DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
Theory of Accounts – Reviewer
____________________________________________________________________________________________________________

COVERAGE:
Other Topics: Single Entry System
Accrual Basis & Cash Basis of Accounting
Correction of Errors

Direction: Read and select the best answer for the following questions.

___1. Under this method of recording transactions, there is complete set of accounting records, journal, special journal, subsidiary ledger and other
important records. Under this method, transactions are recorded in terms of equal debits and credits.
a. Double-entry system
b. Single-entry system
c. Triple-entry system
d. No-entry system
___2. Under this method of recording transactions, the accounting records are incomplete. At most, these is only cashbook, summarizing receipts
and disbursements,
a. Double-entry system
b. Single-entry system
c. Triple-entry system
d. No-entry system
___3. Under this basis of accounting, income is recognized when earned regardless of collection and expense is recognized when incurred
regardless of payment.
a. Simple basis
b. Modified basis
c. Accrual basis
d. cash basis
___4. Under this basis of accounting, income is recognized when cash is collected regardless of when earned and expense is recognized when paid
regardless of when incurred.
a. Simple basis
b. Modified basis
c. Accrual basis
d. cash basis
___5. Total net income over the life of an entity is
a. Higher under the cash basis that under the accrual basis
b. Lower under the cash basis that under the accrual basis
c. The same under the cash basis as under the accrual basis
d. Not susceptible to measurement
___6. Under the cash basis of accounting
a. Revenue is recorded when earned.
b. Accounts receivable would appear in the statement of financial position.
c. Depreciation of assets having an economic life of more than one year is not recognized.
d. The matching principle is ignored.
___7. Which of the following regarding accrual versus cash basis accounting is true?
a. The FRSc believes that the cash basis is appropriate for some smaller entities, especially those in the service industry.
b. The cash basis is less useful in predicting the time and amounts of future cash flows of an entity.
c. Application of the cash basis results in an income statement reporting revenue and expenses.
d. The cash basis requires a comp0lete set of double entry records.
___8. Under the accrual basis of accounting, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses are recognized.
b. Precede or coincide with but never follow the period in which revenue and expenses are recognized.
c. coincide with or follow but never precede the period in which revenue and expenses are recognized.
d. Only coincide with the period in which revenue and expenses are recognized.

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___9. As compare to its cash basis net income for the current year, an entity’s accrual basis net income is increased when it
a. Declared a cash dividend in the prior year that is paid in the current year.
b. Wrote off more accounts receivable that it reported as uncollectible accounts expense in the current year.
c. Had lower accrued expenses on December 31 of the current year than on January 1.
d. Sold used equipment for cash at a gain in the current year.
___10. It is a basis of accounting which is a mixture of cash basis and accrual basis where revenue is reported in the year of cash receipts, prepaid
expenses are deferred but accruals are not recognized, expenditures having benefits of more than one year are capitalized as assets and
depreciated.
a. cash basis
b. Accrual basis
c. Modified cash basis
d. Pure cash basis
___11. These are omissions from and misstatements in the financial statements for one or more periods arising from a failure to use or misuse
reliable information.
a. change in accounting policy
b. change in accounting estimate
c. prior period error
d. change in reporting entity
___12. What is the treatment of prior period error?
a. It should be corrected prospectively in the current year profit or loss.
b. It should be corrected retrospectively by restating the beginning retained earnings.
c. It should be ignored.
d. It should be corrected in the statement of cash flows.
___13. Prior period error should be reported in
a. Income statement of the current year
b. Income statement on the year of error
c. Statement of changes in equity of the current year
d. Statement of changes in equity of the year of error
___14. Prior period errors are omissions from and misstatements in the financial statements for one or more periods arising from a failure to use or
misuse of reliable information that:
a. Was available when financial statements for those periods were authorized for issue.
b. could reasonably be expected to have been obtained and taken into accounting in the preparation and presentation of those financial
statements.
c. Either A or B
d. Both A and B
___15. The following shall be disclosed about prior period errors, except
a. The nature o the prior period error.
b. The amount of correction at the beginning of the earliest prior period presented.
c. If retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and
a description of how and from when the error has been corrected.
d. The comparative amount of error to that of competitor.
___16. These are errors which only affect real or permanent accounts.
a. Statement of financial position errors
b. Income statement errors
c. Mixed errors
d. counter-balancing errors
___17. These are errors which only affect nominal or temporary accounts.
a. Statement of financial position errors
b. Income statement errors
c. Mixed errors
d. counter-balancing errors
___18. These are errors which affect both real and nominal accounts.
a. Statement of financial position errors
b. Income statement errors
c. Mixed errors
d. counter-balancing errors
___19. These are errors which when not detected within the subsequent financial in which the errors were committed, are automatically corrected as
natural part of the accounting process.
a. counter-balancing errors
b. noncounterbalancing errors

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 c. income statement errors
d. Statement of financial position errors
___20. Also called as permanent errors, there errors do not automatically offset in the next accounting reporting period.
a. counter-balancing errors
b. noncounterbalancing errors
c. income statement errors
d. Statement of financial position errors
___21. The following are counterbalancing errors, except
a. Overstatement or understatement of inventory, whether beginning or ending
b. Overstatement or understatement of accruals, whether beginning or ending
c. Overstatement or understatement of prepayments and deferrals, whether beginning or ending
d. Nonrecording of depreciation, amortization and bad debt expense
___22. These are entries that are made in the accounting records to correct an improper treatment of an event, information, or transaction in a prior
period.
a. correcting entry
b. adjusting entry
c. closing entry
d. reversing entry
___23. Indicate the effects of the following errors by writing Over for overstated, Under for understated and NE for no
effect.
ERRORS 12/31/2011 12/31/2011 12/31/2011 12/31/2011 12/31/2012 12/31/2012 12/31/2012 12/31/2012
Total Asset Total Capital/ Net income Total Asset Total Capital / Net Income
Liability Retained Liability Retained
Earnings Earnings
Overstated
Inventory on
12/31/2011
Understated
inventory on
12/31/2012
Understated
Prepaid on
12/31/2011
Overstated
Prepaid on
12/31/2012
Overstated
unearned
revenue on
12/31/2011
Understated
unearned
revenue on
12/31/2012
Overstated
accrued
revenue on
12/31/2011
Understated
accrued
revenue on
12/31/2012
Understated
accrued
expense on
12/31/2011
Overstated
accrued
expense on
12/31/2012
Under
depreciation
on year 2011
Over
depreciation
on year 2012

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