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ReSA

ACCOUNTS

THE REVIEW SCHOOL


(A. LEE)

OF

ACCOUNTANCY THEORY

OF

TA PRE WEEK MATERIALS (A)

CONCEPTUAL FRAMEWORK of ACCOUNTING


1. The Conceptual Framework of Accounting
a. Is a Philippine Financial Reporting Standard
b. Is guided by Philippine Financial Reporting Standards
c. Is used as a guide by Philippine Financial Reporting Standards
d. Overrides Philippine Financial Reporting Standards
2. Choose the correct statement about generally accepted accounting principles
(GAAP)
a. They are laws
b. The Bureau of Internal Revenue enforces
c. Firms that do not comply with GAAP may suffer negative economic
consequences
d. GAAP and tax principles are the same
3. The objective of general-purpose financial statement is:
a. To provide the market value of a firm at a point in time
b. To provide the total market value of its common stock
c. To provide information useful for decision making by investors and
creditors
d. To require all companies to comply with Philippine Financial Reporting
Standards
4. External financial statements, according to the FRSC Conceptual Framework
for the Preparation and Presentation of Financial Statements, should provide
all of the following, except:
a. Information that is useful to present and potential investors and
creditors and other users in making rational investment, credit, and
other decisions
b. Information that is comprehensible to those who have a reasonable
understanding of business and economic activities and are willing to
study the information with reasonable diligence
c. Information for planning the future of the entity, implementing those
plans, and for controlling daily operations
d. Information to help present and potential investors and creditors and
other users in assessing the amounts, timing and uncertainty of
prospective cash receipts.
5. External decision makers include all of the following except:
a. Managers
c. Creditors
b. Owners
d. Financial press
6. Which of the following is not a decision that external users of a companys
financial information would make?
a. Whether or not to extend credit to the company
b. Whether or not to hold the companys stock
c. Whether or not the company should ass a new product line
d. Whether or not to ask for an increase in employees benefits during
union contract negotiations
7. A primary objective of financial reporting is to:
a. Assist investors in analyzing the economy

b. Assist suppliers in determining an appropriate discount to offer a


particular company
c. Assist investors in predicting prospective cash flows
d. Assist banks to determine an appropriate interest rate for their
commercial loans
8. The primary qualitative characteristics of accounting information include
which of the following:
a. Comparability (including consistency)
c. Relevance
b. Understandability
d. Materiality
9. Which one of the following is the secondary qualitative characteristic of
accounting information?
a. Continuity
c. Comparability (including
consistency)
b. Relevance
d. Reliability
10.Relevance is not a function of:
a. Feedback value
b. Verifiability

c. Timeless
d. Predictive Value

11.The going concern or continuity assumption is critical to financial accounting.


The assumption
a. Is always maintained for all firms for all years
b. Supports the use of historical cost valuation for assets rather than
market values
c. Means that a corporation has a definite ending date
d. Requires that we immediately expense prepaid accounts because they
do not represent a future inflow
12.A company reports only its total account receivable balance in its balance
sheet, as opposed to a complete listing of its individual customer balances.
This is an example of
a. Consistency
c. Cost/benefit
b. Materiality
d. Conservatism
13.The recognition of periodic depreciation expense on company-owned
automobiles requires estimating both salvage or residual value, and the
useful life of the vehicles. The use of estimates in this case is an example of:
a. Conservatism
b. Maintaining consistency
c. Invoking the materiality constraint rather than the cost-benefit
constraint
d. Providing relevant data at the expense of reliability
14.A firm does not know exactly how long its equipment will last. The firm
decides to use shorter rather than longer useful lives for depreciating the
equipment. This is an example of:
a. Reliability
c. Materiality
b. Conservatism
d. Stable entity
assumption
15.When assets are acquired, they should be recorded in the accounts in
conformity with the:
a. Full-disclosure principle
c. Cost principle
b. Materiality constraint
d. Separate entity
assumption
16.Under the stable monetary unit assumption:
a. All assets and liabilities are translated to pesos of constant purchasing
power

b. Inflation adjustments are incorporated directly into the financial


statements
c. The peso is assumed to have constant purchasing power, regardless of
the time period
d. Interest rates are increased for expected inflation
17.The matching concept:
a. Requires that a debit is matched or posted for every credit
b. Is the name applied to the process of associating expenses with
revenues
c. Treats all cost as being directly related to revenue generation
d. Treats all cost as expenses
18.Recording periodic depreciation on assets such as buildings or machinery is
an application of the:
a. Cost principle
c. Unit-of-measure
assumption
b. Materiality principle
d. Matching principle
19.The inclusion of footnotes and supporting schedules in the financial
statements reflect application of:
a. Time period assumption
c. Full-disclosure principle
b. Industry peculiarities constraint
d. Relevance quality
20.Under which of the following will revenues and expenses be reported in the
period they are earned or incurred?
a. Cash basis accounting
b. Accrual basis accounting
c. A combination of accrual and cash basis accounting
d. Single entry accounting
21.Which of the following is the incorrect basis for recognizing the expense
indicated?
a. Sales commissions expense on the basis of relationship with sales
b. Administrative salaries expense recognized as incurred
c. Depreciation expense on the basis of time
d. Cost of goods sold expense on a subjective or arbitrary basis
22.The environmental assumptions of accounting include all of the following
except:
a. Prudence
c. Periodicity
b. Separate entity
d. Continuity
23.The implementation constraints include all of the following except:
a. Materiality
c. Cost/benefit
b. Conservatism
d. Separate entity
24.The continuity assumption is the basis for the rule that:
a. The income statement should not include material gains and losses
that are both unusual and infrequent
b. Treasury stock should not be reported in the balance sheet as asset
c. The cost of installing a machine should not be included in the recorded
cost of the machine, but rather expensed immediately
d. The cost of the operating assets should be allocated to expense
systematically over their useful lives
25.Accounting traditionally has been influenced by conservatism because of the:
a. Probability of undetected errors in the financial statements
b. Difficulty in measuring net income on the accrual basis
c. Inherent uncertainties of many accounting measurements

d. Large number of transactions recorded in any one period


ANSWERS:
1. C
2. C
3. C
4. C
5. A
6. C
7. C
8. C
9. C
10.B
11.B
12.C
13.D
14.B
15.C
16.C
17.B
18.D
19.C
20.B
21.D
22.A
23.D
24.D
25.C

THE BASIC ACCOUNTING PROCESS


1. Which one of these is not among the criteria to regard an event as
accountable?
a. It must increase or decrease an element of financial accounting
b. It must have already happened
c. Its amount can be measured reliably
d. It must involve an exchange between two parties
2. A company performed services for several of its customers during the
current, but had not collected or accrued any revenue for the services by the
end of the current year. What effect would an adjustment to correct this
situation have on the fundamental accounting model or equation for this
company?
a. Increase assets, decrease equity
c. Increase assets,
increase equity
b. Increase one asset, decrease another asset d. Increase equity,
decrease assets

3. The double-entry concept in accounting means which of the following?


a. Only two accounts affected by each transaction recording
b. The debit-credit convention must be used
c. For every asset increased, a revenue or liability must also be
increased
d. At least two accounts are affected by each transaction recording
4. Which one of the following best expresses the primary purpose of the
general journal?
a. The general journal provides an organized summary of transactions
classified by type of account

b. The general journal eliminates the need for control accounts in the
ledger
c. The general journal provides a continuing balance of the amount to
date in each of the temporary accounts
d. The general journal provides a chronological listing of transactions in
debit-credit form.
5. A special journal designed for all cash receipts (including cash sales) is called
a(n):
a. Cash receipts journal
c. Accounts payable
subsidiary ledger
b. Sales journal
d. Cash payments journal
6. To post in accounting means to:
a. Copy the information about account changes from the
place it into the ledger.
b. Copy the information about account changes from the
into the ledger, and then delete it from the journal
c. Copy the information about account changes from the
place it into the ledger
d. Copy the information about account changes from the
documents, and record it in the ledger

ledger and
journal, place it
journal, and
source

7. Accounts payable and accounts receivable are examples of:


a. Permanent accounts
c. Mixed balance
accounts
b. Temporary accounts
d. Contra accounts
8. In the accounting cycle, a worksheet is prepared:
a. After adjusting entries are entered in the journal and posted to the
ledger
b. Before adjusting entries are entered in the journal and posted to the
ledger
c. As a substitute for financial statements
d. Only for the purpose of preparing reversing entries
9. What is normal order of accounts in the unadjusted trial balance?
a. Assets, equity, income, expenses, and finally liabilities
b. All accounts with debit balances, then all accounts with credit
balances
c. Assets, liabilities, equity
d. Assets, liabilities, equity, income, and finally expenses
10.Which of the following is not an adjusting entry for a company whose
reporting year ends on December 31?
a. Recognizing the portion of rent collected in advance as revenue for
the current year
b. Recording purchases in a perpetual inventory system
c. Recognizing selling expenses incurred in December but not paid until
the following January
d. Recognizing wages earned but not paid at the end of December
11.The adjusting entry at the end of the accounting year to reflect revenues
earned but not yet collected or recorded will:
a. Decrease liabilities
c. Not affect assets
b. Not affect income for the current period
d. Increase assets
12.Which of the following would most likely be found in an adjusting entry?
a. Prepaid expenses
c. Cash dividend paid
b. Accounts receivable
d. Sales on account

13.At the purchase date of a service that is not immediately used up, the cost
of such unused service is a(n):
a. Revenue
c. Asset
b. Liability
d. Expense
14.Which one of the following is an accrued liability?
a. Unearned subscription revenue
b. Rent revenue
c. Wages payable
d. Current portion of long-term debt payable
15.Adjusting entries are needed because an entity:
a. Uses the accrual basis of accounting
b. Has earned revenue during the period by selling products from its
central operations
c. Has expenses
d. Uses the cash basis of accounting rather than the accrual basis
16.An appropriate reversing entry:
a. Must be made because they are required by the Financial Reporting
Standards
b. Is dated the first day of the next accounting period
c. Is usually mad3e for adjusting entries that affect deferred item only
d. Is often used to correct entries which were initially based on estimates
17.As a general rule, which of the following is not subject to reversal?
a. Accrued expenses
b. Accrued revenues
c. Prepaid expenses recorded as assets upon payment
d. Deferred revenues recorded as revenue upon receipt
18.Reversing entries are used:
a. Primarily to simplify the bookkeeping during the next accounting
period
b. To adjust the inventory account under a periodic inventory system,
c. To close the income summary account
d. To establish appropriate contra accounts
19.Which of the following is an example of a closing entry?
a. Posting the ending inventory balance in perpetual inventory system
b. Transferring an amount entered in wrong account to the appropriate
account
c. Transferring the balance in the bad debt expense account to the
income summary account
d. Transferring the balance in a temporary account to a contra account
20.Which of the following accounting concepts best justifies the use of accruals
and deferrals?
a. Cost/benefit constraint
c. Continuity assumption
b. Unit-of-measure assumption
d. Materiality constraint
ANSWERS:
1. D
2. C
3. D
4. D
5. A
6. C
7. A
8. B

9. D
10.B
11.D
12.A
13.C
14.C
15.A
16.B
17.C
18.A
19.C
20.C

INCOME STATEMENT & STATEMENT OF CHANGES IN EQUITY


1. Accounting income is a concept in which:
a. Income is measured as the amount of real wealth that an entity
could consume during a period and be as well off at the end of that
period as it was at the beginning.
b. The transactions approach is used to record revenues, expenses, gains
and losses throughout the reporting period
c. Market values adjusted for the effects of inflation or deflation are used
to calculate real wealth
d. Income equals the change in market value of the firms outstanding
common stock for the period
2. (OLD) The revenue principle states that revenue should be recognized only
when a (n):
a. Exchange transaction involving goods and services has occurred and a
cash down payment has been received.
b. Exchange transaction involving goods or services has occurred and the
earnings process is essentially completed.
c. Sale or service transaction has occurred.
d. Completed earnings process can be projected.
3. Which of the following is not required for the recognition of revenue?
a. Receipt of cash by the seller at the time of sale.
b. Seller must receive an item ultimately realizable in cash, noncash
resources, or claims to cash
c. The earnings process must be essentially complete.
d. The transaction must create a measurable financial statement element
which fulfills the definition of revenue.
4. The matching principle is best demonstrated by:
a. Allocating advertising expense to several reporting periods
b. Recognizing rent as revenue when the cash was collected.
c. Not recognizing any expense unless some revenue is recognized.
d. Associating effort (cost) with accomplishment (revenue)
5. Which of the following is expensed under the principle of systematic and
rational allocation?
a. Salespeoples monthly salaries
c. Transportation to
customers
b. Insurance premiums
d. Electricity to light
office building
6. Which of the following expenses is not directly related to sales of products?
a. Sales commissions and shipping costs
c. Warranty expense on
products sold

b. Cost of goods sold


advertising

d. Institutional

7. A company sold a used operational asset at a P20, 000 losses. The loss
should be classified on the income statement as:
a. An ordinary item
c. A prior period
adjustment
b. An operating expense
d. An unusual or
infrequent item
8. Which type of accounting change should always be accounted for in current
and future periods?
a. Change in accounting estimate.
c. Change in
accounting principle.
b. Correction of an error.
d. Change in reporting
entity.
9. Which of the following changes would be accounted for prospectively?
a. Change in the expected life of a depreciable asset.
b. Changing from FIFO to weighted average for merchandise inventory.
c. First time presentation of consolidated financial statements.
d. Corrections of prior period errors.
10.Which of the following is characteristic of a change in accounting estimate?
a. Does not affect the financial statements of prior periods.
b. Requires the reporting of pro forma amounts for prior periods.
c. Never needs to be disclosed.
d. Should be reported through restatement of the financial statements.
11.When a firm changes only the estimated residual value of equipment,
a. Depreciation must be computed for each previous year based on the
new residual value.
b. The original cist, reduced by the new residual value, is the basis of
subsequent depreciation.
c. The remaining book value, reduced by the new residual value, is the
basis for subsequent depreciation.
d. No adjustment is needed.
12.Which of the following is treated as a retrospective accounting principle
change?
a. A change in the residual value.
b. A change from declining balance to straight-line depreciation
c. A change from FIFO to Weighted Average
d. Correction of an error affecting current years income
13.In 2007, a firm changed from the FIFO method of accounting for inventory to
Weighted Average (WA). The firms 2006 and 2007 comparative financial
statements will reflect which method or methods?
_____2006_____
_____2007_____
a.
WA
WA
b.
FIFO
FIFO
c.
FIFO
WA
d.
WA
Either WA or FIFO
14.A change in an amortization rate, such as on a copyright, should be
accounted for:
a. Retrospectively
c. Prospectively
b. By recording a prior period adjustment
d. Currently

15.A discontinued operation is defined as the disposal of a separate or major line


of the business. Any resulting gain or loss on discontinued operations is
reported as a(n):
a. Prior period adjustment, after tax
b. Separate item preceding extraordinary items, pretax
c. Separate item from income under continuing operations, after tax
d. Extraordinary gain or loss, after tax
16.A subsidiary that meets the criteria to be classified as held for sale will be
valued in the balance sheet at the date of the first financial statement after
acquisition
a. At fair value
c. At cost
b. At fair value less cost to sell
d. At the lower
amount between b) and c)
17.Any gain on a subsequent increase in the fair value less cost to sell of a
noncurrent asset classified as held for sale should be treated as follows:
a. The gain should be recognized in full
b. The should not be recognized
c. The gain should be recognized but not in excess of the cumulative
impairment loss
d. The gain should be recognized but only in retained earnings
18.Reporting in the main body of the financial statements is required for:
a. Loss contingencies that are probable and can be reasonably estimated
b. Gain contingencies that are probable and can be reasonably estimated
c. Loss contingencies that are possible and can be reasonably estimated
d. All loss contingencies
19.A loss contingency which is remote and cannot be reasonably estimated:
a. Must be disclosed in a note to the financial statements.
b. Need to be reported or disclosed.
c. Must be reported in the body of the financial statements.
d. Is permitted to be reported in the body of the financial statements.
20.(OLD) The concept of consistency is sacrificed in the accounting for which of
the following income statement items?
a. Cumulative effect of change in accounting principle
b. Extraordinary items
c. Discontinued operations
d. Loss on disposal of a segment of a business
ANSWERS:
1. B
2. B
3. A
4. D
5. B
6. D
7. A
8. A
9. A
10.A
11.C
12.C
13.A
14.C
15.C
16.D
17.C
18.A
19.B
20.A

BALANCE SHEET AND NOTES TO THE FINANCIAL STATEMENTS


1. Which term is essentially synonymous with balance sheet?
a. Operating statement
c. Statement of financial
value of the business
b. Statement of cash flows
d. Statement of financial
position
2. Under PAS 1, which one of the following is not required to be presented as
minimum information on the face of the balance sheet?
a. Investment property
b. Investments accounted under the equity method
c. Biological assets
d. Contingent liability
3. Which type of item is unexpired insurance usually considered to be?
a. Noncurrent asset
c. Prepaid expense
b. Inventories
d. Short-term investment
4. Accounts receivable are reported at:
a. Cost
value
b. Current value

c. Fair market
d. Amortized cost

5. The basis for classifying as current or noncurrent is the period of time


normally required to convert cash invested in:
a. Tangible operational assets back into cash, or 12 months whichever is
longer
b. Inventory to receivables and back to cash, or 12 months, whichever is
longer
c. Inventory back to cash, or twelve months, whichever is shorter
d. Receivables back to cash, or 12 months, whichever is longer
6. Which of the following is true about the operating cycle concept?
a. It causes the distinction between current and noncurrent items to
depend on whether they will affect cash within one year.
b. It permits some assets to be classified as current even though they are
more than one year removed from becoming cash.
c. It is becoming obsolete.
d. It affects the income statement but not the statement of cash flows.
7. Which item below is not current asset?
a. Prepaid expense
b. Unearned revenue
inventory

c. Short-term investment
d. Work-in-process

8. Which one of the following assets is similar to certain current assets, but is
not one?
a. Account receivable
b. Prepaid insurance
c. Long-term prepayments of expenses
d. Short-term investment in equity security
9. Equipment is sold at a loss. This means
a. The selling company had a decrease in cash because of the sale
b. Depreciation was recognized at a rate slower than the decline in
market value
c. Depreciation was recognized at a rate faster than the decline in market
value
d. The equipment wore out faster than was anticipated

10.Which of the following is not a negative element under the Property, Plant
and Equipment classification?
a. Accumulated depletion of mineral-bearing property
b. Accumulated depreciation of paved parking lot
c. Accumulated depreciation of buildings
d. Reserve for plant expansion
11.Long-term liabilities are distinguished from current liabilities on the basis of:
a. Whether the liability is to be paid within the operating cycle or one
year, whichever is shorter
b. Whether the liability is to be paid within the operating cycle or one
year, whichever is longer
c. Whether the liability is to be paid within one year or less
d. Whether the liability is to be paid within the operating cycle of the
business, if it is less that one year
12.Which of the following is usually not classified as a current liability?
a. Accrued (unpaid) interest on notes payable
b. Accrued interest on bonds payable
c. Rent collected in advance
d. Premium on long-term bonds payable, a credit (unamortized)
13.How is net working capital defined?
a. Current assets minus current liabilities
b. Total current assets
c. Capital contributed by shareholders
d. Capital contributed by shareholders plus retained earnings
14.The elements of the equity section of balance sheet of a corporation should
be classified primarily by:
a. Source
c. Class of share
capital
b. Maturity date
d. Liquidity
15.Elements in the equity section should be reported in order of:
a. Classes of share capital
c. Permanency
b. Time to maturity
d. Liquidity
16.Retained earnings is a subcategory of:
a. Contributed capital
b. Share capital

c. Liabilities
d. Equity

17.A deficit is synonymous with which item?


a. A net loss for the current reporting period
b. A cash overdraft at the bank
c. Negative working capital at the end of the reporting period
d. A debit balance in retained earnings at the end of the reporting period
18.What is the purpose of the information presented as notes to the 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 totals of the
financial statements
d. To present managements responses to auditors comments
19.Which of the following is not specifically a required disclosure of PAS 1?
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/significant shareholders of the entity


c. Level of rounding used in presenting the financial statements
d. Whether the financial statements cover the individual entity or a group
of entities
20.Which of the following should be disclosed in the summary of significant
accounting policies?
a. Refinancing of debt subsequent to the balance sheet date
b. Guarantees of indebtedness of others
c. Criteria for determining which investments are treated as cash
equivalent
d. Adequacy of pension plan assets relative to vested benefits
21.Which of the following falls within the definition of related parties as defined
by PAS 24?
a. Providers of finance in the course of their normal dealings with an
enterprise by virtue only of those dealings
b. A supplier with whom the reporting entity has one-year contract for the
supply of raw materials
c. Government department and agencies
d. The wife of a key management personnel who has the authority to
plan, direct, and control the activities of the reporting enterprise
22.Which of the following is not among the list of categories specified under PAS
24 for the purposes of separate related party disclosure?
a. Entities with joint control or significant influence over the entity
b. The parent company of the entity
c. An entity that has a common director with the entity
d. Joint ventures in which the entity is a venture
23.Which of the following situations will require disclosure as a related party?
a. In consolidated financial statements in respect to intra-group
transactions
b. In related party relationships where control exists, irrespective of
whether there have been transactions between related parties
c. In financial statement of state-controlled enterprise of transactions
with other state-controlled enterprises
d. In parent financial statements when they are made available or
published with the consolidated financial statements
24.Under PAS 10, Events After the Balance Sheet Date prescribes that an entity
shall adjust the amounts recognized in its financial statement to reflect:
a. Adjusting events after the balance sheet date.
b. Non-adjusting events after the balance sheet date.
c. Dividends declared to holders of equity instruments after the balance
sheet date but before the financial statements are authorized for issue.
d. Date when the financial statements were authorized for issue and
individual(s) who gave that authorization.
25.The party responsible for the fair presentation of financial statements of a
company is the:
a. Shareholders of the company
c. Government
b. Independent auditor
d. Management of the
company
ANSWERS:
1. D
2. D
3. C
4. D
5. B

6. B
7. B
8. C
9. B
10.D
11.B
12.D
13.A
14.A
15.C
16.D
17.D
18.A
19.B
20.C
21.D
22.C
23.B
24.A
25.D

INTERIM AND SEGMENT REPORTING


1. Which of the following measures is not used to determine whether a subunit
of a business is a reportable segment?
a. Revenue
c. Equity
b. Earnings
d. Assets
2. A significant industry segment (for segment reporting purposes) is one which
meets any one of three criteria relating to (a) revenue, (b) earnings, (c)
identifiable assets. The percent that is used to measure each of these criteria
is:
a. 1%
c. 10%
b. 5%
d. 15%
3. The sum of reportable segment sales must be at least equal to what percent
of total company sales?
a. 100
c. 65
b. 75
d. 50
4. In determining whether a particular business segment is of significant size to
warrant disclosure, which of the following statements is true?
a. Three tests are applied and all three must be met
b. Five tests are applied but only one must be met
c. Three tests are applied but only one must be met
d. Five tests are applied and all five tests must be met
5. The reportable identifiable assets of a reportable segment exclude which of
the following?
a. Segment patents
b. Segment receivables
c. Allowance for doubtful accounts on segment receivables
d. Portion the segment uses of corporate assets used by all segments
6. What is the purpose of requiring information about the various segments of a
company?
a. It allows better comparison of the results of two different companies
b. It permits a better assessment of the enterprises past performance
and future prospects
c. It allows comparisons to be made between a segment of one
enterprise and a similar segment of another enterprise
d. The FRSC established reporting requirements but remained silent as to
the rationale for including the data

7. Most interim period gains and losses, for the purpose of interim disclosure,
a. Are deferred until year-end
b. Are allowed to be offset against each other
c. Are recognized in the interim period of incurrence
d. Are allocated ratably over remaining interim periods
8. Temporary declines in inventory value occurring during interim periods
a. Should be recognized in the interim period on a pro-rata allocation
basis
b. May be ignored for purposes of computing interim period earnings
c. Should be offset against previously recognized interim inventory gains
d. Should be accounted for as if the interim period is an annual period
9. Which of the following need not be disclosed in interim financial statements?
a. Earnings per share
c. Seasonal revenue
b. Changes in accounting principle
d. Components of cost of
goods sold
10.Which of the following methods of inventory valuation is allowable at interim
dates but not at year-end?
a. LIFO retail method
c. Weighted-average
b. Specific identification
d. Estimated gross profit
rates

ANSWERS:
1. C
2. C
3. B
4. C
5. D
6. B
7. C
8. B
9. D
10.D