LEGAL ACCOUNTING

Preliminary Exam
AY: 2021 – 2022

NAME:________________________________ JD YEAR:____________________

I. Read and analyze each item. Highlight the letter and your answer with a yellow color.

1. Which of the following is not a step in the accounting process?

a. Identification
b. Communication
c. Recording
d. Verification

2. Which of the following is not a relevant economic event?

a. An agent who attended to the concern of a complaining customer
b. Patricia, manager of Company X, who sold an abandoned building of her company
c. Company Y which borrowed Php5M from a bank due to tight financial conditions
d. Company Z which paid its employees their salaries for the month of January

3. Which of the following cannot be considered a limitation of accounting?

a. Accounting is only historical in nature
b. Accounting provides limited information to the management
c. The accounting process is tedious to execute
d. Accounting considers only those transactions which can be measured in terms of money or
those quantitatively expressed.

4. Jamie, the chief accountant of Company X, is preparing for a meeting with the top management.
This meeting is done monthly to evaluate the performance of the company. Which step of the
accounting process is most likely being done?
a. Recording
b. Communication
c. Identification
d. Classification

5. Which of the following is false?

a. The accounting process consists of identifying economic events, recording these events, and
communicating these events to external users only.
b. The accounting process consists of identifying economic events, recording these events, and
communicating these events to internal and external users.
c. The accounting process consists of identifying economic events, recording these events, and
communicating these events to internal users only.
d. a and c only

6. This branch of accounting focuses on creating value of the business by providing information used
in the financial accounting and management accounting fields.
a. Accounting Education
b. Cost accounting
c. Tax accounting
d. Auditing

7. Which government agency is responsible for the keeping of the national funds of the government?
a. Bureau of Treasury
b. Department of Budget and Management
c. Commission on Audit
 d. Department of Education

8. Which of the following is an objective of financial reporting?

a. To help management in the company’s decision-making
b. To solve conflicts inside the company
c. To help interested users in their economic decisions
d. To adhere to government rules and regulations

9. Financial statements that undergo the process of auditing are called

a. Audited financial statements
b. Certified financial statements
c. Qualified financial statements
d. Financial statements; as is

10. What is the main difference between general purpose financial statements and special purpose
financial statements?
a. General purpose financial statements are prepared by top management; special purpose
financial statements are prepared by middle managers.
b. General purpose financial statements are more difficult to produce than special purpose
financial statements.
c. General purpose financial statements are provided to users who cannot directly request
information from the company; special purpose financial statements are intended to be used by
management.
d. General purpose financial statements are made for internal users only; special purpose
financial statements are for external users only.

11. What is most likely to happen when companies are experiencing financial difficulties?
a. Employees are motivated to work to achieve the company’s goals.
b. Creditors will be more willing to lend to the company to help overcome its financial difficulties.
c. Researchers will lose interest in the company since they mostly study companies that are
successful.
d. Investors will postpone or cancel their investments.

12. Which of the following statements about external users of accounting information is correct?
a. External users of accounting information include the employees of a company.
b. External users of accounting information do not have the capability to acquire information
directly from the company.
c. The needs of external users of accounting information are always prioritized over those of
internal users.
d. External users of accounting information are not concerned with the amount of borrowings of a
company.

13. All of the following are benefits of accounting information to managers, EXCEPT
I. Managers will be able to identify the points of improvement of a company.
II. Managers can react immediately and accordingly to problems identified in the analysis of
financial statements.
III. Managers can make better decisions after studying the financial statements.
a. II only
b. III only
c. I only
d. None of the above

14. Which statement about the academe is incorrect?

a. The financial statements are used to help students understand accountancy with less difficulty.
b. One reason why researchers study financial statements is to find possible improvements in the
accounting practice in the country.
c. Accounting information are useful only to those in the field of accountancy.
 d. Professors, like students, can also learn from the financial statements of a company.

15. Which of the following statements about investors is/are true?

I. There is no limit on the amount of return on investment an investor can receive.
II. Only a few investors put their resources in risky companies.
III. Investors, like creditors, receive fixed amount of payments in their investments.
IV. The company is obligated to pay investors a certain amount of return every year.
a. I only
b. I and II only
c. I, II, III, and IV
d. I, II, and IV only

16. Which of the following statements is true?

a. The stockholders of a corporation are responsible for selecting the board of directors.
b. A stockholder cannot be a member of the board of directors.
c. The stockholders are responsible for the management of the business.
d. The board of directors has the sole authority to make decisions for the corporation.

17. When there is no profit-sharing agreement among the partners, profits should be distributed
a. Based on the original capital contributions of the partners
b. Equally among the partners
c. Based on the amount of time the partners worked for the partnership
d. The partners must create a profit-sharing agreement first before the profits can be distributed.

18. Which of the following is/are false?

I. A corporation is created by the operation of law.
II. Ownership rights in a corporation can be transferred through sale or donation.
III. The law has the authority to restrict the acts that can be performed by a corporation.
a. I only
b. II only
c. III only
d. None of the above

19. The profits of a sole proprietorship are taxed on

a. The company level only
b. The individual level only
c. Both the company and individual levels
d. Profits of a sole proprietorship are exempted from taxation.

20. Which is the primary reason why individuals opt not to use the partnership form of business
organization?
a. Interested individuals should go through a rigorous registration process before the business
can operate as a partnership.
b. The partners in a general partnership are subject to unlimited liability.
c. It is more difficult to acquire additional capital in a partnership than in a corporation.
d. Since it is difficult to transfer ownership in a partnership, individuals find it risky especially
during tough times.

21. Which of the following statements is true?

a. Operating cycle is the time it takes for a company to create products, sell, and deliver them to
customers.
b. The time it takes for a company to create products, sell them, and collect cash payments from
customers is called servicing time.
c. The time it takes for a company to create products, sell them, and collect cash payments from
customers is called operating cycle.
d. Operating cycle is the average length of time a company runs a business.
 22. Which of the following statements regarding service companies is correct?
a. Service companies are firms that generally use their employees to provide tangible products to
customers.
b. Service companies basically provide almost the same services to their customers.
c. Service companies are firms that generally use their employees to provide intangible products
or service to customers.
d. A department store may be considered a service company because the sales ladies assist the
customers in buying merchandise.

23. The main difference of a merchandising company over a service company is

a. It does not need employees.
b. It has no inventory.
c. It provides tangible products.
d. It has production facilities.

24. Samsung is a major player in the electronics industry with products such as tablets, smartphones,
cameras, and laptops. It distributes its products to its stores and dealers all over the country.
Some of its authorized dealers include Robinsons Appliances, Abenson, SM Appliance Center, and
Automatic Centre. Which of the following is considered a manufacturing ompany?
a. Samsung
b. Robinsons Appliances
c. Abenson
d. All of the above except a

25. Based on number 24, which of the following is considered a retail company?
a. Samsung
b. Robinsons Appliances
c. Abenson
d. All of the above except a

II. Identify if the statements are true or false. Choose the letter that represents the correct combination of
answers and highlight your answer with a yellow color.

1. Statement I – Holding inventory entails proper management and control measures which make it
costly.
Statement II – One of the advantages of a service company over the other types of business is the
existence of tangible goods held by the company.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

2. Statement I – The product of a merchandising company is also known as merchandise.

Statement II – Good held by a company which are subsequently sold are called inventory.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

3. Statement I – One major difference of the operating cycle of a merchandising company and a
service company is the storing of inventory.
Statement II – One major difference of the operating cycle of a merchandising company and a
manufacturing company is the storing of inventory.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.
4. Statement I – Like merchandising companies, manufacturers earn sales revenues.
Statement II – The primary source of revenues of manufacturing companies is the production of
goods.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

5. Statement I – One of the advantages of manufacturing one’s product is quality control wherein
manufacturing companies can ensure that their products meet the standard set.
Statement II – Examples of quality control activities are inspection of products and training of
factory workers.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

6. Statement I – The income of a sole proprietorship or a partnership is part of the individual income
of the owners. It is taxed once the income is distributed to the owners.
Statement II – Like in a sole proprietorship, creditors and other parties can go after the personal
assets of the partners when partnership assets are not enough to satisfy their claims.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

7. Statement I – Membership in a cooperative shall be involuntary and available to all individuals

regardless of their social, political, racial or religious backgrounds and beliefs.
Statement II – Profits (or losses) of the partnership do not belong to a specific partner.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

8. Statement I – Features of a corporation include separate legal existence, limited liability of

stockholders, transferable ownership rights, and virtually unlimited life.
Statement II – Even though a partnership has separate legal existence, partners are still liable for
debts and obligations that cannot be paid by partnership assets.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

9. Statement I – A partnership is a contract that can be perfected through oral or written agreement.
Statement II – Creditors can claim the unpaid debts from any of the partners or from all the
partners.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

10. Statement I – The law does not provide protection to the personal assets of a sole proprietor in
case the business assets are not sufficient to pay the creditor’s claims.
Statement II – The stockholders are the legal owners of a corporation. Thus, they have the
authority to decide when the distributions of income will be made.
a. Both statements are true.
 b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

11. Statement I – Financial statements are beneficial to a wide range of external and internal users.
Statement II – Government agencies use financial statements solely for regulation purposes.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

12. Statement I – Government examines small businesses more closely than large businesses.
Statement II – When the company is insolvent (i.e., liabilities are greater than assets), investors are
paid first before creditors.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

13. Statement I – Managers use accounting information to decide what segments of the company
should be discontinued.
Statement II – Accounting information included in general purpose financial statements are the
most useful source of information for managers.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

14. Statement I – Accounting information help external users in making decisions for the benefit of the
company.
Statement II – Accounting information contained in the financial statements should be presented in
a standardized manner.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

15. Statement I – Due to the power given by law, the government can sometimes require businesses
to provide them with accounting information even though the government is considered an external
user.
Statement II – Investors and creditors are alike except in the variability of payment they receive
from the company.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

16. Statement I – Fixed costs are costs that do not change within a relevant range of activity.
Statement II – Variable costs are costs that change as the level of activity or production increase.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

17. Statement I – Tax accounting records financial transactions in the same manner with financial
accounting.
 Statement II – Tax accounting follows the pronouncements of the National Internal Revenue Code
(NIRC).
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

18. Statement I – The government accounting process involves the Commission on Audit (COA), the
Department of Budget and Management (DBM), the Bureau of Treasury (BTr), and all other
government agencies.
Statement II – Government accounting starts before the declaration of the General Appropriations
Act (GAA).
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

19. Statement I – General purpose financial statements are prepared to accommodate the information
needs of persons who have no capability to acquire information directly from the company.
Statement II – Primary users of general-purpose financial statements include investors, creditors
and top management.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

20. Statement I – The functions of accounting education and accounting research reinforce one
another.
Statement II – Financial accounting differs from management accounting in the primary users of
reports generated.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.

III. A is an award-winning salesman. He realized that being a mere employee is not enough for his
dreams and goals. With the experience that he had with the company; he is thinking of starting his
own business. He has limited resources so he sees to it that these resources are allocated properly.
In your opinion, what form of business organization would you suggest? Why? (5 pts).

- End of Examination -