CONCEPTUAL FRAMEWORKS

Elements of Financial Statements

1. The elements directly related to the measurement of financial position are

a. Assets, liabilities, equity, income and expense
b. Assets, liabilities and equity
c. Income and expense
d. Assets and liabilities
2. The elements directly related to the measurement of financial performance are
a. Assets, liabilities, equity, income and expense
b. Assets, liabilities and equity
c. Income and expense
d. Sales and cost of goods sold
3. It is a resource controlled by the entity as a result of past event and from which future economic benefits are
expected to flow to the entity.
a. Asset
b. Liability
c. Equity
d. Income
4. It is a present obligation of an entity arising from past event the settlement of which is expected to result in
an outflow from the entity of resources embodying economic benefits.
a. Asset
b. Liability
c. Equity
d. Expense
5. It is the residual interest in the assets of the entity after deducting all of the liabilities.
a. Income
b. Expense
c. Net income
d. Equity
6. It is an increase in economic benefit during the accounting period related to an increase in asset or a
decrease in liability that results in increase in equity other than contribution from owners.
a. Asset
b. Liability
c. Income
d. Expense
7. It is a decrease in economic benefit during the accounting period related to a decrease in asset or an increase
in liability that results in decrease in equity other than distribution to owners.
a. Asset
b. Liability
c. Income
d. Expense
8. This arises in the course of ordinary regular activities and is referred to by a variety of different names
including sales, fees, interest, dividends, royalties and rent.
a. Income
b. Revenue
c. Profit
d. Gain
9. Which statement in relation to income is true?
a. Income encompasses both revenue and gain.
b. Revenue encompasses both income and gain.
c. Gain encompasses both income and revenue.
d. Income is the same as revenue.
10. It is the process of incorporating in the statement of financial position or statement of comprehensive
income an item that meets the definition of an element of the financial statements.
a. Recognition
b. Measurement
c. Realization
d. Allocation
11. When should an item that meets the definition of an element be recognized?

1905 Page 1 of 7
 a. When it is probable that any future economic benefit associated with the item will flow to or from
the entity.
b. When the element has a cost or value that can be measured with reliability.
c. When the entity obtains control of the rights or obligations associated with the item.
d. When it is probable that any future economic benefit associated with the item will flor to or from
the entity and the item has a cost or value that can be measured with reliability.
12. An asset is recognized when
a. It is probable that future economic benefit will flow to the entity.
b. The cost or value of the asset can be measured reliably.
c. The entity obtains control of the rights associated with the asset.
d. It is probable that future economic benefit will flow to the entity and the cost or value of the asset
can be measured reliably.
13. A liability is recognized when
a. It is probable that an outflow of future economic benefit will be required to settle the obligation.
b. The amount of the obligation can be measured reliably.
c. It is probable that an outflow of future economic benefit will be required to settle an obligation and
the amount of the obligation can be measured reliably.
d. When the entity obtains control of the obligation.
14. An income is recognized when
a. It is probable that future economic benefit will flow to the entity and the economic benefit can be
measured reliably.
b. It is possible that future economic benefit will flow to the entity and the economic benefit can be
measured reliably.
c. The entity obtains control of the future economic benefit.
d. The future economic benefit can be measured reliably.
15. An expense is recognized when
a. It is probable that a decrease in future economic benefit has occurred.
b. The decrease in future economic benefit can be measured reliably.
c. It is probable that a decrease in future economic benefit has occurred and the decrease in the future
economic benefit can be measured reliably.
d. It is probable that an increase in future economic benefit has occurred and the increase in future
economic benefit can be measured reliably.
16. It is the process that involves the simultaneous or combined recognition of revenue and expenses that result
directly from the same transactions and other events.
a. Matching of cost with revenue
b. Matching of revenue with cost
c. Systematic and rational allocation
d. Immediate recognition
17. When economic benefits are expected to arise over several accounting periods and the association with
income can only be indirectly determined, expenses are recognized on the basis of
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
d. Realization
18. An expense is recognized immediately
a. When an expenditure produces no future economic benefit.
b. When cost incurred ceases to qualify as an asset.
c. When an expenditure produces future economic benefit.
d. When an expenditure produces no future economic benefit and when cost incurred ceases to qualify
as an asset.
19. It is the process of determining the monetary amount at which the elements of the financial statements are
recognized in the financial statements.
a. Measurement
b. Recognition
c. Presentation
d. Recording
20. Which measurement is not currently used in practice?
a. Present value
b. Net realizable value
c. Current replacement cost
d. Inflation-adjusted cost

1905 Page 2 of 7
21. Which measurement attributes is the most relevant?
a. Present value
b. Exit value
c. Current cost
d. Realizable value
e. Present value
22. It is the amount of cash that would have to be paid if asset was acquired currently.
a. Historical cost
b. Current cost
c. Realizable value
d. Present value
23. Which term best describes the amount that represents the immediate purchase cost of an asset?
a. Historical cost
b. Realizable value
c. Present value
d. Current cost
24. It is the amount of cash that could currently be obtained by selling the asset in an orderly disposal.
a. Realizable value
b. Fair value
c. Market value
d. Present value
25. Asset measurements in financial statements
a. Are confined to historical cost
b. Are confined to historical cost and current cost
c. Reflect several financial attributes
d. Do not reflect output value
26. Which of the following should be considered a current value measure?
a. Replacement cost and exit value
b. Replacement cost and discontinued cash flow
c. Exit value and discounted cash flow
d. Replacement cost, exit value and discounted cash flow
27. The primary measurement basis is
a. The current market price if the asset currently held was sold on the open market.
b. The current market price if the asset held was purchased on the open market.
c. The present value of the cash flows that the asset is expected to generate.
d. The market price at the date the asset was acquired.
28. Which measurement basis is currently used in financial statements?
a. Present value
b. Present value and settlement value
c. Settlement value and fair value
d. Present value, settlement value and fair value
29. Which statement describes the revenue recognition principle?
a. Cash is received
b. It is probable that future economic benefit will flow to the entity and the amount can be measured
reliably.
c. Production is complete and there is an active market for the product.
d. Production is complete.
30. The revenue principle states that revenue shall be recognized at a point when
a. An exchange transaction has occurred and the earning process is essentially complete.
b. An order for shipment of merchandise has been received.
c. A contract between buyer and seller has been received.
d. The seller has shipped merchandise under terms that customer need to pay until sold.
31. Generally, revenue is recognized
a. At the point of sale.
b. When cause and effect are associated.
c. At the point of cash collection.
d. At appropriate points throughout the operating cycle.
32. Normally, revenue from sale of goods is recognized
a. When the customer order is received.
b. When the customer order is accompanied by a check.
c. Only if the transaction will create an account receivable.

1905 Page 3 of 7
 d. When the title to the goods changes.
33. Revenue may be recognized
a. At the point of sale
b. During production
c. At the end of production
d. All of the choices may be acceptable for revenue recognition
34. Which of the following may not be an acceptable deviation from recognizing revenue at the point of sale?
a. Upon receipt of cash
b. During production
c. Upon receipt of order
d. End of production
35. Which of the following is not a accepted basis for recognition of revenue?
a. Passage of time
b. Performance of service
c. Completion of percentage of a project
d. Upon signing of contract
36. Which of the following represents the least desirable choice of the recognition of revenue?
a. During production
b. When a sale occurs
c. When cash is collected
d. When production is completed
37. Revenue from an artistic performance is recognized when
a. The audience registers for the event online.
b. The tickets for the concert are sold.
c. Cash has been received from the ticket sales.
d. The event takes place.
38. Income recognized using the installment method of accounting equals cash collected multiplied by
a. Net profit rate
b. Net profit rate adjusted for uncollectable accounts
c. Gross profit rate
d. Gross profit rate adjusted for uncollectable accounts
39. Under the installment method of accounting, gross profit on an installment sale is recognized in income.
a. On the date of sale
b. On the date the final cash collection is received
c. In proportion to the cash collection
d. After cash collections equal to the cost of goods sold have been received.
40. Under the cost recovery method of accounting, gross profit on an installment sale is recognized
a. After cash collection equal to the cost of goods sold have been received
b. In proportion to the cash collection
c. On the date the final cash collection is received
d. On the date of sale
41. Which statement justifies the use of the cost recovery method account for installment sales?
a. The sales contract provides that title only passes to the purchaser when all payments have been
made.
b. No cash payments are due until one year
c. Sales are subject to a high rate of return
d. There is no reasonable basis for estimating collectability
42. The installment method of recognizing revenue
a. Should be used when no reasonable basis exists for estimating the collectability
b. Is not a generally accepted accounting principle under any circumstances
c. Should be used for tax purposes
d. Is an acceptable alternative accounting principles
43. Under which circumstances is the installment method appropriate for the recognition of revenue?
a. For any sales where collection is spread over a reasonable long period of time
b. In any situation where management wishes to delay the recognition of revenue in order to smooth
income.
c. For sales where collection is spread over a reasonable long period of time and significant doubts
exists about ultimate collection of installments receivable.

1905 Page 4 of 7
 d. For sales where collection is spread over a reasonable long period of time and no significant doubt
exists about ultimate collection of installments receivable
44. When using the installment method
a. Gross profit is deferred until all cash is received
b. Gross profit is recognized only after the amount of cash collected exceeds the cost of goods sold.
c. Revenue, costs and gross profit are recognized proportionally as cash is received from the sale.
d. Total revenue and costs are recognized at the point of sale but gross profit is deferred in proportion
to the cash that is uncollected from the sale.
45. The cost recovery method of revenue recognition
a. Is used only when circumstances surrounding a sale are so uncertain that earlier recognition is
impossible.
b. Is used in accounting for real estate sales.
c. Is similar to percentage of completion accounting
d. Is never acceptable under GAAP.
46. The term “revenue recognition” conventionally refers to
a. The process of identifying transactions to be recorded as revenue in an accounting period
b. The process of measuring and relating revenue and expenses of an entity for an accounting period.
c. The earning process which gives rise to revenue realization
d. The process of identifying those transactions that result in an inflow of assets from customer
47. Under what condition is it proper to recognize revenue prior to the sale of the merchandise?
a. When the concept of consistency is compiled with.
b. When the revenue is to be reported as an installment sale.
c. When the ultimate sale of the goods is at an assured sales price.
d. When management has a long-established policy.
48. Which term means the process the converting noncash resources and rights into cash or claim to cash?
a. Allocation
b. Collection
c. Recognition
d. Realization
49. Gains in assets unsold are identified in a precise sense by the term
a. Unrecorded
b. Unrealized
c. Unrecognized
d. Unallocated
50. The term “recognized” is synonymous with the term
a. Recorded
b. Realized
c. Matched
d. Allocated
51. Which statement conforms to the realization concept?
a. Depreciation was assigned to product unit cost
b. Equipment was sold in exchange for a note receivable
c. Cash was collected on accounts receivable
d. Product unit costs were assigned to costs of goods sold
52. Revenue may result from
a. A decrease in an asset from primary operations.
b. An increase in an asset from incidental transactions.
c. An increase in liability from incidental transactions.
d. A decrease in a liability from primary operations.
53. When should an entity use the installment method of revenue recognition?
a. When collectability of installment accounts receivable is reasonable predictable.
b. When repossessions of merchandise on the installment plan may result in a future gain or loss.
c. When there is no reasonable basis for estimating collectability
d. When collection expenses are deemed immaterial.
54. The installment method of accounting may be used if the
a. Collection period extends over more than 12 months
b. Installments are due in different years
c. Ultimate amount collectible is indeterminate

1905 Page 5 of 7
 d. Percentage of completion method in inappropriate
55. The matching principles is best demonstrated by
a. Not recognizing any expense unless some revenue is realized
b. Associating effort with accomplishment
c. Recognizing prepaid rent received as revenue
d. Establishing an appropriation for contingency.
56. Which accounting principle is being observed when an accountant charge to expense a cost that
contributed to revenue during a period?
a. Revenue realization
b. Matching
c. Monetary unit
d. Conservatism
57. Which of the following is not an acceptable basis for the recognition of expense?
a. Systematic and rational allocation
b. Cause and effect association
c. Immediate recognition
d. Cash disbursement
58. Bad debt expense is recognized according to which expense recognition principle?
a. Direct matching
b. Immediate recognition
c. Systematic and rational allocation
d. Critical event recognition
59. An example of direct matching of an expense with revenue would be
a. Depreciation expense
b. Office salaries expense
c. Direct labor cost incurred to produce inventory sold during a period
d. Advertising expense
60. Which category of expense is subject to immediate recognition in the income statement?
a. Utilities expense for the production line of a manufacturer
b. Repairs and maintenance expense incurred on production equipment of a manufacturer
c. The salary of the production foreman
d. The salary of the president.
61. Which principles best describe the rationale for matching distribution costs and administrative expense
with revenue of the current period?
a. Direct matching
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
62. What is the general approach as to when product costs are recognized as expense?
a. In the period when the expenses are paid.
b. In the period when the expenses are incurred.
c. In the period when the vendor invoice is received.
d. In the period when the related revenue is recognized.
63. When should an expenditure to recorded as an asset rather than an expense?
a. Never
b. Always
c. If the amount is material
d. When future benefits exist.
64. A decrease in asset arising from peripheral or incidental transaction is called
a. Capital expenditure
b. Cost
c. Lost
d. Expense
65. An outflow of asset based on an activity that represents the major operation is called
a. Loss
b. Liability
c. Expense
d. Equity

1905 Page 6 of 7
66. The primary distinction between revenue and gain is
a. The materiality of the amount
b. The likelihood that the transaction will recur in the future.
c. The nature of the activity that gives rise to the transaction.
d. The method of disclosing the transaction.
67. Which statement in relation to the term “expense” is incorrect?
a. All expenses and losses are expired costs but not all expired costs are expense or losses.
b. All expenses decrease owner’s equity are expenses.
c. Expense is synonymous with expenditure
d. Entities do not incur expenses per se but initially acquire assets.

1905 Page 7 of 7