Modified True or False

Annually 1. Financial statements shall be presented at least monthly.

True 2. A statement of financial position is a formal statement showing the three elements
comprising financial position namely asset, liabilities, and equity.

To 3. Asset is defined as resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow from the entity.

PPE 4. Inventories are tangible assets which are held by an entity for use in production or supply of
goods and services, for rental to others, or for administrative purposes and are expected to be used
during more than one period.

TRUE 5. An entity shall classify an asset as current when the entity expects to realize the asset or
intends to sell or consume it within the entity's normal operating cycle.

Intangible Asset 6. Long term investments are identifiable nonmonetary asset without physical
substance.

Report 7. Using the account form in presenting a statement of financial position, the assets, liabilities,
and equity are arranged in a downward sequence.

Notes to FS 8. The statement of changes in equity is used to report information that does not fit into the
body of the financial statements in order to enhance the understandability of the financial statements.

Other non-current asset 9. Long-term advances to officers, directors, shareholders and employees or
abandoned property and long term refundable deposit are examples of trade and other receivable.

True 10. Equity is the residual interest of owners in the net assets measured by the excess of assets
over liability.

MANAGEMENT 11. The accountant of an entity has the primary responsibility for the preparation and
presentation of the financial statements of the entity.

Indefinitely 12 Going Concern means that the accounting entity is viewed as continuing in operation
definitely in the absence of evidence to the contrary.

ACCRUAL 13 Cash basis accounting means that income is recognized when earned regardless of when
cash is received and expense is recognized when incurred regardless of when paid.

TRUE 14. Financial statements do not provide all the information that users may need to make economic

decisions since this largely portray the financial effects of past events and do not necessarily provide
nonfinancial information.

TRUE 15. Financial statements show the results of the stewardship of management or the accountability
of management for the resources entrusted to it.

Relative 16. Materiality depends on the absolute size and nature of the item judged in the particular
circumstances of the omission.

PRESENT 17. A liability is a past obligation of a particular entity.

TRUE 18. Additional line items, headings and subtotals shall be presented on the face of the
statement

of financial position when such presentation is relevant to the understanding of the entity's financial
position.

Liquidity 19. Profitability refers to the availability of cash in the near future after taking account of the
financial commitments over this period.

Specific date 20. The statement of financial position provides the financial statement user the type and
amounts of each asset, liability, and capital account for a period of time.
II. MULTIPLE CHOICE. Choose and encircle the correct/best answer.

C 1. The term deficit refers to

a. An excess of current assets over current liabilities.

b. . An excess of current liabilities over current asset.
c. A debit balance in retained earnings.
d. A loss that is reported as a prior period error.

D 2. The correct order to present current asset is

a. Cash, inventories, prepaid items, accounts receivable.

b. Cash inventories, accounts receivable, prepaid items
c. Cash, accounts receivable, prepaid items, inventories
d. Cash, accounts receivable, inventories, prepaid items.

D 3. Accrued revenue would normally appear in the statement of financial position under

a. Noncurrent asset
b. Noncurrent liabilities
c. Current Liabilities
d. Current assets

C 4. An operating cycle

a. Is twelve months or less in length.

b. Is the average time required for an entity to collect accounts receivable.
c. Is used to determine current assets when the operating cycle is longer than one year
d. Starts with inventory and ends with cash.

D 5. Which of the following best describes the term liability?

a. An excess of equity over current assets

b. Resources to meet financial commitments when due
c. The residual interest in the assets of the entity after deduction of all the liabilities
d. A present obligation arising from past event

A 6. The primary responsibility for the preparation and presentation of the financial statements of an
entity is reposed in the

a. Management of the entity

b. Internal auditor
c. External auditor
d. Controller

D 7. To meet the objective of providing information about financial position, financial performance and
cash flows of an entity, financial statements should provide information about all of the following, except

a. Assets, liabilities and equity

b. Income and expenses, including gains and losses
c. Contributions by and distribution to owners in their capacity as owners
d. Nature of business activities

D 8. A complete set of financial statements includes all of following components, except

a. Statement of financial position, statement of comprehensive income and statement of cash

flows
b. Statement of changes in equity
c. Notes, comprising a summary of significant accounting policies and other explanatory
information
d. Reports and statements such as environmental reports and value added statements
C 9. Which of the following statements is true concerning the objective of financial statements?
1. Financial statements do not provide all the information that users may need to make economic
decisions since they largely portray the financial effects of past events and do not necessarily provide
nonfinancial information. II. Financial statements show the results of the stewardship of management or
the accountability of management for the resource entrusted to it.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

A 10. What is the objective of financial statements?

a. To provide information about the financial position, financial performance and changes in
financial position of an entity that is useful to a wide range of users.
b. To prepare and present a statement of financial position, statement of comprehensive
income, statement of cash flows and statement of changes in equity.
c. To prepare and present relevant, reliable, comparable and understandable information to
investors and creditors.
d. financial statements in accordance with all applicable PFRS and Interpretations.

B 11 Which of the following is included in a complete set of financial statements?

a. A statement by the board of directors of compliance with local legislation

b. A statement of changes in equity
c. Summarized statements of financial position for the last five years.
d. Value added statements.

B 12. An entity shall clearly identify each financial statement and shall display all of the following
information prominently, except
a. Name of the reporting entity or other means of identification, and any change in that
information from the previous year.
b. Names of major shareholders of the entity.
c. The presentation currency and level of rounding used in presenting financial statements.
d. Whether financial statements cover the individual entity or a group of entities and the date of
the end of reporting period or the period covered by the financial statements.

A 13) Financial statements include a statement of financial position, statement of comprehensive

income, a statement of changes in equity and a statement of cash flows. Which of the following is also
included within the financial statements?
A statement of retained earnings c. A director's report.
b. accounting policies d. An auditor's report.

C 14 Which of the following is not a component of the financial statements?

a. Statement of financial position c. Report of board of directors

b. Statement of changes in equity d. Notes to financial statements

B 15. An entity decided to extend the reporting period from a year to a 15-month period. Which of the
following is not required in case of change in reporting period?
a. The entity shall disclose the reason for usinga longer period than a period of 12 montns.
b. The entity shall change the reporting period only if other similar entities in the geographical
area in which it generally operates have done so in the current year.
c. The entity shall disclose that comparative amounts used in the financial statements are not
entirely comparable.
d. The entity shall disclose the period covered by the financial statements.

D 16. Which of the following cannot be considered fair presentation of financial statements?
a. To present information in a manner that provide relevant and faithfully represented financial
information.
b. To provide additional disclosures when compliance with specific PERS is insufficient to
understand the financial position and financial performance.
c. To select and apply accounting policies in accordance with applicable PFRS.
 d. To rectify inappropriate accounting policies either by disclosure of accounting policies used or
by notes or by explanatory information.

A 17. Financial statements must be prepared at least.

a. Annually c. Semiannually
b. Quarterly d. Every two years
D 18. An entity is permitted to depart from a particular standard if all of the following conditions are
satisfied, except

a. In extremely rare circumstances.

b. When management concludes that compliance with the
c. When departure from the standard is necessary to achieve fair presentation. standard would
be misleading.
d. When the conceptual framework for financial reporting prohibits such departure.

A 19 The effects of transactions and other events on economic resources and claims are depicted in the
periods in which those effects occur even if the resulting cash receipts and payments occur in a different
period.

a. Accrual accounting
b. Cash accounting
c. Modified accrual accounting.
d. Modified cash accounting.

C 20. Items of dissimilar nature or function

a. Must always be presented separately in financial statements.
b. Must not be presented separately in financial statements.
c. Must be presented separately in financial statements if those items are material.
d. Must be presented separately in financial statements even if those items are immaterial.

C 21. An entity must disclose comparative financial information for

a. The previous comparable period for all amounts reported.
b. The previous comparable period for all amounts reported and for all narrative and descriptive
information.
c. The previous comparable period for all amounts reported and for all narrative and descriptive
information when it is relevant to an understanding of the current period's financial statements.
d. The previous two comparable period for all amounts reported.

C 22. When the classification of items in the financial statements is changed, the entity.
a. Must not reclassify the comparative amounts.
b. Can choose whether to reclassify the comparative amounts.
c. Must reclassify the comparative amounts unless it is impracticable to do so.
d. Must reclassify the current year amounts only.

C 23) What is an objective of financial reporting?

a. To provide information that is useful to management in making decisions.
b. To provide information that clearly portrays nonfinancial transactions.
c. To provide information that is useful to assess the amounts, timing and uncertainty of
prospective cash receipts.
d. To provide information that excludes claims against resources.

C 24 As part of the objective of financial reporting, the phrase "assessing cash flow prospects" is
interpreted mean to
a. Cash basis accounting is preferred over accrual basis accounting.
b. Information about the financial effects of cash receipts and cash payments is generally
considered the best indicator of an entity's present and continuing ability to generate favorable
cash flows.
C. Over the long run, trends in revenue and expenses are generally more meaningful than trends
in cash receipts and disbursements.
d. All of the choices are correct regarding "assessing cash flow prospects ."

B 25. The objective of financial reporting is based on

a. The need for conservatism
 b. Reporting on management's stewardship
c. Generally accepted accounting principles
d. The needs of the users of the information.

A 26, The information provided by financial reporting pertains to

a. Individual business entities, rather than to industries or an economy as a whole or to
members of society as consumers
b. Individual business entities and an economy as a whole or to members of society as
consumers
c. Individual business entities and an economy as a whole, rather than to industries or to
members of Society as consumers
d. Individual business entities, industries and an economy as a whole, rather than to members of
society as consumers

B 27. Which of the following would most likely prepare the most accurate financial forecast for an
entity based on empirical evidence?
a. Investors, using statistical models to generate forecasts.
b. corporate management
c. financial analysts
d. Independent certified public accounts

C 28. The accrual basis of accounting is more useful for

a. Determining the amount of income tax liability.
b. Predicting the short-term financial performance.
c. Predicting the long-term financial performance.
d. Determining the amount of dividends to shareholders.

B 29 In measuring financial performance, accrual accounting is used because

a. Cash flows are considered less important.
b. It provides a better indication of ability to generate cash flows than cash basis.
c. It recognizes revenue when cash is received and expenses when cash is paid.
d. It is one of the implicit assumptions.

B 30 The most useful information to existing and potential investors, lenders and other creditors in
predicting flows is a. Information about current cash flows. b. Current earnings based on accrual
accounting. Information regarding the accounting policies used by management. Information regarding
the results obtained by using a wide variety of accounting policies.

IDENTIFICATION, Identify the proper classification of the following accounts. Write the letter only before
the number.

A Current Asset D. Non-Current Liability

B. Non-Current Asset E. Equity cash
C. Current Liability

C 1. Employees income tax payable

A 2. Claims receivable
B 3. Plant expansion fund
B 4. Investment in bonds
E 5. Retained earnings appropriated for contingencies
A 6. Bond Sinking Fund, related liability matures within a year
B 7. Treasury Bill, purchased 4 months prior to maturity
C 8. /Accrued salaries
B 9. Cash Surrender Value
B 10. Computer Software
B 11. Lease Rights
D 12. Discount of bonds payable
A 13. Advances to customers
B 14. Franchise
E 15. Share Premium - Preference
A 16. Equipment held for sale
A 17. Land held for trading
C 18. Unearned service revenue
B 19 Preference share redemption fund
A 20. Marketable securities

CHAPTER 3

NOTES TO FINANCIAL STATEMENTS TECHNICAL KNOWLEDGE

To understand the nature of notes to financial statements.

To know the purpose of notes to financial

statements.

To knows the order of presenting notes to financial statements.

NOTES TO FINANCIAL STATEMENTS

Notes to financial statements provide narrative description or disaggregation of items presented in the
financial statements and information about items that do not qualify for recognition.

Notes contain information in addition to that presented in the statement of financial position, income
statement, statement of comprehensive income, statement of changes in equity and statement of cash
flows.

In other words, notes to financial statements are used to report information that does not fit into the
body of the statements in order to enhance the understandability of the statements.

Notes provide additional information and help clarify the items presented in the financial statements.
PAS 1, paragraph 113, provides that an entity shall, as far as practicable, present notes in a systematic
manner.

Purpose of notes to financial statements

The purpose of notes to financial statements is to provide the necessary disclosures required by
Philippine Financial Reporting Standards.

Specifically, PAS 1, paragraph 112, provides that the notes to financial statements shall:
a. Present information about the basis of preparation of the financial statements and the specific
accounting policies.
b. Disclose the information required by Philippine Financial Reporting Standards that is not
presented in the financial statements.
c. Provide additional information which is not presented in the financial statements but is
relevant to an understanding of the financial statements.

Order of presenting the notes

PAS 1, paragraph 114, provides that an entity normally presents notes in the following order to assist
users understand the financial statements and to compare them with financial statements of other
entities:
a. Statement of compliance with PFRS
b. Summary of significant accounting policies used
c. Supporting information or computation for line items presented in the financial statements.
d. other disclosures, such contingent liabilities, unrecognized contractual commitments and
nonfinancial disclosures.
In some circumstances, it may be necessary or desirable to vary the order of specific items within the
notes. However, the entity must retain the systematic presentation and structure of the notes as far as
practicable.
Compliance with PFRS
PAS 1, paragraph 16, provides that an entity whose financial statements comply with Philippine Financial
Reporting Standards shall make an explicit and unreserved statement of such compliance in the notes.

An entity shall not describe financial statements as complying with PFRS unless they comply with all the
requirements of each applicable Philippine Financial Reporting Standard.
Accounting policies
Accounting policies are defined as the specific principles, methods, practices, rules, bases and
conventions adopted by on entity in preparing and presenting financial statements.

Accounting standards set out the required recognition and measurement principles that an entity shall
follow in preparing its financial statements and shall often prescribe the accounting policy to be adopted.

Significant accounting policies

The summary of significant accounting policies shall disclose the following:

a. The measurement basis used b. The accounting policies used
b. Disclosure of measurement basis

It is important for an entity to inform users of the- measurement basis used in the financial statements
because the basis on which the entity prepares the financial statements significantly affects the users'
analysis. Under the Revised Conceptual Framework, the measurement bases are historical cost and
currrent value."
Current value includes fair value, value in use, fulfillment value and current cost. Disclosure of
accounting policies

In deciding whether a particular accounting policy should be disclosed, management shall consider
whether the disclosure would assist users in understanding how transactions, other events and
conditions are reflected in the financial statements.

Disclosure of particular accounting policies is especially useful to users when those policies are selected
from alternatives allowed in Philippine Financial Reporting Standards.

Disclosure of judgment

PAS 1, paragraph 122, provides that an entity shall disclose in the summary of significant accounting
policies the judgments that management has made in the process of applying accounting policies and
that have a significant effect on the amounts recognized in the financial statements.

For example, management makes judgment in determining the following:

a. (Whether financial assets are to be measured at fair value or at amortized cost.
b. Whether in substance particular sales of goods are product financing arrangement and therefore do
not give rise to revenue.

Disclosure of estimation uncertainty

PAS 1, paragraph 125, provides that an entity shall disclose information about the assumptions it makes
about the future, and other major sources of uncertainty at the end of reporting period that have a
significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within
the next financial year.
With respect to those assets and liabilities, the notes shall include the nature and carrying amount of the
assets and liabilities at the end of reporting period.

Other disclosures

PAS 1, paragraph 138, provides that an entity shall disclose the following:

a. The domicile and legal form of the entity, its country of incorporation and the address of the
registered office or principal place of business
b. A description of the nature of the entity's operations and its principal activities. c. The name of the
parent and the ultimate parent of the group.

Paragraph 137 provides that an entity shall disclose the following:

a. The amount of dividends proposed or declared before the financial statements were authorized for
issue but not recognized as distribution during the period and the related amount per share.
b. The amount of any cumulative preference dividends not recognized.

Examples of notes to financial statements (amounts are assumed)

Note 1-Compliance with PFRS

The financial statements have been prepared in compliance with the Philippine Financial Reporting
Standards and rules and regulations of the Philippine Securities and Exchange Commission. The
accounting policies adopted in the preparation of financial statements have been applied on a consistent
basis.

Note 2-Significant accounting policies

Measurement basis- The financial statements have been prepared on the basis of historical cost, and
except where stated, do not take into account changing prices and current cost of noncurrent assets.

Inventories - Inventories are measured at the lower of FIFO cont and net realizable value.

Store preopening costs - Such costs are charged to expense in the year incurred.

Property, plant and equipment - Property, plant and equipment are recorded at cost. The straight-line
method is used in recording depreciation on the basis of the estimated useful life of the assets.

Capital expenditures-Expenditures incurred subsequent to the acquisition of property, plant and

equipment are expensed outright if the amounts are P5,000 and below. Such expenditures amounted to
P100,000 in 2018 and P30,000 in 2017 on the aggregate.

Cash equivalents-The entity considers all highly liquid investments with maturities of three months or
less when purchased as cash equivalents.

Intangible assets - Goodwill represents the difference between the purchase price of on acquired entity
and the related fair values of net assets acquired. Goodwill is not amortized but tented for impairment
annually.

The cost of patents, copyrights and other intangible assets - are amortized over their estimated useful
life. The straight line method in used for amortization.

Research and development - All expenditures for research and development are charged to expense in
the year incurred.

Income taxes - Income taxes include deferred income taxes that result from all taxable and deductible
temporary differences between carrying amount for financial reporting and tax base for tax reporting of
assets and liabilities.

Earnings per share- Earnings per share amounts are based on the weighted average number of ordinary
shares outstanding after recognition of preference dividends. Potential ordinary shares are not material.
Note 5 Contingent liability

The entity is a defendant in a patent infringement suit seeking damages of P2,000,000. The suit is still
pending and the entity's legal counsel firmly believed that the case will not prosper.

Note 6-Long term debt

The bonds payable of P5,000,000 mature on December 31. 2024, pay semiannual interest of 12% on
June 30 and December 31.
The bonds require sinking fund deposit of P1,000,000 annually, starting December 31, 2021.

Note 7 Shareholders' equity

Preference share capital - P100 par value, 100,000 shares authorized, issued and outstanding at both
December 31. 2020 and December 31, 2019.

The preference share is cumulative and there are no dividends in arrears.

Ordinary share capital - P50 par. 1,000,000 shares authorized, and 800,000 shares issued at both
December 31, 2020 and December 31, 2019 of which 50,000 shares are held in treasury and recorded at
cost of P3,000,000.

Retained earnings are appropriated to the extent of the cost of the treasury shares.

The balance of retained earnings represents unrestricted amount legally available for dividends.

Note 8 - Share options

On December 1, 2020, the shareholders of the entity approved the share option plan which provides for
granting of options to purchase 50,000 ordinary shares at 100% of fair value at the date of grant. The
options are exercisable immediately.
PROBLEMS
Problem 3-1 Multiple choice (PAS 1)

1. Which is a purpose of notes to financial statements?

a. To present information about the basis of preparation of the statements and accounting
policies used.
b. To disclose the information required by PFRS not presented elsewhere in the financial
statements.
c. To provide additional information not presented but necessary for a fair presentation.
d. All of these can be considered a purpose of the notes.

2. What is the first item in presenting the notes?

a. Statement of compliance with PFRS
b. Other disclosures, such as contingent liabilities and unrecognized contractual commitments
c. Supporting information for items presented on the face of the financial statements
d. Summary of significant accounting policies.

3. An entity whose financial statements comply with PFRS shall

a. Make an explicit statement of compliance in the notes.
b. Make an unreserved statement of compliance in the
notes.
c. Make an explicit and unreserved statement of compliance in the notes.
d. Not describe financial statements as complying with PFRS.

4. The presentation of the notes to financial statements in a systematic manner

a. Is voluntary
b. Is mandatory
c. Is mandatory, as far as practicable
d. Depends on the industry

5. Disclosure of information about estimation uncertainty and judgments

a. Is voluntary
b. Is mandatory
c. Is either voluntary or mandatory
d. Depends on the industry

Problem 3-2 Multiple choice (IAA)

1. Which statement is incorrect regarding notes to financial statements?

a. IFRS requires specific note disclosures including disaggregation of inventories.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes should be clear, simple to understand and nontechnical in nature.
d. All of the choices are correct regarding notes to financial statements.

2. Notes to financial statements

a. Must be quantifiable.
b. Must qualify as an element.
c. Amplify items presented in the financial statements,.
d. All of the choices are correct

3. Which of the following is not a method of disclosing pertinent information?

a. Supporting schedule
b. Parenthetical explanation
c. Cross reference and contra item
d. All of these are methods of disclosing pertinent information
4. The disclosure of accounting policies is important financial statement readers in determining
a. Net income for the year to
b. Whether accounting policies are consistently applied from year to year.
c. The value of obsolete goods in ending inventory.
d. Whether the working capital position is adequate for future operations.

5. Accounting policies disclosed in the notes to financial statements typically include all of the following,
except
a. The cost flow assumption
b. The depreciation method
c. Significant estimates
d. Significant inventory purchasing policies

6. Significant accounting policies may not be

a. Selected on the basis of judgment.
b. Selected from existing acceptable alternatives.
c. Unusual or innovative in application.
d. Omitted from financial statement disclosure

7. An example of an inventory accounting policy that should be disclosed in a summary of significant

accounting policies is
a. Composition of inventory into raw materials, work in process and finished goods
b. Major backlog of inventory orders
c. Method used for pricing inventory
d. All of these should be disclosed in the summary of significant accounting policies.

8. Which of the following should be disclosed in a summary of significant accounting policies?

a. Type of executory contract
b. Cumulative effect of change in accounting policy
c. Claims of equity holders
d. Depreciation method

9. Notes to financial statements

a. Are relatively unimportant facts
b. Document the source of financial statement facts
c. Are an integral part of financial statements
d. Are irrelevant and immaterial facts

10. Which best demonstrates the standard of adequate disclosure?

a. The separate income statement
b. The auditor's report
c. The tax return.
d. The notes to financial statements

Problem 3-3 Multiple choice (AICPA Adapted)

1. What is the purpose of information presented in the notes to financial statements?

a. To provide disclosures required by generally accepted accounting principles
b. To correct improper presentation in the financial statements.
c. To provide recognition of amounts not included in the total of the financial statements
d. To present management response to auditor comments

2. Which of the following information should be disclosed in the summary of significant accounting
policies?
a. Refinancing of debt subsequent to the reporting period
b. Guarantee of indebtedness of others
c. Criteria for determining which investments are treated as cash equivalents
d. Adequacy of pension plan assets relative to the defined benefit obligation

3. Which of the following is not a required disclosure of accounting policies?

a. The measurement basis used
b. Key management personnel involved in drafting the summary of significant accounting
policies c. Disclosures required by Standards
 d. The nature of operations and the policies that the users of the financial statements would
expect to be disclosed
4. The notes to financial statements should not be used to
a. Describe significant accounting policies.
b. Describe depreciation method employed.
c. Describe the principles and methods peculiar to the industry in which the entity operates.
d. Correct an improper presentation in the financial statements.
5. An entity shall disclose in the summary of significant accounting policies.

a. The measurement basis used in preparing the financial statements.

b. All the measurement bases irrespective of whether used by the entity.
c. The measurement basis used in preparing the financial statements and the accounting policies
used.
d. All of the measurement bases and the accounting policy choices available to the entity
irrespective of whether used.

6. The summary of significant accounting policies should disclose

a. Proforma effect of retroactive application of an accounting change

b. Basis of profit recognition on long term construction contracts
c. Adequacy of pension plan assets in relation to vested benefits
d. Future lease payments

7. The summary of significant accounting policies should disclose

a. The composition of property, plant and equipment and the depreciation method used
b. The composition of property, plant and equipment only
c. The depreciation method used only
d. Neither the composition of property, plant and equipment nor the depreciation method used.

8. Which of the following should be included in the summary of significant accounting policies?
a. Property, plant and equipment recorded at cost with the depreciation computed principally by
straight line method
b. A business component was sold during the current year
c. Breakdown of sales attributable to business components
d. Future ordinary share dividends are expected to approximate sixty percent of earnings