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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

FINANCIAL STATEMENTS

1. The components of the financial statements include all, except

a. Balance sheet, income statement and cash flow statement
b. Statement of changes in equity or statement of recognized gains and losses
c. Notes, comprising a summary of significant accounting policies and other
explanatory notes
d. Additional statements such as environmental reports and value added statements
2. Which is incorrect concerning fair presentation of financial statements?
a. In virtually all circumstances, a fair presentation is achieved by compliance with
applicable Philippine Financial Reporting Standards.
b. Financial statements shall present fairly the financial position, performance and
cash flows of an enterprise.
c. An enterprise whose financial statements comply with PFRS shall make an explicit
and unreserved statement of such compliance in the notes.
d. Inappropriate accounting treatments are rectified either by disclosure of the
accounting policies used or by note or explanatory material.

3. Which is incorrect concerning the overall considerations in the preparation and

presentation of financial statements?
a. An enterprise shall prepare its financial statements, except for cash flow
information, under the accrual basis of accounting.
b. The presentation and classification of items in the financial statements shall be
retained from one period to the next.
c. Assets and liabilities, income and expenses, shall not be offset unless required or
permitted by another PFRS.
d. Comparative information need not be disclosed in respect of the previous period for
all numerical information in the financial statements.
4. Which is incorrect concerning the concept of materiality and aggregation?
a. Materiality depends on the size and nature of the item judged in the particular
circumstances of its omission or misstatement.
b. Materiality provides that the specific disclosure requirements of a PFRS must be
met even if the resulting information is not material.
c. Items of a dissimilar nature or function shall be presented separately unless they
are immaterial.
d. Information is material if its nondisclosure could influence the economic decisions of
users taken on the basis of the financial statements.

5. An asset shall be classified as current when it satisfies any of the following criteria
(choose the incorrect one).
a. It is expected to be realized in or is intended for sale or consumption in the entity’s
normal operating cycle.
b. It is held primarily for the purpose of being traded.
c. It is expected to be realized in more than twelve months after the balance sheet
date.
d. It is cash or a cash equivalent which is unrestricted from being exchanged or used
to settle a liability for at least twelve months after the balance sheet date.
6. The operating cycle of an enterprise
a. Is set by the industry’s trade association usually on an average length of time for all
firms which are members of the association.
b. Is the time between the acquisition of assets for processing and their realization in
cash or cash equivalents.
c. Is the period of time normally elapsed from the time the enterprise expends cash to
the time it converts trade receivables back into cash.
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d. Causes the distinction between current and noncurrent items to depend on whether
they will affect cash within one year.
7. A liability shall be classified as current when it satisfies any of the following criteria
(choose the incorrect one)
a. It is expected to be settled in the entity’s normal operating cycle.
b. It is held primarily for the purpose of being traded.
c. It is due to be settled within twelve months after the balance sheet date.
d. The entity has an unconditional right to defer settlement of the liability for at least
twelve months after the balance sheet date.

8. Which can be classified as current liabilities even if they are due to be settled after
more than twelve months from balance sheet date?
a. Bank overdrafts
b. Dividends payable
c. Income taxes payable
d. Trade payables and accruals for employee and other operating costs

9. A long-term debt that is due to be settled within twelve months after the balance sheet
date is classified as noncurrent when
I. An agreement to refinance or reschedule payment on a long-term basis is
completed after balance sheet date and before the financial statements are
authorized for issue.
II. The entity has the discretion to refinance or roll over the obligation for at least
twelve months after the balance sheet date under an existing loan facility.
a. I only b. II only c. Both I and II d. Neither I nor II

10. When an entity breaches a covenant under a long-term loan agreement on or before
the balance sheet date with the effect that the liability becomes payable on demand,
the liability is classified as noncurrent when
I. The lender has agreed on or before the balance sheet date to provide a grace
period ending at least twelve months after the balance sheet date.
II. The lender has agreed after the balance sheet date and before the financial
statements are authorized for issue not to demand payment as a consequence
of the breach.
a. I only b. II only c. Both I and II d. Neither I nor II

11. Which statement is incorrect?

a. As a minimum, the face of the balance sheet shall include line items that are
sufficiently different in nature or function to warrant separate presentation.
b. The standard does not prescribe the order or format in which the line items are to
be presented.
c. Additional line items, headings and subtotals shall be presented on the face of the
balance sheet when such presentation is relevant to an understanding of the entity’s
financial position.
d. When entity presents current and noncurrent captions, it shall classify deferred tax
assets and deferred tax liabilities as current.

12. Biological assets are measured at initial recognition and every balance sheet date at
a. Cost c. Replacement cost
b. Fair value d. Fair value less estimated point of sale cost

13. The notes to financial statements should be presented in what order?

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

14. Accounting policies are

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

15. The summary of significant accounting policies shall describe

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

16. Nonfinancial disclosures include all of the following, except

a. The domicile and legal form of the enterprise, its country of incorporation and the
address of the registered office.
b. A description of the nature of the enterprise’s operations and its principal activities.
c. The name of the parent and the ultimate parent of the group.
d. Contingent liabilities and unrecognized contractual commitments.

17. Related parties include all of the following, except

a. Affiliates
b. Associates
c. Two enterprises that have a common director
d. Key management personnel, directors and officers of enterprise, and close family
members of such individuals

18. Unrelated parties include all of the following, except

a. Two venturers simply because they share joint control over a joint venture.
b. Providers of finance, trade unions, public utilities and government departments and
agencies simply by virtue of their normal dealings with an entity.
c. A customer, supplier, franchisor or general agent with whom an entity transacts a
significant volume of business, merely by virtue of the resulting economic
dependence.
d. Postemployment benefit plan for the benefit of employees of the entity.

19. Close family members of an individual are those who may be expected to influence or
be influenced by that individual in their dealings with the entity. Close family members
include all of the following, except
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse
d. Brothers and sisters

20. It is the method used in pricing transactions between related parties by making
reference to comparable goods sold in an economically comparable market to a buyer
unrelated to the seller.
a. No specific method c. Fixed price method
b. Cost plus 10 % mark-up method d. Uncontrolled price method

21. Which statement is incorrect concerning the presentation of the income statement?
a. The nature of expense method means that expenses are aggregated according to
their nature and are not reallocated among various functions within the enterprise.
b. The cost of sales method means that expenses are classified according to their
function as cost of sales, distribution or administrative activities.
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c. PAS 1 requires the use of the cost of sales method because this presentation often
provides more relevant information to the users than the nature of expense method.
d. The choice between the functional and natural presentation depends on historical
and industry factors and the nature of the entity.

22. The statement of recognized gains and losses shall include all of the following, except
a. Net unrealized loss on available for sale securities
b. Foreign currency translation gain
c. Revaluation surplus
d. Dividend paid to stockholders

23. Which statement is correct concerning the two concepts of capital?

I. Under a financial capital concept, such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity of the
enterprise.
II. Under a physical capital concept, such as operating capability, capital is
regarded as the productive capacity of the enterprise.
a. Both I and II b. Neither I nor II c. I only d. II only

24. Which is incorrect concerning accounting changes?

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

25. A change in accounting policy shall be made when

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

26. Prior period errors are omissions from and misstatements in the financial statements
for one or more periods arising from a failure or misuse of reliable information that
I. Was available when financial statements for those periods were authorized for
issue.
II. Could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements.
a. I only b. II only c. Both I and II d. Neither I nor II

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

28. A discontinued operation is a component of an entity that either has been disposed of
or is classified as “held for sale” and
I. Represents a separate major line of business or geographical area of
operations.
II. Is part of a single co-ordinated plan to dispose of a major line of business or
geographical area of operations.
III. Is a subsidiary acquired exclusively with a view to resale.
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a. I only b. I and II only c. III only d. I, II and III

29. A component of an entity is classified as “held for sale” when the following conditions
are met (choose the incorrect one)
a. Management is committed to a plan to sell.
b. The component is available for immediate sale.
c. An active program to locate a buyer is initiated.
d. The sale is highly probable with two years from the date of classification as held for
sale.

30. What is the appropriate presentation of a discontinued operation?

a. The amounts of revenue, expenses and pre-tax profit or loss from the activities
attributable to the discontinued operation during the current period, and the related
income tax expense are presented on the face of the income statement side by side
with the continuing operation.
a. Net profit or loss from the activities of discontinued operation is treated as
component of equity.
b. Net profit or loss from the activities of the discontinued operation is accounted for
as a change in accounting policy.
c. The results from the discontinued operation shall be presented as a single amount
net of tax below the income from continuing operations.

31. Which is incorrect concerning the balance sheet presentation of discontinued

operation?
a. Assets of the component held for sale are presented separately from all other
assets of the entity.
b. Assets of the component held for sale are measured at the lower of fair value less
cost to sell and their carrying amount.
c. Liabilities of the component held for sale are presented separately from all other
liabilities of the entity.
d. Noncurrent assets of the component held for sale shall continue to be depreciated.

32. It is a distinguishable component of an enterprise that is engaged in providing an

individual product or service or a group of related products or service and that is
subject to risks and returns that are different from those of other segments.
a. Geographical segment c. Both geographical and business segment
b. Business segment d. Neither geographical nor business segment

33. Segment assets include all of the following, except

a. Income tax assets
b. Goodwill directly attributable to a segment
c. Operating assets shared by two or more segments
d. Current assets used in the operating activities of the segment

34. What is the approach of looking into an enterprise’s organizational and management
structure and its financial reporting system in order to identify the enterprise’s
geographical and business segments?
a. Enterprise approach c. Operating approach
b. Segment approach d. Management approach

35. A business or geographical segment is a reportable segment if a majority of its revenue

is earned from sales to external customers and (choose the incorrect one)
a. Segment internal and external revenue is 10% or more of total internal and external
revenue of all segments
b. Segment external revenue is 10% or more of total internal and external revenue of
all segments
c. Segment result is 10% or more of the combined result of all segments in profit or
combined result of all segments in loss, whichever is greater in absolute amount
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d. Segment assets are 10% or more of the total assets of all segments

36. Interim financial reporting should be viewed primarily in which of the following ways?
a. As useful only if activity is spread evenly throughout the year
b. As if the interim period were an annual accounting period
c. As reporting under a comprehensive basis of accounting other than GAAP
d. As reporting for an integral part of an annual period

37. An interim financial report shall include, as a minimum, all of the following components,
except
a. Condensed balance sheet and income statement
b. Condensed cash flow statement
c. Condensed statement of changes in equity or statement of recognized gains and
losses
d. Accounting policies and explanatory notes

38. If the enterprise publishes interim financial reports quarterly on June 30, 2005, and the
financial year ends December 31, 2005, which is an incorrect interim reporting?
a. Balance sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding fiscal year.
b. Income statements for the current interim period and cumulatively for the current
financial year to date, with comparative income statement for the immediately
preceding year.
c. Cash flow statement cumulatively for the current financial year to date with
comparative statement for the comparable year-to-date period of the immediately
preceding year.
d. Statement of changes in equity cumulatively for the current financial year to date
with comparable statement for the comparable year-to-date period of the
immediately preceding year.

39. An enterprise should prepare a cash flow statement and should present it as
a. Integral part of the enterprise’s basic financial statements.
b. Supporting schedule for the amount appearing as cash and cash equivalent.
c. Note to financial statements.
d. Supplementary financial statement.

40. Cash flows in the cash flow statement are

a. Inflows and outflows of cash
b. Inflows and outflows of cash and cash equivalents
c. Inflows of cash and cash equivalents
d. Outflows of cash and cash equivalents

41. XYZ Company purchased a three-month Treasury bill. The company’s policy is to treat
as cash equivalents all highly liquid investments with an original maturity of three
months or less when purchased. How should this purchase be reported in the cash flow
statement?
a. As an outflow from operating activities c. As an outflow from investing activities
b. As an outflow from financing activities d. Not reported

42. Cash receipts from royalties, fees, commissions and other revenue are
a. Cash outflows for operating activities c. Cash inflows from investing activities
b. Cash inflows from operating activities d. Cash outflows for investing activities

43. Cash payments to acquire equity or debt instruments of other enterprises are
a. Cash outflows for financing activities c. Cash outflows for investing activities
b. Cash inflows from financing activities d. Cash inflows from investing activities

44. Cash receipts from issuing shares and other equity instruments are
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a. Cash inflows from financing activities c. Cash outflows for investing activities
b. Cash inflows from investing activities d. Cash outflows for financing activities

45. Cash payments to owners to acquire or redeem the enterprise’s shares are
a. Cash inflows from financing activities c. Cash inflows from investing activities
b. Cash outflows for financing activities d. Cash outflows for investing activities

46. Interest payments to lenders and other creditors should be classified as cash outflows
for
a. Operating activities c. Borrowing activities
b. Lending activities d. Financing activities

47. Dividend payments to owners should be classified as cash outflows for

a. Operating activities c. Financing activities
b. Investing activities d. Ordinary activities

48. Cash flows arising from income taxes should be separately disclosed and should be
classified as
a. Operating activities c. Investing activities
b. Financing activities d. Extraordinary activities

49. The aggregate cash flows from acquisition and disposal of a subsidiary should
a. Be classified as operating activities c. Be classified as financing activities
b. Be classified as investing activities d. Not be reported

50. Which can qualify as cash equivalent?

a. Equity securities
b. Six-month certificate of deposit
c. Preferred shares with specified redemption date and acquired three months before
redemption date
d. One-year treasury bills maturing in three months from balance sheet date.

51. Which of the following cash flows does not appear in a cash flow statement using
indirect method?
a. Net cash flow from operating activities c. Cash inflow from sale of equipment
b. Cash received from customers d. Cash outflow for dividend payment

52. In a cash flow statement using the indirect approach for operating activities, an
increase in inventory should be presented as
a. Outflow of cash c. Inflow and outflow of cash
b. Addition to net income d. Deduction from net income

53. Which should not be disclosed in the cash flow statement using the indirect method?
a. Interest paid, net of amounts capitalized
b. Income taxes paid
c. Cash flow per share
d. Dividends paid on preferred stock

54. How should a gain from the sale of used equipment for cash be reported in a cash flow
statement using the indirect method?
a. In investing activities as a reduction of the cash inflow from the sale
b. In investment activities as a cash outflow
c. In operating activities as a deduction from income
d. In operating activities as an addition to income

55. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a
cash flow from investing activities equals the carrying amount of the equipment
a. Plus the gain
b. Plus the gain and less the amount of tax attributable to the gain
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c. Plus both the gain and the amount of tax attributable to the gain
d. With no addition or subtraction

56. In a cash flow statement, if used equipment is sold at loss, the amount shown as a
cash flow from investing activities equals the carrying amount of the equipment
a. Less the loss and plus the amount of tax attributable to the loss
b. Less both the loss and the amount of tax attributable to the loss
c. Less the loss
d. With no addition or subtraction
57. On July 1, 2005 ABC Company signed a 20-year building lease that it reported as a
finance lease. ABC paid the monthly lease payments when due. How should ABC
report the effect of the lease payments in the financing activities section of its 2005
cash flow statement?
a. As an inflow equal to the present value of future lease payments at July 1, 2005
less the 2005 principal and interest payments
b. As an outflow equal to the 2005 principal and interest payments
c. As an outflow equal to the 2005 principal payments only
d. The lease payments should not be reported in the financing activities section
58. Financing activities are the
a. Activities that result in changes in the size and composition of equity capital and
borrowings of the enterprise.
b. Acquisition and disposal of long-term assets and other investments not included in
cash equivalents.
c. Principal revenue-producing activities of the enterprise.
d. Borrowings and subsequent payments of the borrowings only.
59. Bank overdrafts are
a. Component of cash and cash equivalents if they are repayable on demand and the
bank balance often fluctuates from positive to negative.
b. Investing activities
c. Operating activities
d. Financing activities
60. A company’s wages payable increased from the beginning to the end of the year.
Under the direct method, cash paid for wages would be
a. Salary expense plus beginning wages payable
b. Salary expense plus the increase in wages payable
c. Salary expense less the increase in wages payable
d. The same as salary expense
61. An enterprise’s accounts receivable decreased from beginning to the end of the year.
In the cash flow statement using the direct method, the cash collected from customers
would be
a. Sales revenue plus accounts receivable at the beginning
b. Sales revenue plus the decrease in accounts receivable
c. Sales revenue minus the decrease in accounts receivable
d. The same as sales revenue
62. Which of the following information would be added back to the net income when
reporting cash flow from operating activities using the indirect method?
a. Excess of treasury stock acquisition cost over sales proceeds
b. Bond discount amortization
c. Bond premium amortization
d. Extraordinary gain
63. Which of the following information should be disclosed as supplemental information in
the cash flow statement?
a. Cash flow per share
b. Conversion of debt to equity
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c. Issue of common stock for cash

d. Purchase of treasury stock for cash at more than par value
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