Republic of the Philippines

ISABELA STATE UNIVERSITY

Echague, Isabela

EXERCISE 1
Listed below are several information characteristics and accounting principles and
assumptions. Match the letter of each with the appropriate phrase that states its
application. (Items a through k may be used more than once or not at all.)
a. Economic entity assumption g. Matching principle
b. Going concern assumption h. Full disclosure principle
c. Monetary unit assumption i. Relevance characteristic
d. Periodicity assumption j. Reliability characteristic
k. Consistency
e. Historical cost principle characteristic
f. Revenue recognition principle

1. Stable-dollar assumption (do not use historical cost principle).

C (MONETARY)
2. Presentation of error-free information with representational
faithfulness.
J (RELIABILITY)
3. Yearly financial reports.
D (PERIODICITY)
4. Accruals and deferrals in adjusting and closing process. (Do not use
going concern.)
G (MATCHING PRINCIPLE)
5. Useful standard measuring unit for business transactions.
C (MONETARY UNIT ASSUMPTION)
6. Notes as part of necessary information to a fair presentation.
H (FULL DICLOSURE PRINCIPLE)
7. Affairs of the business distinguished from those of its owners.
A (ECONOMIC ENTITY ASSUMPTION)
8. Business enterprise assumed to have a long life.
B (GOING CONCERN ASSUMPTION)
9. Valuing assets at amounts originally paid for them.
E (HISTORICAL COST PRINCIPLE)
10. Application of the same accounting principles as in the preceding
year.

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
K (CONSISTENCY CHARACTERISTICS)
11. Summarizing significant accounting policies.
H (FULL DISCLOSURE PRNCIPLE)
12. Presentation of timely information with predictive and feedback
value.
I (RELEVANCE CHARACTERICTICS)

EXERCISE 2
Fill in the blanks below with the accounting principle, assumption, or related item
that best completes the sentence.

1. The CONSISTENCY characteristic requires that the same accounting

method be used from one accounting period to the next, unless it becomes
evident that an alternative method will bring about a better description of a
firm's financial situation.
2. CONSERVATISM guides accountants to select the accounting treatment
that is least likely to overstate income and assets.
3. Parenthetical balance sheet disclosure of the inventory method utilized by a
particular company is an application of the FULL DISCLOSURE principle.
4. Corporations must prepare accounting reports at least yearly due to the
PERIODICITY assumption.
5. Recording and reporting inflows at the end of production is an allowable
exception to the REVENUE RECOGNITION principle.

CHAPTER QUIZ – Multiple Choices

1. It refers to the process of incorporating the effects of an accountable event in the
statement of financial position or the statement of profit or loss and other
comprehensive income through a journal entry.
a. Realization
b. Derecognition
Recognition C
c. Posting
2. All of the following are events considered nonreciprocal transfers, except
a. declaration of cash dividends
b. declaration of stock dividends C
c. payment of accounts payable

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
d. imposition of fines
e. theft
3. These are events involving an entity and another external party.
a. external events
b. internal events A
c. adultery
d. life events
4. What is the basic purpose of accounting?
a. To provide quantitative financial information about economic
activities
b. To provide all information that users need in making economic
decisions D
c. To provide qualitative financial information about economic
activities intended to be useful in making economic decisions
d. To provide quantitative financial information about economic
activities intended to be useful in making economic decisions.
5. General purpose financial statements are
a. those statements that cater to the common and specific needs of a
wide range of external users.
b. those statements that cater to the common needs of a wide range of
external users and internal users. D
c. those statements that cater to the common needs of a limited range
of external users.
d. those statements that cater to the common needs of a wide range of
external users.
6. External users are those
a. who do have the authority to demand financial reports tailored to
their specific needs.
b. who do not have the authority to demand financial reports tailored
to their common needs. C
c. who do not have the authority to demand financial reports tailored
to their specific needs.
d. who belong to countries other than the domicile country of the
reporting entity
7. The assumption that a business enterprise will not be sold or liquidated in the
near future is known as the
a. economic entity assumption.
b. monetary unit assumption. B
c. conservatism assumption.

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d. going concern.
8. Accounting provides which type of information?
a. Quantitative
b. Financial information D
c. Qualitative
d. All of these
9. The primary objective of financial reporting is to provide
a. information about economic resources, claims to these
resources, and changes in them.
b. information useful for investment and credit decisions. D
c. information useful in predicting future cash flows.
d. all of these
10. Which of the following statements is true?
a. In current practice, accounting provides only quantitative
information that is useful in making economic decisions. B
b. External users are those who do not have the authority to
demand financial reports tailored to their specific needs.
c. Under the stable monetary unit assumption, the owners of the
business and the business are viewed as a single reporting entity.
Therefore, the personal transactions of the owners are recorded
in the books of accounts.
d. The practice of accountancy in the Philippines is regulated under
R.A. 9892.
11. Which of the following events is considered a non-reciprocal transfer?
a. Sale of an asset
b. Donation
c. Loss from a calamity B
d. Production of finished goods
12. Woo Company values its fixed assets at their historical costs and does not
restate them for changes in the purchasing power of the Philippine pesos due
to inflation. Woo Company is applying which of the following accounting
concepts.
a. Prudence
b. Accrual basis
c. Stable monetary unit C
d. Time period
13. Cha Company engages in importing and exporting activities. At the end of the
period, Cha Company has assets and liabilities denominated in foreign
currencies. When preparing its financial statements, Cha Company translates
these assets and liabilities to pesos. Cha Company is most likely to be applying
which of the following accounting concepts?
a. Double entry
b. Accrual basis

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c. Stable monetary unit C

d. Time period
14. Preparing financial statements at least annually is an application of which of
the following accounting concepts?
a. Historical cost
b. Accrual basis
c. Stable monetary unit D
d. Time period
15. On Day 1, a customer buys goods from Lee Company and promises to pay the
sales price on Day 30. Lee Company recognizes sales revenue on Day 1 rather
than on Day 30. This is an application of which of the following accounting
concepts?
a. Prudence
b. Accrual basis
c. Consistency B
d. Materiality
16. Which of the following is considered an internal user of Min Corporation’s
financial reports?
a. Entity L, a bank, requires Min Corporation to submit audited
financial statements in conjunction to a loan being applied for by
Min Corporation. D
b. Mr. O is deciding whether to invest in Min Corporation. Mr. O
uses Min Corporation’s financial statements in making its
investment analysis.
c. Ms. V, a shareholder of Min Corporation, is deciding whether to
hold or sell her shareholdings in Min Corporation. Ms. V uses
Min Corporation’s financial statements in making its “hold or
sell” analysis.
d. Mr. E, a member of Min Corporation’s board of directors, uses
financial reports to make decisions regarding the financial and
operational affairs of Min Corporation.
17. Ho Co. buys bananas and converts them into banana chips. The conversion of
bananas into banana chips is a(an)
a. Non-accountable events
b. External event
c. Non-reciprocal transfer D
d. Internal event
18. What type of user’s needs is catered by general purpose financial statements?
a. Common needs
b. Specific needs
c. a & b
d. Neither a & b A

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19. Which of the following is not among the four sectors in the practice of
accountancy as enumerated in R.A. 9298 also known as the Philippine
Accountancy Act of 2004?
a. Practice in Commerce & Industry
b. Practice in the Government D
c. Practice in Education
d. Practice in Private Accountancy
20.Mr. Song is assessing the ability of Joong Firm to generate future cash and
cash equivalents. In making the assessment, Mr. Song uses not only the
statement of cash flows but also the other components of a complete set of
financial statements. This is because of which of the following concepts?
a. Going concern
b. Time period C
c. Intercalation
d. Articulation

MODULE 2
 EXERCISE 2
TRUE OR FALSE
1. All changes in an entity’s economic resources and claims to those resources
result from the entity’s financial performance. FALSE
2. The qualitative characteristics of useful information apply only to the
financial information provided in the financial statements. FALSE
3. According to IFRS® Practice Statement 2 Making Materiality Judgments,
cost is an important consideration when making materiality judgments.
FALSE
4. When making materiality judgments, a quantitative assessment alone is
not always sufficient to conclude that an item of information is not
material. The entity should further assess the presence of qualitative
factors. TRUE
5. The Conceptual Framework and the Standards specify a uniform
quantitative threshold for materiality. FALSE

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6. The Conceptual Framework is concerned with the provision of financial

information to both external users and internal users. FALSE
7. Timeliness and neutrality are two ingredients of relevance. FALSE
8. Revenues, gains, and distributions to owners all increase equity. FALSE
9. The historical cost principle would be of limited usefulness if not for the
going concern assumption. TRUE
10. The economic entity assumption means that economic activity can be
identified with a particular legal entity. FALSE

 CHAPTER QUIZ - Multiple Choices

1. The overall objective of financial reporting is to provide information
a. about an entity's assets, liabilities, and owners' equity.
b. about an entity's financial performance during a period. C
c. that is useful in making economic decisions.
d. that allows owners to assess management's performance.

2. The two primary qualities that make accounting information useful for
decision making are
a. comparability and consistency.
b. materiality and timeliness. D
c. relevance and reliability.
d. faithful representation and relevance.

3. Late information lacks this qualitative characteristic.

a. Tardiness c. Timeliness C
b. Verifiability d. Comparability

4. Which of the following statements about materiality is not correct?

a. An item must make a difference; otherwise, it need not be reported.
b. Materiality is affected by an item’s relative size and/or importance. D
c. An item is material if its inclusion or omission would influence or change
the judgment of a reasonable person.
d. All of these are correct statements about materiality.

5. Information is neutral if it
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information.
c. has no impact on a decision maker. D
d. is free from bias toward a predetermined result.

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6. Decision makers vary widely in the types of decisions they make, the methods
of decision making they employ, the information they already possess or can
obtain from other sources, and their ability to process information.
Consequently, for information to be useful there must be a linkage between
these users and the decisions they make. This link is a. relevance.
b. reliability.
c. understandability. C
d. materiality.

7. Accounting information is considered to be relevant when it

a. can be depended on to represent the economic conditions and events that
it is intended to represent.
b. is capable of making a difference in a decision. B
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

8. The quality of information that gives assurance that it is reasonably free of

error and bias and provides a true, correct and complete depiction of what it
purports to represent is
a. relevance.
b. faithful representation. B
c. verifiability.
d. neutrality.

9. When information about two different entities has been prepared and
presented in a similar manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency. D
d. comparability.

10. Which of the following is not an element that is directly related to the
measurement of an entity’s financial position?
a. assets
b. liabilities
c. equity D
d. income

11. According to the Conceptual Framework, these are the qualitative

characteristics that make information useful to users.
a. Fundamental
b. Enhancing A
c. Relevance

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d. Comparability

12. Which of the following does not meet the definition of an asset?
a. Equipment which the entity intends, and very certain, to acquire in
the future.
b. Inventories purchased and received but not yet paid. A
c. Land received from a donation.
d. A publishing title for a college textbook. The publishing title has no
physical substance, meaning you cannot see or touch it.

13. Which of the following could result to the recognition of income?

a. Increase in liability
b. Decrease in asset
c. Decrease in equity D
d. Decrease in liability

14. This refers to the process of incorporating in the statement of financial

position or statement of comprehensive income an item that meets the
definition of an element and satisfies the criteria.
a. Recognition
b. Incorporation A
c. Definition
d. Celebration
15. Which of the following is considered a qualitative factor in making
materiality judgments?
a. 10% of total revenues
b. 2.5% of total assets D
c. P25,000 or more
d. The context of an item in relation to a current crisis in the banking
and insurance industry.

16. These are users of financial information who are not in a position to require a
reporting entity to prepare reports tailored to their particular information
needs.
a. Primary users
b. Secondary users A
c. Heavy users
d. Slight users

17. Which of the following would least likely need general purpose financial
statement in making economic decisions?
a. Stockholders

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b. Potential investors
c. Management D
d. Lenders

18. The Conceptual Framework (choose the incorrect statement)

a. is not a PFRS.
b. in the absence of a standard, shall be considered by management
when making its judgment in developing and applying an
accounting policy that results in information that is relevant and
reliable. D
c. is concerned with general-purpose financial statements only.
d. Prevails over the PFRSs in cases of conflicts.

19. Which of the following would not result to the recognition of a liability?
a. Receipt of the proceeds of a bank loan.
b. Receipt of delivery of equipment purchased on credit. D
c. A future commitment becomes burdensome.
d. Paying in advance the purchase price of inventories for future
delivery.

20. Under this concept of capital maintenance, profit is earned if net assets
increased during the period after excluding the effects of transactions with
the owners. a. Financial capital maintenance
b. Physical capital maintenance
c. Repairs and maintenance A
d. Building maintenance

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MODULE 3
 EXERCISE 1
IDENTIFICATION

1. Obligations expected to be liquidated within the current period.

CURRENT LIABILITIS
2. Statement showing financial condition at a point in time.
STATEMENT OF FINANCIAL POSITION
3. Probable future sacrifices of economic benefits. LIABILITIES
4. Resources expected to be converted to
cash & to be utilized within one year or the operating cycle, whichever
is longer. CURRENT ASSTES
5. Resources of a durable nature used in operations. PROPERTIES,
PLANT AND EQUIPMENT
6. Economic rights or competitive advantages which lack physical
substance. INTANGIBLE ASSETS
7. A present economic resource controlled by the entity as a result of past
events ASSETS
8. Residual interest in the net assets of an entity. EQUITIES
9. The time between the acquisition of assets for processing and their
realization in cash or cash equivalents. OPERATING CYCLE
10. It amplifies the information given in the face of the financial
statements.
NOTES TO FINANCIAL POSITION
 EXERCISE 2
Account classification (Balance Sheet)
a. Current assets
b. Non-current assets
c. Current liabilities
d. Non-current liabilities
e. Equity
f. Excluded from balance sheet

1. Bank overdraft C (CL)

2. Bonds payable (due in 11 months after the reporting period) C (CL)
3. Ordinary shares E (EQUITY)
4. Securities owned by another company which are collateral for that
company's note F (EXCLUDED)
5. Trading securities A (CA)

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6. Inventory A (CA)
7. Patents B (NCA)
8. Unearned revenue C (CL)
9. Mortgage payable D (NCL)
10. Service Revenue F (EXCLUDED)
11. Accrued salaries and wages C (CL)
12. Rental revenues for 3 months collected in advance C (CL)
13. Land used as plant site B (NCA)
14. Accrued interest payable due in 30 days C (CL)
15. Premium on ordinary shares E (EQUITY)

 CHAPTER QUIZ – Multiple Choices

1. The objective of PAS 1 is
a. To ensure comparability by prescribing the basis for presentation of
general purpose financial statements A
b. To ensure the faithful representation of financial statements
c. To ensure the relevance of information presented in the financial
statements
d. To prescribe the recognition and measurement principles applicable to
assets, liabilities, income and expenses
2. The scope of PAS 1 is
a. The preparation and presentation of general purpose financial statements
b. The recognition, measurement and disclosure requirements for specific
transactions and events A
c. The presentation of general purpose financial statements as well as all
other information contained in an entity’s annual report
d. All of these
3. According to PAS 1, a complete set of financial statements includes which of
the following?
a. Income tax return C c. Notes
b. Director’s report d. All of these
4. Which of the following is not a purpose of the notes?
a. To present information about the basis of preparation of the financial
statements and the specific accounting policies
b. To disclose the information required by PFRSs that is not presented
elsewhere in the financial statements D
c. To provide information that is not presented elsewhere in the financial
statements but is relevant to an understanding of any of the financial
statements

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d. To rectify inappropriate accounting policies 5. Which of the following is a

current asset?
a. Deferred tax asset expected to reverse within three months from the
reporting date D
b. Property, plant and equipment
c. Non-trade note receivable due in 13 months
d. Accounts receivable
6. According to PAS 10, these are those events, favorable and unfavorable, that
occur between the end of the reporting period and the date when the financial
statements are authorized for issue.
a. Events after the reporting period c. Adjusting events
b. Non-adjusting events A d. all of these
7. Which of the following is an example of a non-adjusting event?
a. Sale of inventory for less than its carrying value shortly after the reporting
period C
b. Amounts received in respect of an insurance claim being negotiated at the
period end
c. Destruction of a machine by fire after the reporting period
d. Bankruptcy of a major customer with a balance owing at the period end 8.
Which of the following is most likely to be a non-adjusting event?
a. A major customer liquidates its business after the end of the reporting
period.
b. The entity announces a major restructuring after the end of the reporting
period. B
c. The settlement after the reporting period of a court case that confirms that
the entity has a present obligation at the end of reporting period.
d. The determination after the reporting period of the cost of asset
purchased, or the proceeds from asset sold, before the end of reporting
period.
9. These are the end product of the financial reporting process and the means by
which information gathered and processed is periodically communicated to
users. a. Financial reporting
b. Financial statements
c. Financial products B
d. Accounting statements
10. Which of the following is not one of the general features of financial
statements under PAS 1?
a. Fair presentation and compliance with PFRSs
b. Going Concern C
c. Cash Basis
d. Materiality and aggregation
11. Who is responsible for the preparation and the fair presentation of an entity’s
financial statements in accordance with the PFRSs? a. Any accountant

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b. Certified Public Accountant

c. Auditor D
d. Management
12. This type of presentation of statement of financial position does not show
distinctions between current and noncurrent items. a. Classified presentation
b. Unclassified presentation
c. Non-discriminating presentation B
d. Awesome presentation
13. In making an economic decision, an investor needs information on the
amounts of an entity’s economic resources and claims to those resources. That
investor would most likely refer to which of the following financial
statements? a. Statement of financial position
b. Statement of comprehensive income A
c. Statement of cash flows
d. Statement of changes in equity
14. This comprises all “non-owner changes in equity.” It excludes owner changes
in equity, such as subscription, issuance, and reacquisition of share capital
and declaration of dividends.
a. Other comprehensive income
b. Changes in equity C
c. Total comprehensive income
d. Profit or loss
15. The statement of financial position is also called
a. Balance sheet
b. Income statement
c. Positions statement A
d. All of these

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MODULE 4
 EXERCISE 1
For each event listed below, select the appropriate category which describes the
effect of the event on a statement of cash flows:

a. Cash provided/used by operating activities.

b. Cash provided/used by investing activities.
c. Cash provided/used by financing activities.
d. Not a cash flow.

1. Payment on long-term debt C

2. Issuance of bonds at a premium C
3. Collection of accounts receivable A
4. Cash dividends declared D
5. Issuance of stock to acquire land D
6. Payment of employees' wages A
7. Issuance of common stock for cash C
8. Purchase of equipment B
9. Purchase of treasury stock (common) C
10. Sale of real estate held as a long-term investment B

 EXERCISE 2
Matching accounting changes to situations.
a. Change in accounting estimate
b. Change in accounting policy
c. Error
Following are a series of situations. You are to enter a code letter to the left to
indicate the type of change.

1. Change due to charging a new asset directly to an expense account. C

2. Change from expensing to capitalizing certain costs, due to a change in
periods benefited. A
3. Change from LIFO to FIFO inventory procedures. B
4. Change due to failure to recognize an accrued (uncollected) revenue. C
5. Change in amortization period for an intangible asset. A
6. Change in the loss rate on warranty costs. A

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7. Change in residual value of a depreciable plant asset. A

8. Change from an unacceptable to an acceptable accounting principle. C
9. Change from straight-line to sum-of-the-years'-digits method of
depreciation. A
10. Change from one acceptable principle to another acceptable principle. B

 CHAPTER QUIZ
1. According to PAS 8, these are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting
financial statements. a. Accounting policies c. Accounting standards B
b. Accounting estimates d. Accounting assumptions
2. A change in the pattern of consumption of economic benefits from an asset
is most likely a
a. change in accounting policy. B c. error.
b. change in accounting estimate. d. any of these
3. PAS 8 permits a change in accounting policy only if the change
a. is required by a PFRS C
b. results in reliable and more relevant information
c. a or b
d. PAS 8 does not permit a change in accounting policy
4. These arise from misapplication of accounting policies, mathematical
mistakes, oversights or misinterpretations of facts, or fraud. a. Error
b. Change in accounting estimate
c. Change in accounting policy A
d. Impracticable application
5. How should the following changes be treated, according to PAS 8?
I. A change is to be made in the method of calculating the provision for
uncollectible receivables.
II. Investment properties are now measured at fair value, having
previously been measured at cost.
Change (1) C Change (2)

a. Change of accounting policy Change of accounting policy

b. Change of accounting policy Change of accounting estimate
c. Change of accounting estimate Change of accounting policy
d. Change of accounting estimate Change of accounting estimate
6. Entity A acquires equipment by issuing shares of stocks. How should Entity
A report the transaction in the statement of cash flows?
a. Operating activities B c. Financing activities

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b. Investing activities d. Not reported

7. Entity A, a financial institution, received cash dividends from its
investments in marketable securities during the year. How will the
dividends be presented in Entity A’s statement of cash flows?
a. as investing activity B c. as financing activity
b. as operating activity d. a or b
8. Which of the following statements best describes a statement of cash flows?
a. The statement of cash flows is also called the statement of activities.
b. The statement of cash flows shows information on an entity’s assets,
liabilities and equity. D
c. The statement of cash flows shows information on an entity’s income and
expenses during the period.
d. The statement of cash flows shows historical changes of cash and cash
equivalents during the period.
9. Which of the following is presented under the investing activities section of
a statement of cash flows?
a. Collection of accounts receivable
b. Cash purchases of inventories C
c. Purchase of equipment through cash
d. Issuance of share capital through cash
10. Which of the following cash flows is presented in the operating activities
section of a statement of cash flows?
a. Cash receipts from issuing shares or other equity instruments and cash
payments to redeem them C
b. Cash receipts from issuing notes, loans, bonds and mortgage payable and
other short-term or long-term borrowings, and their repayments
c. Cash receipts from the sale of goods, rendering of services, or other
forms of income
d. Cash payments by a lessee for the reduction of the outstanding liability
relating to a lease
11. In the statement of cash flows of a non-financial institution, interest
expense paid is presented under
a. Operating activities D c. Financing activities
b. Investing activities d. a or c
12. Which of the following is included in the financing activities section of the
statement of cash flows?
a. Cash payments for purchases of goods and services
b. Cash receipts and cash payments in the acquisition and disposal of
property, plant and equipment, investment property, intangible assets
and other noncurrent assets D
c. Loans to other parties and collections thereof (other than loans made by
a financial institution)

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d. Cash receipts from issuing shares or other equity instruments and cash
payments to redeem them
13. The effect of which of the following is presented in profit or loss in the
current period (or current and future periods, if both are affected) rather
than as an adjustment to the opening balance of retained earnings. a.
Correction of a prior period error
b. Change in accounting policy C
c. Change in accounting estimate
d. All of these
14. According to PAS 8, a change in accounting policy is accounted for
a. Using a transitional provision, if any
b. Retrospectively D
c. Prospectively, if retrospective application is impracticable
d. A, b, c, whichever is most appropriate
15. According to PAS 8, a change in accounting estimate is accounted for
a. Using a transitional provision, if any
b. Retrospectively C
c. Prospectively
d. A, b, c, whichever is most appropriate

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