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BASIC ACCOUNTING AND THEORY OF ACCOUNTS

EASY
1. Failure to record the expired portion of prepaid rent will not
a.
b.
c.
d.

overstate assets
overstate retained earnings
understate expenses
understate liabilities

2. In recording transactions, which of the following best describes the distinction


between expense accounts and loss accounts?
a.
b.
c.
d.

Losses are material items while expenses are immaterial items


Expenses are related to revenue, losses are not
Expenses can always be prevented while losses can never be prevented
Losses are extraordinary charges to income while expenses are ordinary
charges to income

3. Objectivity is an ingredient of
a.
b.
c.
d.

faithful representation and relevance


relevance
faithful representation
neither relevance nor faithful representation

4. The following are essential characteristics of an asset. Which is not?


a.
b.
c.
d.

The
The
The
The

asset is the result of a past transaction or event.


asset is owned by the entity.
asset provides future economic benefits only.
cost of the asset can be measured reliably.

5. Which is correct regarding closing entries?


a.
b.
c.
d.

The account income summary is a real account


A credit balance in the income summary represents net loss
After the accounts have been closed, all the accounts have zero balances.
They remove the balances from the firms temporary accounts.

AVERAGE

1. When an entity changed the expected service life of an asset because additional
information has been obtained, which of the following should be reported?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retrospective application
c. Prior period error
d. None of the above
2. Which of the following is true regarding compensating balance?
a. It must be included in cash and cash equivalent
b. It should be classified as current asset when it is legally restricted and related
to long-term loan.
c. It should be classified as non-current asset when it is legally restricted and
related to a short-term loan
d. It should be classified as current asset when it is not legally restricted as to
withdrawal.
3. A bank reconciliation is a statement which brings into agreement the cash
balance per book and cash balance per bank. If the balance shown on the
companys bank statement is less than the correct cash balance and neither the
company nor the bank has made errors, there must be
a.
b.
c.
d.

outstanding checks
deposits in transit
bank charges not recorded by the company
deposits credited by the bank but not yet recorded by the company

4. For an entity with a periodic inventory system, which of the following would cause
income to be overstated in the period of occurrence?
a.
b.
c.
d.

Overestimated bad debt expense


Understated beginning inventory
Understated ending inventory
Overstated purchases

5. When the allowance method of recognizing bad debts expense is used, income
would increase when
a.
b.
c.
d.

specific account receivable is collected


specific uncollectible account is written off
account previously written off becomes collectible
account receivable is recognized in relation to a sale

DIFFICULT
1. An entity failed to amortize premium on its investment in bonds. What effect
would this have on the carrying amount of the investment and interest received,
respectively?
a.
b.
c.
d.

overstated, overstated
overstated, no effect
understated, understated
understated, no effect

2. How would the declaration and subsequent issuance of a 20% stock dividend by
the issuer affect each of the following when the fair value of the shares exceeds the
par value of the share?
a.
b.
c.
d.

Share Premium
No effect
Increase
No effect
Increase

Retained Earnings
Shareholders Equity
No effect
No effect
Decrease
No effect
Decrease
No effect
No effect
No effect

3. An entity owns 30% of the preference shares of another company. Which of the
following affects the investors income?
a.
b.
c.
d.

Net Income of Investee


Yes
No
No
Yes

Cash Dividends
Yes
Yes
No
No

4. Statement 1: Small and Medium-sized entities (SMEs) do not have public


accountability.
Statement 2: Small and Medium-sized entities (SMEs) publish general-purpose
financial statements
for external users.
Which of the above-mentioned statements is/are correct?
a.
b.
c.
d.

Only statement 1
Only statement 2
Both
Neither

5. One of the enhancing qualities of accounting information is


a
b
c
d

Free from error


Predictive value
Timeliness
Cost-benefit

CLINCHER
1. Under the equity method, net income reported by the investee is properly
treated by the investor as a/an
a. return on investment
b. dividend income
c. event that requires memorandum entry
d. event that requires a journal entry
2. Which of the following is true regarding reversing entries?
a. They are normally prepared for accrued, prepaid and estimated items.
b. They are necessary to achieve proper matching of revenue and expense.
c. They are desirable to exercise consistency and establish standardized procedures.
d. They must be made at year-end.
3. In the Conceptual Framework for Financial Reporting, what provides the why of
accounting?
a.
b.
c.
d.

Measurement and recognition principle


Element of financial statements
Objective of financial reporting
Qualitative characteristics of accounting information

4. Of the following items, which one should be classified as current assets?


a. Cash designated for the redemption of callable preference shares.
b. A deposit on the machinery ordered, delivery of which will be made within 6
months.
c. Installment notes receivable due over 18 months in accordance with normal trade
practice.
d. Cash surrender value of a life insurance policy.
5. What do an appropriation of retained earnings and a declaration of cash dividend
(same amount) have in common?
a. Both results in a decrease in unappropriated retained earnings.
b. Both have the same consequences for shareholders.
c. Both increase the amount of appropriated retained earnings.
d. Both permanently reduce future ability to pay dividends.

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