Basic Accounting

CFAS

MCQ

1. A company pays its annual insurance premium of $12,000 on December 1, covering an entire
year. How should this expense be recognized at year-end on December 31?
a. As an expense of $12,000
b. As a liability of $12,000
c. As an expense of $1,000
d. As a liability of $1,000

2. How does the recognition of accrued interest expense affect the financial statements?
a. It decreases liabilities on the balance sheet.
b. It increases assets on the balance sheet.
c. It increases expenses on the income statement.
d. It has no impact on the financial statements.

3. Which accounting principle supports the use of accrual accounting?

a. Revenue recognition principle
b. Historical cost principle
c. Cash basis accounting
d. Matching principle

4. When unearned revenue is earned, which of the following journal entries is correct?
a. Debit Unearned Revenue, Credit Revenue
b. Debit Revenue, Credit Unearned Revenue
c. Debit Cash, Credit Unearned Revenue
d. Debit Unearned Revenue, Credit Cash

5. Which financial statement is most impacted by accrual adjustments?

a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Statement of owner's equity

6. It focuses on general purpose reports on financial position, performance and cash flows.
a. Managerial Accounting
b. Management Advisory Services
c. Auditing
d. Financial Accounting
7. They encompass the conventions, rules, and procedures necessary to define what is accepted
accounting practice
a. Characteristics Principles
b. Recognition Principles
c. Generally Accepted Accounting Principles
d. Accounting Assumptions

8. Which is NOT part of the accounting standard setting process in the Philippines?
a. Preparation and approval by a Task Force of draft of the proposed SFAS
b. Distribution of the exposure draft for comment to PICPA members, FINEX members and
other interested parties.
c. Publication in the Official Gazette or in a newspaper of general circulation.
d. Approval by the Professional Regulation Commission.

9. Financial accounting is concerned with:

a. General-purpose reports on financial position and results of operations.
b. Specialized reports for inventory management and control.
c. Specialized reports for income tax computation and recognition.
d. General purpose reports on changes in stock prices and future estimates of market position.

10. If a business is not being sold or closed, the amounts reported in the accounts for assets used
in the business operations are based on the cost of the assets. This practice is justified by:
a. Accrual
b. Time period
c. Continuity Assumption
d. Accounting entity

11. Which of the following is NOT an example of a deferral?

a. Recognizing rent revenue received in advance
b. Recognizing interest expense accrued but not yet paid
c. Recording the purchase of inventory on credit
d. Recording a customer's payment for services to be provided in the future

12. Under the perpetual inventory system, how are inventory balances updated?
a. Periodically at the end of the fiscal year
b. Only when purchases are made
c. Each sale and purchase transaction
d. Only when inventory is physically counted

13. What is the purpose of the post-closing trial balance in the accounting cycle?
a. To identify errors and adjust account balances
b. To ensure that all temporary accounts are closed properly
c. To prepare the financial statements
 d. To reconcile bank statements

14. How does the concept of materiality affect the accounting cycle?
a. Materiality determines which accounting principles a company must follow
b. Materiality affects the timing and recognition of financial statement items
c. Materiality only applies to large corporations, not small businesses
d. Materiality is irrelevant in the accounting cycle

15. In a complex financial transaction, the company receives advance payments from customers.
Which accounts are affected and how during this transaction? a. Decrease in assets, decrease
in liabilities
b. Increase in assets, decrease in liabilities
c. Decrease in assets, increase in owner's equity
d. Increase in assets, increase in liabilities

16. Friva is the sole owner and manager of King Services. Friva purchased a car for personal use.
He uses a van in the business. Which of the following is violated if Friva recorded the cost of
the car as an asset of the business?
a. Conservatism
b. Going Concern
c. Full Disclosure
d. Separate entity assumption

17. The concept of accounting is applicable:

a. Only to the legal aspects of business organizations.
b. Only to the economic aspects of business organizations.
c. Only to business organizations.
d. Whenever accounting is involved.

18. It is the capacity of information to make a difference in a decision by helping users from
predictions about the outcome of past, present, and future events, or confirm and correct
prior expectations.
a. Relevance
b. Comparability
c. Reliability
d. Understandability

19. Verifiability of financial accounting information is synonymous with:

a. Faithful representation
b. Substance over form
c. Prudence
d. Completeness
20. MA Company does not know exactly how long its equipment will last. It decides to use a
shorter rather than longer useful life for depreciating the equipment. What accounting
concept is being applied in this decision?
a. Reliability
b. Materiality
c. Relevance
d. Conservatism

21. If the owner invests additional capital into the business, which accounts are affected, and how?
a. Increase in assets, increase in liabilities
b. Increase in assets, increase in owner's equity
c. Increase in assets, decrease in owner's equity
d. Decrease in assets, increase in liabilities

22. Under the double-entry accounting system, what happens to total assets and total liabilities
when a company records a purchase of equipment on credit?
a. Total assets and total liabilities both increase
b. Total assets increase, total liabilities decrease
c. Total assets decrease, total liabilities increase
d. Total assets and total liabilities both decrease

23. What is the difference between a current liability and a long-term liability?
a. Current liabilities are payable within one year; long-term liabilities are payable in more than
one year
b. Current liabilities are related to revenue; long-term liabilities are related to expenses
c. Current liabilities are recorded on the income statement; long-term liabilities are recorded
on the balance sheet
d. Current liabilities are interest-bearing; long-term liabilities are not Interest-bearing

24. What is the purpose of adjusting entries in the accounting cycle?

a. To record routine business transactions
b. To close temporary accounts
c. To allocate expenses and revenue to the appropriate period
d. To prepare the trial balance

25. Among the following choices, how can the accounting equation be presented?
a. – Asset + Expense + Withdrawal = Liability + Owner’s Equity - Revenue
b. Asset = Liability + Owner’s Equity – Revenue + Expenses - Withdrawal
c. Asset + Withdrawal + Expense – Liability – Revenue = Owner’s Equity
d. Asset – Liability = Owner’s Equity + Revenue – Expenses + Withdrawal

26. Which of the qualitative characteristics relate to the presentation of financial statements?
a. Relevance and reliability
 b. Understandability and comparability
c. Relevance and understandability
d. Reliability and comparability

27. An estimated loss from a loss contingency should be accrued when:

a. It is probable at the date of the financial statements that an asset has been impaired or a
liability has been incurred and the amount of the loss can be reasonably estimated.
b. The loss has been incurred on the date of the financial statements and the loss may be
material.
C. It is probable that a loss will be incurred in a future period and the amount of the loss can
be reasonably estimated.
d. It is probable at the date of the financial statements that a loss has been incurred and the
amount of the loss may be material.

28. A company did not record and accrual for a contingent loss but disclose the nature of the
contingency and the range of the loss. How likely is the loss?
a. Remote
b. Reasonably possible
c. Probable
d. Certain

29. It represents the gross outflows of economic benefits during the period arising in the course
of ordinary activities of an enterprise when these outflows result in decreases in equity, other
than those relating to distribution to owners.
a. Assets
b. Liabilities
c. Expense
d. Revenue

30. Imputing interest for certain assets and liabilities is primarily based on the concept of:
a. Valuation
b. Conservatism
c. Consistency
d. Stable monetary unit

31. On June 1, 2008, MAS Inc. reported a cash balance of $12,000. During June, MAS made
deposits of $3,000 and made disbursements totalling $16,000. What is the cash balance per
book at the end of June?
a. $1,000 debit balance
b. $15,000 debit balance
c. $1,000 credit balance
d. $4,000 credit balance
Solution: 12,000+3,000-16,000

32. At the end of the accounting period, Company Y had office supplies amounting to P4,500. At
the beginning of the period, the amount of supplies on hand was P3,000. If the business
purchased office supplies worth P12,000 in the same year, what amount of the said supplies
were used during the year?
a. P16,500
b. P14,300
c. P10,500
d. P9,750

Solution:

Supplies, beg. P 3,000

Purchases 12,000
Supplies, end. (4,500)
Supplies used P 10,500
33. Gardner Co. purchased a truck from Cole Co. by issuing a 6-month, 8% note payable for 60,000
on November 1. On December 31, the accrued expense adjusting entry is:
a. No entry is required
b. Dr. Interest expense 4,800; Cr. Interest payable 4,800
c. Dr. Interest expense 9,600; Cr. Interest payable 9,600
d. Dr. Interest expense 800; Cr. Interest payable 800

Solution: 6000*0.08*2/12

34. VeryFales Corporation purchased a one-year insurance policy in January 2008 for $66,000. The
insurance policy is in effect from March 2008 through February 2009. If the company neglects
to make the proper year-end adjustment for the expired insurance:
a. Net income and assets will be understated by $55,000.
b. Net income and assets will be overstated by $55,000.
c. Net income and assets will be understated by $11,000.
d. Net income and assets will be overstated by $11,000.

Solution: 66,000*10/12

35. An awareness of the normal balances of accounts would help you spot which of the following
as an error in recording?
a. A debit balance in the drawing account
b. A credit balance in an expense account
c. A credit balance in a liabilities account
d. A credit balance in a revenue account
 36. The adjusted trial balance of Exile Security Services shows the following balances:
Accounts payable P18,000
Accounts receivable P44,000
Accumulated Depreciation P4,000
Cash P6,000
Equipment P20,000
Land P50,000
Mortgage payable P40,000
Capital,owner P45,000
Prepaid insurance P1,000
Supplies P1,000
Wages payable P2,000
Compute for the company’s working capital.
a. P30,000
b. P32,000
c. P28,000
d. P29,000

Solution: 6000+44000+1000+1000-18000-2000

37. Which of the following is NOT true regarding depreciation?

a. Depreciation allocates the cost of a fixed asset over its estimated life.
b. Depreciation expense reflects the decrease in market value each year.
c. Depreciation is an allocation, not a valuation method.
d. Depreciation expense does not measure changes in market value.

38. An analysis of the records of Coron Realty Co. shows the following:

● The firm pays weekly salaries of P37,500 on Friday for a five-day workweek ending
that day. The accounting period ends on a Wednesday.
● The prepaid insurance account had a balance of P54,000 at the beginning of the year.
The account was debited for P60,000 for premiums on policies purchased during the year. THe
amount of unexpired insurance applicable to future periods is P10,000. ● The total expenses
prior to any adjustment is P288,000.

How much is the adjusted total expenses for the period?

a. P414,500
b. P410,800
c. P412,300
d. None of the above

Solution:
Unadjusted balance of expenses P 288,000
 Accrued salaries (37,500/5 x 3) 22,500
Insurance expense (54,000+60,000-10,000) 104,000
Adjusted balance of expenses P 414,500
39. Which of the following is not true about accounting principles?
a. Financial accountants follow generally accepted accounting principles (GAAP).
b. Following GAAP allows accounting information users to compare one company to another.
c. A new accounting principle can be adopted with stockholders approval.
d. The International Accounting Standards Board (IASB) has primary responsibility for
developing accounting principles.

40. You are the accountant of DLA Co. During the period, your company purchased staplers worth
P1,000. Although the staplers have an estimated useful life of 10 years, you have charged their
cost as an expense. Which of the following is most likely to be true?

a. You are applying the concept of matching principle.

b. You are applying the concepts of materiality and cost-benefit consideration.
c. You are applying the concept of verifiability.
d. All of the above.

OPEN ENDED QUESTIONS

1. MK Delivery service is owned and operated by Michael K. The following selected transactions
were completed by BBB Delivery Service during February:

(1) Received cash from owner as initial investment, P150,000

(2) Paid advertising expense, P9,000
(3) Purchased supplies on account (which were all consumed during February),
P6,000
(4) Billed customers for delivery services on account, P90,000 (5) Received cash from
customers on account, P55,000
(6) Withdrew cash for personal use, P10,000.

How much is the capital balance as of the end of February?

Answer: P215,000

Solution: 150000-9000-6000+90000-10000

2. The assets and liabilities of Impress Travel Service at June 30, 2023, the end of the current
fiscal year, and its revenue and expenses for the year are herein:
 Accounts Payable P12,000
Accounts receivable P32,000
Supplies used P6,000
Cash P78,000
Fees earned P475,000
Land P150,000
Miscellaneous Expense P8,000
Office Expense P111,000
Wages Expense P239,000

The capital of the owner was P125,000 at July 1, 2022, the beginning of the current year.
Compute the net income for the period.

Answer: P111,000

Solution: 475000-8000-111000-6000-239000

3. This is a characteristic in which financial accounting information is directed toward the

common needs of users and is independent of presumptions about particular needs and
desires of specific users.

Answer: Neutrality

4. This qualitative characteristic implies consensus.

Answer: Verifiability

5. The basic elements directly related to the measurement of financial position are: Answer:
Assets, Liabilities, and Equity

6. Janny B. acquired the equipment on June 30, 2007, at a cost of P504,000. It has an estimated
useful life of 12 years with a scrap value of P42,000. The firm uses a straight line method of
depreciation. What is the carrying amount of the equipment to be presented in the statement
of financial position as of December 31, 2010.

Answer: P369,250

Solution: 504000-((504000-42000)/12*3.5)

7. An accountant prepared the following post-closing trial balance:

 Heather Inc.
Post-closing Trial Balance
October 31, 2022

Debit Credit

Cash 13,200

Accounts Receivable 29,350

Supplies 1,850

Equipment 130,600

Accumulated Depreciation - Equipment 43,500

Accounts Payable 15,800

Salaries Payable 1,500

Unearned Rent 6,000

Heather, Capital 108,200

Total P 216,050 P 133,950

Assuming that all accounts have normal balances, how much should the total debits be in the
corrected post-closing trial balance?

Answer: P175,000

Solution:

Heather Inc.
Post-closing Trial Balance
October 31, 2022

Debit Credit

Cash 13,200
 Accounts Receivable 29,350

Supplies 1,850

Equipment 130,600

Accumulated Depreciation - Equipment 43,500

Accounts Payable 15,800

Salaries Payable 1,500

Unearned Rent 6,000

Heather, Capital 108,200

Total P 175,000 P 175,000

8. The process of identifying, measuring, analyzing, and communication financial information
needed by management to plan, evaluate, and control an organization’s operations is called:

Answer: Managerial Accounting

9. It is the residual interest in the assets of the entity after deducting all its liabilities.

Answer: Equity

10. This measurement basis is the discounted value of the future net cash inflows that an asset is
expected to generate in the normal course of business.

Answer: Present Value