchased on account. As
of December 31, Cris had recorded the transaction, but did not include the Overstated receivables, Unrecorded Interest income
merchandise in its inventory. The effect of this on its financial statements for 29. At the beginning of 2003, Gold Company received a three-year, zero-interest-bearing
December 31 would be P100,000 trade note. The market rate for equivalent notes was 8% at that time. Gold
A. Net income, current assets, and retained earnings were understated reported this note as a P100,000 trade receivable on its 2003 year-end statement of
B. Net income was correct and current assets were understated financial position and P100,000 as sales revenue for 2003. What effect did this
C. Net income was understated and current liabilities were overstated. accounting for the note have on net earnings for 2003, 2004 and 2005 and its
D. Net income was overstated and current assets were understated. retained earnings at the end of 2005, respectively.
A. Overstate, overstate, understate, zero
Consigned Items Erroneously Included in Ending Inventory B. Overstate, understate, understate, understate
82. If a company incorrectly includes consignment items in the ending inventory, the C. Overstate, overstate, overstate, zero
effect on the next period’s cost of goods sold and net income is D. Overstate, understate, understate, zero
A. Understatement, overstatement C. Overstatement, overstatement
B. Overstatement, understatement D. The next period’s account will be Comprehensive
correct 84. The following statements relate to fundamental errors. Which statements is
incorrect?
A. The amount of the correction of a fundamental error that relates to prior periods 35. The following statements relate to current value accounting. Which statement is
should be reported by adjusting the opening balance of retained earnings. correct?
B. The financial statements including the comparative information for prior periods, A. The objective of current value accounting is to report the effects of general price
are presented as if the fundamental error had been corrected in the period in changes rather than specific price changes.
which it was made. B. The term "current value" may mean replacement cost, net realizable value, net
C. The amount of the correction relating to periods prior to those included in the present value of expected future cash flows, or current cost.
comparative information in the financial statements is adjusted against the C. All items in a current value balance sheet are different in amount from what they
opening balance of retained earnings in the earliest period presented, would be in a historical cost balance sheet.
D. The restatement of comparative information necessarily gives rise to the D. Both purchasing power and holding gains and losses are recognized in current
amendment of financial statements which have been approved by shareholders value accounting.
or registered or filed with regulatory authorities.
92. The recognition of the deficiencies of historical cost accounting has led to the
PRICE-LEVEL ACCOUNTING advocacy of the recognition of the effects of inflation in the accounts. The following
89. During a period of inflation, the specific price of a parcel of land increased at a lower statements characterize the recognition of the effects of inflation except
rate than the consumer price index. The accounting method that would measure the A. All accounts in the financial statements are affected to a certain extent by
land at the highest amount is inflationary conditions, and the effect is more explicit in some accounts than in
A. Current cost/constant peso C. Historical cost/nominal peso others.
B. Historical cost/constant peso D. Current cost/nominal peso B. Restating the entire financial statements in terms of current prices is a very
complicated process and requires considerable additional work.
79. Four types of money prices are used in measuring resources in financial accounting. C. Users of financial statements advocate the recognition of the effects of inflation in
The type which uses such concepts as present value, discounted cash flow and value the accounts because historical cost creates the impression that the business
in use is known as entity is more profitable than what it ready is.
A. Price in a current purchase exchange C. Price based on future exchange D. Inflation affects more drastically those items in the accounts where the rate of
B. Price in past purchase exchange D. Price in a current sale exchange turnover is quite high.
90. The restatement of historical-peso financial statements in terms of current prices INTERIM FINANCIAL REPORTS
results in presenting assets at Basic Concepts
A. Lower of cost or market value 86. Conceptually, interim financial statements can be described as emphasizing
B. Current appraisal value A. Timeliness over reliability C. Relevance over comparability
C. Current replacement cost B. Reliability over relevance D. Comparability over neutrality
D. Costs adjusted for purchasing power changes
91. Which one among the following statements is not a characteristic of the integral view
91. All accounts in the financial statements are affected to a certain extent by inflationary of presenting interim financial statements?
conditions, but the effect is more explicit in some accounts than in others. Which A. It is the more acceptable view.
among the following accounts are the more seriously affected by inflation? B. Each interim period is recognized as a separate accounting period, regardless of
A. Property, plant and equipment C. Receivables the length of time involved.
B. Merchandise inventory D. Cash C. Each interim period is a part of the annual period.
D. The revenues and expenses for the annual period are allocated among interim C. Statement of changes in equity cumulatively for the current financial year to date,
periods on some reasonable basis. with comparable year-to-date period of the immediately preceding financial year.
D. Cash flow statement cumulatively for the current financial year to date, with a
79. Interim financial statements are usually presented on a comparative cash flow statement for the immediately preceding financial year.
A. Monthly basis C. Semiannually basis
B. Quarterly basis D. Nine-month basis 92. An interim financial report should include as a minimum all of the following
components except
80. Fame Company seeks your advice on the frequency of its issuance of interim reports. A. Condensed balance sheet and income statement.
Given the expense involved as well as the need for updated information useful in B. Condensed statement showing all changes in equity, or changes in equity other
decision making, what would your advice be on how frequent it should issue interim than those arising from capital transactions with ownership and distributions to
reports? owners.
A. Monthly C. Quarterly C. Condensed cash flow statement.
B. Every four months D. Semestral or semi-annual D. Accounting policies and explanatory notes.
Components Accounting Treatment

93. Interim reports should include interim financial statements for periods as follows 81. Meek Company issues quarterly interim financial statements, in the preparation of
(choose the incorrect one) these statements, Meek Company should
A. Balance sheet as of the end of the current interim period and a comparative A. Defer inventory losses from temporary market declines beyond the interim period
balance sheet as of the end of the immediately preceding fiscal year. in which the decline occurred.
B. Income statements for the current interim period and cumulatively for the current B. Not match expenses associated directly with revenue against revenue in those
financial year to date, with comparative income statement for the immediately interim periods in which the related revenue is recognized.
preceding year. C. Determine inventories and cost of goods sold using the gross profit method.
C. Statement showing changes in equity cumulatively for the current financial year D. Not recognize for interim periods revenues from products sold on the same basis
to date, with comparative statement for the comparable year-to-date period of the as for the annual period.
immediately preceding financial year.
D. Cash flow statement cumulatively for the current financial year to date, with a Inventories
comparative statement for the comparable year-to-date period of the immediately 47. An inventory loss from a market price decline occurred in the first quarter. The loss
preceding year. was not expected to be restored in the fiscal year. However, in the third quarter the
inventory had a market price recovery that exceeded the market decline in the first
48. If the enterprise publishes interim financial reports quarterly on June 30, 2003, and quarter. For interim financial reporting, the amount of the inventory should
the enterprise’s financial year ends December 31, which is an incorrect interim A. Decrease in the first quarter by the amount of the market price decline and
reporting? increase in the third quarter by the amount of the market price recovery
A. Balance sheet as of the end of the current interim period and a comparative B. Decrease in the first quarter by the amount of the market price decline and
balance sheet as of the end of the immediately preceding fiscal year. increase in the third quarter by the amount of decrease in the first quarter
B. Income statements for the current interim period and cumulative for the current C. Not be affected in the first quarter and increase in the third quarter by the amount
financial year to date, with comparative income statements for the comparable of market price recovery that exceeded the market price decline
interim periods (current and year-to-date) of the immediately preceding financial D. Not be affected in either the first or the third quarter
year.
75. Due to a decline in market price in the second quarter, Anna Company incurred an B. For interim reporting purposes, companies that have seasonal revenue should
inventory loss. The market price is expected to return to previous levels by the end of allocate such revenue over the full year to avoid distorting the operating results
the year. At the end of the year the decline had not reversed. When should the loss of interim periods.
be reported in Anna’s interim income statement? C. An inherent limitation of interim reports is the need to sacrifice some amount of
A. Ratably over the second, third, and fourth quarters accuracy and completeness in order to achieve timeliness.
B. Ratably over the third and fourth quarters D. The computation of income taxes for interim periods assumes that each interim
C. In the second quarter only period is a separate taxable accounting period.
D. In the fourth quarter only
45. Which statement is incorrect concerning interim financial reporting?
Major Repairs A. Revenue that are received seasonally, cyclically or occasionally within a financial
35. If annual major repairs made in the first quarter and paid for in the second quarter year should not be anticipated of deferred as of an interim date
clearly benefit the entire year, when should the repairs be expensed? B. A bonus is anticipated for interim purposes if and only if the bonus is a legal
A. An allocated portion in each of the last three quarters obligation and past practice would make the bonus a constructive obligation for
B. An allocated portion in each quarter of the year which the enterprise has no realistic alternative but to make the payments and a
C. In full in the first quarter reliable estimate of the obligation can be made
D. In full in the second quarter C. To save time and cost, enterprise often use estimates to measure inventories at
interim dates
Bonus D. Charitable contributions, employee training costs and other costs that are
95. A bonus is anticipated for interim reporting purposes if and only if expected to be incurred irregularly during the financial year should be accrued as
I. The bonus is a legal obligation and past practice would make the bonus a of the interim reporting date.
constructive obligation for which the enterprise has no realistic alternative but to
make the payments. 94. The following statements relate to interim financial reporting. Which statement is
II. A realizable estimate of the obligation can be made. incorrect?
A. I only. C. I and II. A. The cost of planned major periodic maintenance or overhaul or other seasonal
B. II only. D. Neither I nor II. expenditure that is expected to occur late in the year is not anticipated for interim
purposes, unless an event has caused the enterprise to have a legal or
Extraordinary Gain constructive obligation.
31. For interim financial reporting, an extraordinary gain occurring in the second quarter B. Charitable contributions, employee training costs and other costs that are
should be expected to be incurred irregularly during the financial year should be accrued as
A. Recognized ratably over the last three quarters of the interim reporting date.
B. Recognized ratably over all four quarters with the first quarter being restated C. Depreciation and amortization for an interim period should be based only on
C. Recognized in the second quarter asset owned during that interim period.
D. Disclosed by footnote in the second quarter D. To save time and cost, enterprises often use estimates to measure inventories at
interim dates to a greater extent than at annual reporting dates.
Comprehensive
32. The following statements relate to interim reporting. Choose the correct statement. 46. Which statement is correct concerning interim financial reporting?
A. Product costs are allocated among interim periods on the basis of an estimate of I. A bonus is anticipated for interim purposes if and only if the bonus is a legal
time expired, benefit received, or activity associated with the periods. obligation and past practice would make the bonus a constructive obligation for
which the enterprise has no realistic alternative, but to make the payments and a
reliable estimate of the obligation can be made. 28. Proportionate consolidation reporting for jointly controlled entity means
II. Charitable contributions, employee training costs and other costs that are I. The venturer may combine its share of the assets, liabilities and expenses of the
expected to be incurred irregularly during the financial year should be accrued as jointly controlled entity with similar items in its consolidated financial statements
of the interim reporting date. on a line by line basis
A. I only C. Both I and II II. The venturer may combine its share of the assets, liabilities, income and
B. II only D. Neither I nor II expenses of the jointly controlled entity by using separate line items in its
JOINT VENTURE A. I only C. Both I and II
92. It is contractual arrangement whereby two or more parties undertake an economic B. II only D. Neither I nor II
activity which is subject to joint control.
A. Joint venture C. Joint operation BUSINESS COMBINATION
B. Partnership D. Joint undertaking Basic Concepts
74. The device by which a corporation transfers a part of its assets to a new company in
40. It is a party to a joint venture and has joint control over that joint venture exchange for stocks of the new company, after which the corporation distributes such
I. Venturer stock to its stockholders without any surrender of stock is known as
II. Investor A. Spin off C. Split off
A. Both I and II C. I only B. Split up D. Split on
B. Neither I and II D. II only
94. A business combination may give rise to a legal merger. A legal merger is usually a
93. A jointly controlled operation involves merger between two entities in which:
I. The use of the assets and other resources of the venture rather than the I. The assets and liabilities of one entity are transferred to the other entity and the
establishment of a corporation, partnership or other legal entity first entity is dissolved,
ll. The joint control and often the joint ownership of assets contributed to the joint II. The assets and liabilities of both entities are transferred to a new entity and both
venture or assets acquired by the joint venture the original entities are dissolved.
III. The establishment of a corporation, partnership or other legal entity in which A. I only C. Either I or II
each venturer has an interest B. II only D. Neither I nor II
A. I only C. Ill only
B. II only D. I, II and III 82. Combined financial statements may be used to present the results of
A. A group of unconsolidated subsidiaries but not for enterprises under common
41. A jointly controlled entity is a joint venture which involves the management
A. Establishment of a corporation, partnership or other entity in which each venturer B. A group of unconsolidated subsidiaries or for enterprises under common
has an interest. management
B. Use of the assets and other resources of the venturers rather than the C. Neither group of unconsolidated subsidiaries nor enterprises under common
establishment of a corporation, partnership or other entity. management
C. Joint control and often the joint ownership by the venturers of one or more assets D. Enterprises under common management but not for a group of unconsolidated
contributed to or acquired for the purpose of the joint venture. subsidiaries
D. Establishment of a foreign entity.
Pooling of Interests
77. It is a business combination in which the shareholders of the combining enterprises 84. What is the manner of preparing and presenting the income statement for the year
combine control over the whole or effectively the whole of their net assets and when a parent company applies the pooling-of-interests method of accounting for a
operations to achieve a continuing mutual sharing in the risks and benefits attaching business combination effected at mid-year?
to the combined entity such that neither party can be identified as the acquirer A. Must be consolidated and report income for both parent and subsidiary for the
A. Purchase C. Business combination entire year with footnotes as to certain income statement items of the separate
B. Pooling of interests D. Merger companies for the first half of the year.
B. May be unconsolidated and should report the parent's income for the whole year
88. In order to report a business combination as a pooling of interests, the minimum and the subsidiary's income earned since the combination
amount of an investee's common stock that must be acquired during the combination C. May be unconsolidated and should report the parent's income for the whole year
period in exchange for the investor's common stock is and the dividends received from the subsidiary since the combination
A. 51 percent C. 90 percent D. Must be consolidated and should report the parent's income for the whole year
B. 80 percent D. 100 percent and the subsidiary's income earned since the combination
89. A business combination is accounted for appropriately as a pooling of interests. 92. Companies A and B combine On July 1, 2003. The combination is properly
Registration fees related to effecting the business combination should be accounted for as a pooling of interests. How should the result of operations be
A. Deducted directly from retained earnings of the combined corporation reported for the year ended December 31, 2003?
B. Deducted in determining net income of the combined corporation for the period in A. Combined from July 1 to December 31 and disclosed for the separate companies
which costs were incurred from January 1 to June 30.
C. Capitalized and subsequently amortized over a period not exceeding 20 years B. Combined from July 1 to December 31 and disclosed for the separate companies
D. Capitalize but not subsequently amortized for the entire year.
C. Combined for the entire year and disclosed for the separate companies from
78. A business combination is accounted for as a pooling of interests. Cost of furnishing January 1 to June 30.
information to stockholders, registration fees and fees of finders and consultants D. Combined for the entire year and disclosed for the separate companies for the
related to affecting the business combination should be entire year.
A. Deducted directly from retained earnings of the combined corporation
B. Deducted in determining net income of the combined corporation for the period in Purchase Method
which the costs were incurred Identified Acquirer
C. Capitalized but not amortized 95. The business combination should be accounted for by the purchase method if an
D. Capitalized and subsequently amortized over a period not exceeding twenty acquirer can be identified. An acquirer can be identified under all of the following
years situations, except
A. The fair value of one enterprise is significantly greater than that of the other
83. A business combination accounted for by the pooling of interests method combining entity
A. Records direct acquisition costs as part of the cost of investment. B. The business combination is effected through an exchange of voting common
B. Reports results of operations only for the period in which the combination occurs. shares for cash.
C. After the combination, carries the balance sheet amounts at fair market value. C. The shareholders of each entity maintain substantially the same voting rights and
D. Reports results of operations for the period in which the combination occurs as Interest in the combined entity relative to each other alter the combination as
though the enterprises had been combined at the beginning of the period. before.
D. The business combination results in the management of one entity being able to which may be the quoted market or bid price in an active market, or the amount
dominate the selection of the management team of the resulting combined entity. that would be paid by the enterprise in arm's length transaction in the absence of
an active market.
Inventories II. If the fair value of the intangible asset cannot be measured reliably, the asset is
79. White Company acquired 100% of the outstanding common stock of Orange not recognized and not included within the overall cost of goodwill
Company in a purchase transaction. The cost of acquisition exceeded the fair value A. Both I and II C. I only
of the identifiable assets and assumed liabilities. The general guidelines for assigning B. Neither I nor II D. II only
amounts to the inventories acquired provide for
A. Raw materials to be valued at original cost Acquisition Purchase Exceeds Fair Value of Net Assets
B. Work in process to be valued at estimated selling price less cost to complete and 90. Company J acquired all of the outstanding common stock of Company K in exchange
cost of disposal for cash. The acquisition price exceeds the fair value of net assets acquired. How
C. Finished goods to be valued at replacement cost should Company J determine the amounts to be reported for the plant and equipment
D. Finished goods to be valued at estimated selling price less cost of disposal and a and long-term debt acquired from Company K?
reasonable profit allowance Plant and equipment Long-term debt
A. K's carrying amount K's carrying amount
84. A subsidiary acquired for cash in a business combination, owned inventories with a B. K's carrying amount Fair value
market value different from the book value as of the date of combination. A C. Fair value K's carrying amount
consolidated balance sheet prepared immediately after the acquisition would include D. Fair value Fair value
this difference as part of
A. Deferred credits C. Inventories
80. A subsidiary was acquired for cash in a business combination on January 1, 2003.
B. Goodwill D. Retained earnings
The purchase price exceeded the fair value of identifiable assets. The acquired
company owned equipment with a market value in excess of carrying amount as of
Intangible Assets
the date of combination. A consolidated balance sheet prepared on December 31,
50. When an intangible asset is acquired as a part of a business combination, which
2003 would
statement is incorrect?
A. Report the unamortized portion of the excess of the market value over the
A. The cost of the intangible asset is equal to its fair value on the date of
carrying amount of the equipment as part of goodwill
acquisition.
B. Report the unamortized portion of the excess of the market value over the
B. If the fair value of the intangible asset cannot be measured reliably, the asset is
carrying amount of the equipment as part of property, plant and equipment
not recognized and not included within the overall cost of goodwill.
C. Report the excess of the market value over the carrying amount of the equipment
C. The fair value of an intangible asset is equal to the quoted market price in an
as part of property, plant and equipment
active market.
D. Not report the excess of the market value over the carrying amount of the
D. The fair value of an intangible asset is equal to the amount that would be paid by
equipment because it would be expensed as incurred
the enterprise in an arm's length transaction between knowledgeable and willing
parties in the absence of an active market.
Reported Income of the Acquiring Company
85. In a business combination accounted for as a purchase, the reported income of the
45. When an intangible asset is acquired as part of a business combination, which
acquiring company should include
statement is correct?
A. The operations of the acquired company after acquisition.
I. The cost of the intangible asset is equal to its fair value on the date of acquisition
B. The combined operations of the constituents as though the companies combined
at the beginning of the year. 85. It is a foreign operation whose activities are not integral part of those of the parent.
C. Only the reported income of the acquired company for the entire year in which A. Foreign entity C. Domestic operation
the combination occurs. B. Foreign operation D. Branch operation
D. Only the operations of the acquiring company.
Nature
Financial Statement Presentation 93. Consolidated financial statements are typically prepared when a company has
91. How would the retained earnings of a subsidiary acquired in a business combination A. Accounted for its investment in another company by the equity method
usually be treated in a consolidated balance sheet prepared immediately after the B. Accounted for its investment in another company by the cost method
acquisition? C. Significant influence over the operating and financial policies of another company
A. Excluded for both a purchase and a pooling of interests. D. The controlling financial interest in another company
B. Excluded for a pooling of interests but included for a purchase.
C. Included for both a purchase and a pooling of interests. 25. Consolidated financial statements are typically prepared when one enterprise has a
D. Included for a pooling of interests but excluded for a purchase. controlling interest in another unless
I. Control is intended to be temporary because the subsidiary is acquired and held
CONSOLIDATED FINANCIAL STATEMENTS exclusively with a view to its subsequent disposal in the near future.
Basic Concepts II. The subsidiary operates under severe long-term restrictions which significantly
Virtually wholly owned subsidiary impair its ability to transfer funds to the parent.
94. For purposes of consolidation, the term 'virtually wholly owned subsidiary" means that A. I only C. Both I and II
the interest of the parent company is B. II only D. Neither I nor II
A. 100% C. At least 20%
B. At least 50% D. At least 90% Scope
92. What is the scope of consolidated financial statements?
26. Virtually wholly owned subsidiary is often to mean that the parent owns A. All subsidiaries, foreign and domestic.
A. 90% or more of the voting power C. 20% or more of the voting power B. A parent company that is wholly owned or virtually wholly owned, meaning 90%
B. 51% or more of the voting power D. 10% or more of the voting power or more, provided the approval of minority interest is obtained.
C. Subsidiary acquired and held exclusively with a view to its subsequent disposal
Different Accounting Period in the near future
91. A subsidiary’s fiscal year-end is June 30 and the parent’s fiscal year-end is December D. Subsidiary operating under severe long-term restriction which impairs the
31. The effect of this difference is significant to the consolidated financial statements. parent's ability to transfer funds.
In preparing consolidated financial statements the subsidiary should
A. be consolidated using more recent interim financial statements. 96. A parent which issues consolidated financial statements should consolidate
B. not be consolidated but its financial results are disclosed in the notes to the A. Domestic subsidiaries only
consolidated financial statements. B. Foreign subsidiaries only
C. be consolidated using its June 30 annual financial statements. C. Domestic and foreign subsidiaries
D. not be consolidated but accounted for by the equity method in the consolidated D. Domestic and subsidiaries, foreign subsidiaries and, associates
90. Which of the following conditions does not preclude consolidation of a subsidiary?
Foreign Entity A. Investment in the subsidiary is temporary.
B. Severe long-term restrictions are imposed on the subsidiary. A. I only. C. I and III only.
C. The subsidiary is engaged in dissimilar activities. B. I and II only. D. I, II, and III.
D. Control does not rest with the majority owners.
94. The subsidiary is excluded from consolidated when (choose the incorrect one)
97. Consolidated financial statements are typically prepared when one company has A. The subsidiary is acquired and held exclusively with a view to its subsequent
controlling financial interest in another unless disposal in the near future.
A. The subsidiary is a finance company B. The subsidiary operates under severe long-term restrictions which significantly
B. The fiscal year-ends of the two companies are more than three months apart impair its ability to transfer funds to the parent.
C. Such control is likely to be temporary C. The subsidiary is in legal reorganization or in bankruptcy
D. The two companies are in unrelated industries, such as manufacturing and real D. The subsidiary is a foreign subsidiary.
estate.
98. A subsidiary should be excluded from consolidation when Goodwill & Asset Valuation Adjustment
I. Control is intended to be temporary because the subsidiary is acquired and held 86. On January 1, 2003, Gee Company acquired all of the outstanding common shares of
exclusively with a view to its subsequent disposal in the near future. Jay Company, for cash equal to the book value of the stock. The carrying amounts of
II. It operates under severe long-term restrictions which significantly impair its ability Jay 's assets and liabilities approximated their fair values, except that the carrying
to transfer funds to the parent. amount of its factory equipment was more than fair value. In preparing Gee's 2003
III. Its business activities are dissimilar from those of the enterprises within the consolidated income statement, which of the following adjustments should be made?
group. A. Depredation expense would be increased and no goodwill amortization would be
A. I, II, and III. C. I and III only. recognized
B. I and II only. D. II and III only. B. Depreciation expense would be decreased and no goodwill amortization would
be recognized
27. Consolidated financial statements are typically prepared when one enterprise has a C. Depreciation expense would be increased and goodwill amortization would be
controlling interest in another unless recognized
I. Control is intended to be temporary because the subsidiary is acquired and held D. Depreciation expense would be decreased and goodwill amortization would be
exclusively with a view to its subsequent disposal in the near future. recognized
II. The subsidiary operates under severe long-term restrictions which significantly
impair its ability to transfer funds to the parent. Investment in Associate
A. I only C. Both I and II 25. Under SFAS 27/IAS 27, in a parent's separate financial statements, investments in
B. II only D. Neither I nor II subsidiaries that are included in the consolidated financial statements should be
A. Carried at cost.
96. Which statement is correct concerning presentation of consolidated financial B. Accounted for using the equity method.
statements? C. Accounted for as available for sale financial assets.
I. A parent should present consolidated financial statements. D. Either carried at cost, accounted for using the equity method, or accounted for as
II. A parent that is a wholly owned subsidiary, or is virtually wholly owned, should available for sale financial assets.
present consolidated financial statements.
III. A parent which issues consolidated financial statements should consolidate all Cost Method
subsidiaries, foreign and domestic. 49. An investment in associate should be accounted for in consolidated financial
statements under the cost method when a 40% gross profit to Senior. Senior sold all of these goods in 2004. For 2004
I. The investment is acquired and held exclusively with a view to its subsequent consolidated financial statements, how should the summation of Perez and Senior
disposal in the near future. income statement items be adjusted?
II. The associate operates under severe long-term restrictions that significantly A. Sales and cost of goods sold should be reduced by the intercompany sales.
impair its ability to transfer funds to the investor. B. Sales and cost of goods sold should be reduced by 80% of the intercompany
A. I and II. C. I only. sales.
B. Neither I nor II. D. II only. C. Net income should be reduced by 80% of the gross profit on intercompany sales.
D. No adjustment is necessary.
44. An investment in associate should be accounted for in consolidated financial
statements using the cost method under all of the following situations, except 95. East Company, a parent company, and its subsidiary, West Company, are so situated
A. The investment is acquired and held exclusively with a view to its subsequent that East Company should present consolidated financial statements. East acquired
disposal in the near future. P500,000 of West Company’s merchandise inventory and was able to sell the same
B. The associate operates under severe long-term restrictions that significantly for P800,000. In preparing the consolidated financial statements, the profits earned
impair its ability to transfer funds to the investor. by East Company should
C. The investor ceases to have significant influence but retains, either in whole or in A. Be eliminated in full
part, its investment. B. Not be eliminated
D. The investor holds, directly or indirectly through subsidiaries, 20% or more of the C. Be eliminated to the extent of the minority interest of West Company
voting power of the investee. D. Be eliminated to the extent of East Company’s controlling interest
Discontinue Use of Equity Method Consolidation of a Foreign Subsidiary

53. An investor should discontinue the use of the equity method in consolidated financial 33. Under SFAS No. 8, in determining whether a foreign corporation should be regarded
statements from the date that as a foreign entity or as an integral part of the parent's operations depends on certain
I. The investor ceases to have significant influence but retains either in whole or in factors. Such factors include all of the following, except
part, its investment. A. Cost and expense factors.
II. The associate operates under severe long-term restrictions that significantly B. Extent of intercompany relationship
impair its ability to transfer funds to the investor. C. Financing of the foreign operation's day to day activities
A. I only. C. I and II. D. Location of the business operations.
B. II only. D. Neither I nor II.
Presentation & Disclosure Requirements
Foreign Entity Minority Interests
93. When transmitting, for consolidation purposes, the financial statements of a foreign 100.Minority interests should be presented in the consolidated balance sheet
subsidiary whose operations are not an integral part of the parent company, the A. As part of the parent’s shareholders’ equity.
subsidiary’s property, plant and equipment should be translated at B. As noncurrent liability.
A. Forward exchange rate C. Average exchange rate C. As current liability.
B. Historical exchange rate D. Current exchange rate D. Separately from liabilities and the parent’s shareholders’ equity
Intercompany Transactions 93. Minority interests should

95. Perez Company owns 80% of Senior Company. During 2004, Perez sold goods with A. Not be reported in the consolidated balance sheet
B. Be reported in the consolidated balance sheet as noncurrent liability 87. How should exchange gains and losses as a result of translating foreign currency
C. Be reported separately from liabilities and the parent's stockholders' equity in the financial statements of a foreign subsidiary that is not integral to the operations of the
consolidated balance sheet parent company into pesos be accounted for?
D. Be disclosed only in the notes to the consolidated financial statements. A. Considered as a deferred item in the financial statements.
B. Treated as an extraordinary item in net earnings for the period in which the rate
88. Consolidated financial statements should contain notes that disclose changes.
A. Investments in consolidated subsidiaries carried at cost, whether material or not C. Considered as an ordinary item in net earnings for the period in which the rate
B. Amount of any material intercompany balances which are eliminated changes.
C. Disaggregated information for subsidiaries whose activities are similar to those of D. Treated as a separate component of owners’ equity in the balance sheet.
other companies in the group
D. The consolidation policy being followed Comprehensive
34. Assume there have been no intercompany transactions. Which of the following is an
Consolidation of a Foreign Subsidiary incorrect statement concerning the financial statements of a parent and its 60%
94. Kim Company included a foreign subsidiary in its 2003 consolidated financial owned subsidiary?
statements. The subsidiary was acquired in 2000 and was excluded from previous A. Net income of the parent would be the same whether or not consolidated
consolidations. The change was caused by the elimination of foreign exchange statements were prepared.
controls including the subsidiary in the 2003 consolidated financial statements results B. Consolidated financial statements would include 100% of the assets and
in an accounting change that should be reported liabilities of the subsidiary
A. By footnote disclosure only C. The minority interest in net assets would not be shown oh the consolidated
B. Currently and prospectively balance sheet.
C. Currently with footnote disclosure of proforma effect of retroactive application D. If the parent does not prepare consolidated financial statements it should use the
D. By restating the financial statements of all prior periods presented equity method of accounting.
87. XYZ (Phils.) Company is the parent company of XYZ (HK). XYZ (Phils.) borrowed HK 53. Which statement is incorrect concerning consolidation of financial statements?
dollars from a Hongkong bank as a partial hedge of its investment in the Hongkong A. Consolidated financial statements should include the statements of the parent
subsidiary. In preparing consolidated financial statements, XYZ (Phils.) Company's company and all its subsidiaries, domestic and foreign
translation loss on its investment in XYZ (HK) exceeded its exchange gain on the B. If the parent and its subsidiaries are engaged in dissimilar activities, consolidated
borrowing. How should the effects of the loss and gain be reported in XYZ (Phils) financial statements shall be presented for the group
consolidated financial statements? C. If parent that is a wholly owned or virtually owned subsidiary should present
A. The translation loss less the exchange gain is reported in the income statement consolidated financial statements providing the approval of the minority interests
B. The translation loss less the exchange gain is reported separately in the is obtained
stockholders' equity section of the balance sheet D. The financial statements of the parent and its subsidiaries are combined on a line
C. The translation loss is reported separately in the stockholders' equity section of by line basis by adding together like items of assets, liabilities, equity, income
the balance sheet and the exchange gain is reported in the income statement and expenses
D. The translation loss is reported in the income statement and the exchange gain
is reported separately in the stockholders equity section of the balance sheet 28. Which statement is incorrect concerning consolidation of financial statements?
A. Consolidated financial statements should include the statements of the parent
Foreign Entity company and all its subsidiaries, domestic and foreign
B. If the parent and its subsidiaries are engaged in dissimilar activities, consolidated Basic Concepts
financial statements shall be presented for the group. Management Approach
C. A parent that is a wholly owned or virtually owned subsidiary should present 35. The approach of looking to an enterprise’s organizational and management structure
consolidated financial statements provided the approval of the minority interests and its financial reporting system in order to identify the enterprise’s business and
is obtained. geographical segments for external reporting purposes is called the
D. The financial statements of the parent and its subsidiaries are combined on a line A. Management approach. C. Operating approach.
by line basis by adding together like items of assets, liabilities, equity, income B. Segment approach. D. Enterprise approach.
and expenses.
38. The method used to determine what information to report for business segments is
99. Which statement is incorrect concerning preparation of consolidated financial referred to as
statements? A. Segment approach C. Enterprise approach
A. The financial statements of the parent and its subsidiaries are combined on a B. Operating approach D. Management approach
line-by-line basis by adding together like items of assets, liabilities, equity,
income and expense. Business Segment
B. Intragroup balances and intragroup transactions and resulting unrealized profits 37. A business segment is
should be eliminated in full. I. A distinguishable component of an enterprise that is engaged in providing an
C. When the financial statements used in the consolidation are drawn up to different individual product or service or a group of related products or services and that is
reporting dates, adjustments should be made for the effects of significant subject to risks and returns that are different from those of other business
transactions or other events that occur during the time lag and in any case, the segments.
difference between reporting dates should be no more than 5 months. II. A distinguishable component of an enterprise that is engaged in providing
D. Consolidated financial statements should be prepared using uniform accounting products or services within a particular economic environment and that is subject
policies for like transactions and other events in similar circumstances. to risks and returns that are different from those operating in other economic
environments.
29. The following statements relate to consolidation of financial statements. Which A. I only C. Both I and II
statement is incorrect? B. II only D. Neither I nor II
A. Minority interests should be presented in the consolidated balance sheet
separately from liabilities and the parent's stockholders' equity. Comprehensive
B. Intercompany transactions and the resulting unrealized profits should be 36. The following statements relate to segments. Which statement is false?
eliminated in full. A. Segment revenue is revenue that is directly attributable to a segment and the
C. Consolidated financial statements present the assets, liabilities, stockholders' relevant portion of enterprise revenue that can be allocated on a reasonable
equity, income and expenses of a parent company and its subsidiaries as if the basis to a segment, whether from sales to external customers or from
group was a single enterprise. transactions with other segments of the same enterprise.
D. When the financial statements used in consolidation are drawn up to different B. Segment expense includes extraordinary items, interest expense, losses on
reporting dates, adjustments should be made for the effects of significant sales of investments, losses on extinguishment of debt, income tax expense and
transactions that occur during the time lag and in any case, the difference general administrative expenses.
between reporting dates should be no mere than six months. C. Segment result is segment revenue less segment expense.
D. Segment assets are those operating assets that are employed by a segment in
SEGMENT REPORTING its operating activities and that are either directly attributable to the segment or
can be allocated to the segment on a reasonable basis. segment operating loss

C. Segment assets are 10% or more of the total assets of reportable segments
Criteria D. Total external revenue of all reportable segments is 75% or more of total
Comprehensive enterprise revenue.
43. The following statements relate to segments. Which statement is correct?
I. A segment is reportable if a majority of its revenue is earned from sales to Operating Profit Test
external customers and its revenue from sales to external customers and from 69. Axis Company is a multifunctional corporation which has both intersegment sales and
transactions with other segments is 10% or more of the total revenue, external sales to unaffiliated customers. Axis should report segment financial information for
and internal, of all segments. each division meeting which of the following criteria?
II. If a segment is identified as reportable segment in the current period, prior A. Segment operating profit or loss is 10% or more of consolidated profit and loss
segment data presented for comparative purposes should be restated to reflect B. Segment operating profit or loss is 10% or more of combined operating profit and
the newly reportable segment, even if that segment did not satisfy the 10% loss of all company segments
thresholds in the prior periods. C. Segment revenue is 10% or more combined revenue of all the company
III. A segment identified as reportable segment in the immediately preceding period segments
should not continue to be a reportable segment for the current period if its D. Segment revenue is 10% or more of consolidated revenue
revenue, result and assets no longer satisfy the 10% thresholds when the
enterprise judges the segment to be of continuing significance. Comprehensive
A. I only C. I and III only 25. XYZ Company is a multidivisional corporation which has both intersegment sales and
B. I and II only D. I, II and III sales to unaffiliated customers. XYZ should report segment financial information for
each division meeting which of the following criteria?
37. A business segment or geographical segment should be identified as reportable A. Segment operating profit or loss is 10% or more of consolidated profit and loss
segment if a majority of its revenue is earned from sales to external customers and B. Segment operating profit or loss is 10% or more of combined operating profit and
(choose the incorrect one) loss of all company segments
A. Its revenue from sales to external customers and from transactions with other C. Segment revenue is 10% or more of combined revenue of all the company
segments is 10% or more of the total revenue, external and internal, of all segments
segments. D. Segment revenue is 10% or more of consolidated revenue
B. Its revenue from sales to external customers is 10% or more of the total revenue,
external and internal, of all segments. 38. Which is true concerning segment reporting?
C. Its segment result, whether income or loss, is 10% or more of the combined I. A segment identified as a reportable segment in the immediately preceding
result of all segments in profit, or the combined result of all segments in loss, period because it satisfied the relevant 10% thresholds should continue to be a
whichever is the greater in absolute amount. reportable segment for the current period notwithstanding that its revenue, result
D. Its assets are 10% or more of the total assets of all segments. and assets no longer exceed the 10% thresholds, if the management of the
enterprise judges the segment to be of continuing significance.
Revenue Test II. If a segment is identified as reportable segment in the current period because it
36. A segment is reportable if a majority of its revenue is earned from sales to external satisfies the relevant 10% thresholds, prior segment data presented for
customers and comparative purposes should be restated to reflect the newly reportable
A. Segment revenue is 10% or more of the total revenue of all segments. segment, even if that segment did not satisfy the 10% thresholds in the prior
B. Segment result is 10% or more of the total segment operating profit minus total period.
A. I only. C. I and II.

B. II only. D. Neither I nor II. Segment Operating Profit or Loss
85. In financial reporting of segment data, which of the following would be used to
Segment Assets determine a segment's operating income?
74. In Vigan Company’s financial reporting for segments of a business enterprise, which A. Gain or loss on discontinued operations C. Sales to other segments
of the following assets should be included as an identifiable asset of the textile mill B. General corporate expense D. Income tax expense
product industry segment?
A. A loan from the textile mill product segment to another industry segment 70. In financial reporting for segments of a business enterprise, the operating profit or
B. An investment by the textile mill product segment in another industry segment loss includes a portion of
C. An allocated portion of assets maintained for general corporate purposes and not A. General corporate expenses C. Indirect operating expenses
used in the operations of the textile mill product segment. B. Interest expense D. Income taxes
D. An allocated portion of intangible assets used jointly by the textile mill product
segment and another industry segment. 18. In financial reporting for segments of a business enterprise, the segment results
includes a portion of
39. Segment assets do not include A. Interest expense C. Indirect operating expenses
A. Current assets that are used in the operating activities of the segment, property, B. Extraordinary losses D. General corporate expenses
plant and equipment, assets that are the subject of finance leases, and intangible
assets. 42. An enterprise must disclose all of the following about each reportable segment if the
B. Income tax assets. amounts are used by the chief operating decision maker, except
C. Operating assets shares by two or more segments if a reasonable basis for A. Depreciation expense C. Interest expense
allocation exist. B. Allocated expense D. Income tax expense
D. Goodwill that is directly attributable to a segment or that can be allocated to a
segment on a reasonable basis. Required Disclosures
42. An enterprise must disclose all of the following about each reportable segment if the
34. Segment assets do not include amounts are used by the chief operating decision maker, except
A. Current assets used in the operating activities of the segment A. Depreciation expense C. Interest expense
B. Property, plant and equipment less accumulated depreciation, attributable to the B. Allocated expense D. Income tax expense
segment
C. Intangible assets less amortization attributable to the segment 41. In financial reporting for segments of a business, an enterprise should disclose all of
D. Deferred tax assets the following except
A. Types of products and services from which each reportable segment derives its
Segment Expense revenues
41. Under segment reporting, segment expense includes B. The title of the chief operating decision maker of each reportable segment
A. Extraordinary losses C. Factors used to identify the enterprise reportable segment
B. Interest expense, if the segment’s operations are primarily of a financial nature D. The basis of measurement of segment profit or loss and segment assets
C. Income tax expense
D. General administrative, head office expenses and other expenses that arise at Comprehensive
the enterprise level and relate to the enterprise as a whole 38. Which statement is incorrect concerning segment reporting?
I. Segment result is segment revenue minus segment expense.

II. Segment expense includes extraordinary items, interest expense, losses on sale Prime Costs & Conversion Costs
of investments, income tax expense and general and administrative expenses. 96. What are prime costs?
A. I only C. Both I and II A. The first costs incurred on a job
B. II only D. Neither I nor II B. Indispensable as distinguished from avoidable costs
C. Direct materials and direct labor
43. The following statements relate to segments. Which statement is incorrect? D. Cost incurred on joint products before the split-off point
A. The amount of revenue, expenses and pretax profit or loss from ordinary
activities attributable to the discontinuing segment during the current period and 93. Indirect labor is a
the related income tax expense are presented on the face of the income A. Non-manufacturing cost C. Period cost
statement side by side with the continuing segments. B. Prime cost D. Conversion cost
B. A segment is reportable if a majority if its revenue is earned from sales to
external customers and its revenue from sales to external customers and from Product Cost & Period Cost
transactions with other segments is 10% or more of the total revenue, external 39. For a manufacturing company, which of the following is a product rather than a period
and internal, of all segments cost?
C. If a segment is identified as reportable segment in the current period, prior A. Salaries of sales personnel C. Advertising expense
segment data presented for comparative purposes should be restated to reflect B. Depreciation of plant equipment D. Rent of office space
the newly reportable segment, even if that segment did not satisfy the 10%
thresholds in the prior period 94. Seawall Company insures its assets spending P2 million for insurance premium. The
D. A segment identified as reportable segment in the immediate preceding period amount it paid is generally considered as a
should not continue to be a reportable segment for the current period if its A. Conversion cost C. Semi-variable cost
revenue result and assets no longer satisfy the 10% thresholds when the B. Period cost D. Non-manufacturing cost
enterprise judges the segment to be of continuing significance
1. All of the following costs should be charged against revenue in the period in which
COST ACCOUNTING costs are incurred, except for
Cost Concepts A. Manufacturing overhead costs for a product manufactured and sold in the same
Factory Overhead accounting period.
89. Factory overhead includes B. Costs which will not benefit any future period.
A. All manufacturing costs C. Costs from idle manufacturing capacity resulting from unexpected plant
B. All manufacturing costs which may be variable or fixed, except direct material shutdown.
and direct labor D. Costs of normal shrinkage and scrap incurred for the manufacture of a product in
C. Indirect materials but not indirect labor ending inventory.
D. Indirect labor but not indirect materials
Variable Cost & Fixed Cost
92. The sale of scrap from a manufacturing process usually would be 96. How would you describe a fixed cost?
A. Decrease in factory overhead control C. Decrease in finished A. It may change in total where such change is unrelated to changes in production.
goods control B. It may change in total where such change is related to changes in production.
B. Increase in factory overhead controlD. Increase in finished goods control C. It is constant per unit of change in production.
D. It may change in total where such change depends on production within the D. Production in process at the end of a period is restated in terms of completed
relevant range. units.
Job-Order Costing 96. Queue Company, a manufacturing concern, engaged your services to develop a
40. The source documents for assigning costs to work in process in a job order cost factory overhead application rate for use in a process costing system Which of the
system are following could be used as a denominator?
A. Invoices, time tickets, and the predetermined overhead rate. A. Actual factory overhead C. Estimated factory overhead
B. Materials requisition slips, time tickets, and the predetermined overhead rate. B. Actual direct labor hours D. Estimated direct labor hours
C. Materials requisition slips, payroll register, and the predetermined overhead rate.
D. Materials requisition slips, time tickets and the actual overhead costs. 97. In the computation of manufacturing cost per equivalent unit, the weighted average
method of process costing considers
89. A direct labor overtime premium should be charged to a specific job when the A. Current cost only
overtime is caused by B. Current cost plus cost of ending work in process inventory
A. Management's requirement that the job be completed before the annual factory C. Current cost plus cost of beginning work in process inventory
vacation closure. D. Current cost less cost of beginning work in process inventory
B. Increased overall level of activity
C. Customer's requirement for early completion of job 90. The FIFO process costing method will produce the same cost of goods manufactured
D. Management's failure to include the Job in the production schedule. as the average method if
A. The goods produced are homogenous in nature
95. Petite Company uses the job order cost system. The company should record the use B. There are no lost units
of indirect materials previously purchased as decrease in C. There is no beginning inventory
A. Factory overhead applied C. Stores control D. Beginning and ending inventories are equal
B. Factory overhead control D. Work-in-process control
29. How does first-in, first-out method of process costing differ from weighted average?
91. In job order costing, what journal entry should be made for the return to the A. FIFO considers the stage of completion of beginning work-in-process inventory in
storekeeper of direct materials previously issued to factory for use in a particular job? computing equivalent units of production, but weighted average does not.
A. Debit materials and credit factory overhead B. FIFO does not consider the stage of completion of beginning work-in-process
B. Debit materials and credit work in process inventory in computing equivalent units of production, but weighted average
C. Debit purchase returns and credit work in process does.
D. Debit work in process and credit materials C. FIFO is applicable only to those companies using the first-in, first-out inventory
pricing method, but the weighted average method may be used with any
Process Costing inventory pricing method.
90. Which of the following is not a characteristic of process cost system? D. FIFO allocates cost based on whole units, but the weighted-average method
A. Costs are posted to departmental work in process accounts uses equivalent units.
B. Costs are not assigned to specific units but to a manufacturing process or
department MANAGERIAL ACCOUNTING
C. Costs of raw materials, direct labor and factory overhead applicable to each job 97. The branch of accounting that is concerned primarily with providing information for
are compiled to arrive at an average unit cost. internal users is called
A. Auditing C. Financial accounting D. Have no effect on the current ratio or earnings per share.
B. Managerial accounting D. Income tax accounting
98. Kemp Company’s income statement showed that the company was profitable for the
100.The singularly unique function performed by certified public accountants is fiscal year that had just ended. Over the past five years, the balance in the company’s
A. Tax preparation C. The attest function trade accounts receivable account has grown dramatically while sales have remained
B. Management advisory services D. The preparation of financial relatively flat. Assuming this trend continues, which of the following statements is
statements correct?
A. The company likely will encounter no significant problems in the next five years.
Cost-Volume-Profit Analysis B. The company likely will show no profit in the next fiscal year.
36. In cost accounting, the term "relevant range" refers to the range over which the C. The company may begin to experience shortages of cash.
A. Relevant costs are incurred C. Cost may fluctuate D. The company’s current ratio will continue to increase.
B. Cost relationships are valid D. Production may vary
Master Budget
Variable Costing & Absorption Costing 53. Zero Base Budgeting
37. West Company desires to prepare an income statement as an internal report using A. Is a process in the budget preparation which requires systematic consideration of
the direct (variable) costing method. In such a case, fixed selling and administrative all programs, projects and activities with the use of defined ranking procedures.
expenses would be B. Focuses on the objects of expenditures such as salaries and wages, traveling
A. Used in the computation of operating income but not in the computation of the expenses, freight, supplies, materials and equipment.
contribution margin. C. Is a financial plan to augment the general budget or to adjust a previous budget
B. Used in the computation of the contribution margin. which is deemed inadequate for the purpose for which it is intended.
C. Treated in the same manner as variable selling and administrative expenses. D. Is a budget which covers items not adequately provided or not at all included in
D. Ignored and not used. the general appropriation law.
38. How will the variable selling and administrative expenses be used in the preparation Capital Budgeting
of Income statement to be used as an internal report applying the variable costing 94. The accounting area in which the only objective of depreciation accounting relates to
method? the effect of depreciation changes upon tax payments is
A. Will not be used. A. Cost-volume-profit analysis C. Income determination
B. Will be used in the computation of operating income but not in the computation of B. Capital budgeting D. Responsibility accounting
contribution margin.
C. Will be used in computation of contribution margin.
D. Will be treated the same as fixed selling and administrative expenses.
Financial Statement Analysis

97. Recording the payment (as distinguished from the declaration) of a cash dividend
whose declaration was already recorded will
A. Increase the current ratio but have no effect on working capital.
B. Decrease both the current ratio and working capital.
C. Increase both the current ratio and working capital.
GOVERNMENT GRANTS and accounting entity.

79. These represent assistance by government in the form of transfers of resources to an A. Cash disbursement ceiling C. Fund
enterprise in return for past or future compliance with certain conditions relating to the B. Appropriation D. Budget
operating activities of the enterprise.
A. Government grants C. Government donation Local Government Fund
B. Government assistance D. Government aid 100.It is a local government fund which consists of money and resources raised or
earmarked by law which is available exclusively for such purposes as repair and
98. What is the acceptable approach in accounting for government grants? Government construction of roads, bridges and highways, and acquisition of land and buildings for
grants should be public use.
A. recognized as income over the periods necessary to match them with the related A. Infrastructure fund C. Trust fund
costs. B. Special education fund D. Barrio development fund
B. credited directly to donated capital
C. credited directly to retained earnings. 53. This fund constitutes the annual contribution from each province, city or municipality
D. deferred and amortized over maximum period of 20 years in the amounts approved by law for each barrio and which is spent solely for
community development projects.
43. These are government grants whose primary condition is that an enterprise qualifying A. Barrio development fund C. Special education fund
for them should purchase, construct, or otherwise acquire long-term assets. B. Infrastructure fund D. Trust fund
A. Grants related to assets C. Government gift
B. Grants related to income D. Government appropriation Appropriations
99. Congressional authorization in the form of law to make payment out of the public
45. Which is incorrect concerning recognition of government grants as income? treasury for specific purposes after compliance with certain conditions is known as
A. Grants in recognition of specific expenses should be recognized as income over A. Appropriation C. Budgeting
the period of the related expense. B. Allotment D. Obligation
B. Grants related to depreciable assets should be recognized as income over the
periods and in proportion to the depreciation of the related assets. 54. Standing appropriation is an appropriation
C. Grants related to nondepreciable assets requiring fulfillment of certain conditions A. Made annually which does not require periodic action by the legislative body.
should be recognized as income over the periods which bear the cost of meeting B. For a particular purpose which has not been included in the annual appropriation
the conditions. act on account of lack of time or on account of its importance, the Congress and
D. Government grants that become receivable as compensation for expenses or the President deem it wise to consider it separately.
losses already incurred or for the purpose of giving immediate financial support C. Provide an additional amount to the original appropriation which proved to be in
to the enterprise with no future related costs should be recognized as an inadequate for the purpose intended.
adjustment of retained earnings. D. To meet emergency expenditures.
NATIONAL GOVERNMENT ACCOUNTING SYSTEM 52. Continuing appropriation is an appropriation

Basic Concepts A. For incurring obligations for the current fiscal year only
98. This is a sum of money or other government resources set aside for the purpose of B. Which extends beyond one fiscal year
carrying cut specific activities or attaining certain objectives in accordance with C. For a definite period in excess of one fiscal year
specific regulations, restrictions or limitations, and constitutes an independent fiscal D. For an indefinite period in excess of one fiscal year
expenditure levels by various agencies of the government through the

Constitutional Provisions Department of Budget and Management
30. The following statements are constitutional provisions. Which statement is incorrect? B. The enactment of the general appropriation law by Congress
A. The President shall submit to Congress within thirty days from the opening of C. The operational aspects of budgeting to ensure that public funds are spent only
every regular session, as the basis of the general appropriations bill, a budget of for the specific purposes for which they are appropriated
expenditures and sources of financing, including receipts from existing and D. The periodic reporting by government agencies of their performance under the
proposed revenue measures. approved budget and the action of COA in assuring the fidelity of government
B. The Congress may contract or guarantee foreign loans on behalf of the Republic officials by carrying out the intent of Congress in regard to the handling of
of the Philippines with the prior concurrence of the Monetary Board and subject receipts and expenditures in accordance with the approved budget
to such limitations as may be provided by law.
C. No law shall be passed authorizing any transfer of appropriations. 31. Budget preparation is
D. All appropriation, revenue or tariff bills, bills authorizing increase of public debt, A. Done by the President through the DBM usually applying ZBB concept.
bills of local application and private bills shall originate exclusively in the House B. The enactment of the general appropriation law by Congress.
of Representatives but the Senate may propose or concur with amendments. C. The implementation of the approved national budget by the government
agencies.
97. The Philippines Constitution provides that D. Periodic reporting by the governmental agencies of their performance in relation
A. Where there occurs a budget deficit, the President of the Philippines shall have to the approved budgets.
the power to levy and impose taxes in order to meet the deficit.
B. GAAP as well as sound management and fiscal administrative shall be observed 54. The President of the Republic of the Philippines shall submit to Congress a national
in the utilization of government funds, provided they do not contravene existing government budget as the basis of the general appropriation bill within how many is
laws and regulations. from the opening of every regular session?
C. The local chief executive is principally responsible for the fiscal administration of A. Thirty C. Ninety
the local government. B. Sixty D. Fifteen
D. The Congress may not increase the appropriations recommended by the
President of the Philippines for the operation of the Government as specified in 97. Congressional authorization in the form of law to make payment cut of the public
the budget treasury for specific purposes after compliance with certain conditions is known as
A. Appropriation C. Budgeting
99. No money shall be paid out of the National Treasury except in pursuance of an B. Allotment D. Obligation
appropriation law. Consequently, a government official who disburses government
funds beyond the approved budget may be charged with 55. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
A. Technical malversation C. Irregular disbursement bills of local application, and private bills shall originate exclusively in the
B. Graft and corruption D. Estafa A. House of Representatives C. Department of Budget and
Management
National Budget Cycle B. Senate D. Commission on Audit
58. The government budget cycle consists of preparation, authorizing, execution and
accountability. Budget authorization means 100.All appropriation, revenue or tariff bills, bills authorizing Increase of the public debt,
A. The estimation of government revenues, the determination of budgetary priorities bills of local application, and private bills shall originate exclusively in the
and activities and the translation of approved priorities and activities into A. House of Representatives but the Senate may propose or concur with
amendments 98. A feature of government accounting that provides for the calling or maximum amount
B. Senate but the House of Representatives may propose or concur with an agency can spend or incur in the performance of its functions is known as
amendments A. Budgetary accounting C. Obligation accounting
C. Executive Department but Congress may propose and concur with amendments B. Responsibility accounting D. Fund accounting
D. Department of Budget and Management subject to the approval of the
Commission on Audit. 60. Technically, which is a government income but not a government revenue?
A. Taxes C. Loans and borrowing
32. It is the preparation of the national budget where the total estimated revenue must be B. Grants and aids D. Proceeds from sale of property
more than the total estimated expenditures.
A. Balanced budget C. Special budget 100.Which one of the following is not considered government income?
B. Supplemental budget D. Performance budget A. Proceeds from loans and borrowings
B. Government buildings
100.The phase in the national budget cycle which involves the comparison of C. Grants and aids received from foreign governments
performance with predetermined plans and the evaluation of expenditures and D. Taxes
performance is called
A. Execution C. Preparation Specific Income
B. Authorization D. Accountability 98. Specific income accounts under the new government accounting system encompass
I. All taxes imposed on income, properties and use or sale of goods and services,
Government Accounting System taxes on international trade and transactions, and other taxes including fines and
99. The government entity charged with the responsibility and approval of accounting penalties.
systems for government agencies is the II. All types of revenue or income generated by government agencies in the
A. Commission on Audit C. Bureau of Treasury exercise of their administrative and regulatory function, income from public
B. Department of Budget and Management D. Bangko Sentral ng Filipinas enterprises or investments, and income from grants and donations.
99. Which is not a function of the Department of Budget and Management? B. II only D. Neither I nor II
A. The DBM shall be responsible for the design, preparation and approval of
accounting systems of government agencies 37. Specific income accounts of the government include all of the following, except
B. The DBM shall summarize all budget proposals and submit the same to the A. Income taxes
President and the cabinet before finalization and submission to Congress. B. Taxes on properties and use or sale of goods and services
C. The DBM shall keep the general accounts of the government for such period as C. Fines and penalties
may be provided by law, preserve the vouchers and supporting papers pertaining D. Grants and donations
thereto
D. The DBM shall monitor the budget execution. Personal Services
99. In government accounting, personal services include
100.What is the new government accounting system? A. Salaries, allowances, bonuses, cash gifts, incentives and other benefits.
A. Cash basis C. Accrual basis B. Traveling expenses, training and seminar, water electricity, telephone, internet
B. Modified cash basis D. Modified accrual basis and postage.
C. Advertising, rent insurance, spare parts, gasoline and oil, auditing and
consultancy, and taxes. line method is used.

D. Bank charges, interest, commitment fees and losses incurred on foreign D. The use of corollary and negative entry shall not be stopped
exchange transactions.
Maintenance and other operating expenses

38. Maintenance and other operating expenses in government accounting include
A. Allowance, bonuses and other incentives
B. Telephone, internet, advertising, rent and insurance
C. Bank charges and interest
D. Losses incurred relative to foreign exchange transactions
Government Accounting Reports

35. Which government body prepares the annual financial statements of the national
government, local government, agencies and government-owned or controlled
corporations?
A. Commission on Audit
B. Department of Budget and Management
C. Bureau of Treasury
D. Chief Accountant of each government agency
98. The government accounting reports include all of the following, except
A. Balance sheet C. Cash flow statement
B. Statement of income and expense D. Auditor’s report
Comprehensive
33. Which is incorrect concerning the new government accounting system?
A. The modified accrual basis is adopted.
B. Only one fund is maintained for a more simplified accounting.
C. The declining balance method is used in recording depreciation.
D. The corollary and negative entry shall be stopped.
100.Which statement is incorrect under the new government accounting system?

A. Under the modified accrual basis, all expenses are recognized when incurred
and income shall be on accrual basis except for transactions where accrual basis
is impractical or where other methods are required by law.
B. A new coding structure and a new chart of accounts with a three-digit numbering
system is adopted.
C. Depreciation is now regularly taken up in government accounting and the straight

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THEORY OF ACCOUNTS Comprehensive Examination

STANDARD SETTING PROCESS D. Conceptual framework

1. Which of the following statements regarding international accounting standards is not

2. The purposes of the ASC Framework do not include

1. Which is incorrect concerning the ASC Framework?

8. Which statement is incorrect concerning the ASC framework?

B. Current earnings based on accrual basis accounting A. I only. C. I and II.

A. Elements of financial statements. D. Recognized when paid for,

Liabilities & Equity Revenues and gains

B. Liability D. Equity C. Expense is synonymous with expenditure.

A. Historical cost only A. Conservatism C. Relevance

B. II only D. Neither I nor II contributions from owners during the period.

ASC SFAS No. 1

11. Which of the following statements is incorrect? Measurement in terms of Money

postulates? II. Income and expenses, including gains and losses.

Purpose of Financial Statements Fair Presentation & Compliance with GAAP

statements is incorrect? A. I, II and III C. I only

information. B. Equity investment in unconsolidated subsidiary

B. Sales of plant and equipment D. Sales of product

26. Ordinary activities are

Expenses C. Gain from discontinued operations, net of income tax

the income statement.

results of operations? prohibition

directors has both approved and announced the planned discontinuance,

face of the income statement. capital of the company.

value. virtue only of those dealings.

24. Related parties include 64. Related parties do not include

B. Associates D. Trade unions financial statements.

II. Achieve an accurate statement of assets and equities. occurs is called

Balance Sheet Classification RECEIVABLES

Chiang Kai Shek College Page 55 of 151

9. Which method of recording uncollectible accounts expense is consistent with accrual

Which of the following cost shall be included in the cost of inventories?

Manufacturing Concern Service Providers

A. Cost of goods sold C. Selling expenses A. Average cost C. Joint cost

LIFO method. most conservative net income?

Periods of Rising Prices Gross Profit Method

A. Include net markups and exclude net markdown

Presentation & Disclosure Requirements

33. When a portion of inventories has been pledged as security on a loan

Trading Securities Temporary Decline

balance sheet date should

Reclassification of Investments AFS to HTM

LONG-TERM INVESTMENTS A. Deferred charge C. Long-term investment

Decrease in equity interest Preferred Shares

A. I only. C. I and II. B. Be recognized as expense D. Debited to revaluation surplus

B. Allocation D. Expiration physical existence are intangible assets.

B. II only D. Neither I nor II in an active market, whichever is higher.

A. Provision C. Accrued liability and measurable loss?

required to settle the obligation. the current best estimate.

Contingent Asset Presentation & Disclosure Requirements

Interest Expense Recognition

A. Be expensed when incurred

Treasury Bonds BORROWING COSTS

Free Rent Lessee Accounting - Finance Lease

ACCOUNTING FOR EMPLOYEE BENEFITS Past Service Cost

present value of the defined benefit obligation.

of the purchase and subsequent sale of treasury stock?

Nonmonetary Exchange Stock Dividend

contributed capital of the company.

Treasury Stock Appropriated Retained Earnings

90. Treasury stock should be reported Deficit

Antidilutive Shares 23. Which is incorrect concerning EPS calculations?