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THEORY OF ACCOUNTS C.Gonzaga


TOPIC: FINANCIAL STATEMENTS (IAS/PAS 1)

1 January 2010 Effective date of the April 2009 revisions to IAS 1

Objective of IAS 1 . The objective of IAS 1 is to prescribe the basis for presentation of general purpose financial statements,
to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of
other entities. IAS 1 sets out the overall framework and responsibilities for the presentation of financial statements,
guidelines for their structure and minimum requirements for the content of the financial statements. Standards for
recognizing, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations.

Scope . Applies to all general purpose financial statements based on International Financial Reporting Standards.

General purpose financial statements are those intended to serve users who do not have the authority to demand
financial reports tailored for their own needs.

Objective of Financial Statements . The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making
economic decisions. To meet that objective, financial statements provide information about an entity's:

(1) Assets. (2) Liabilities. (3) Equity. (4) Income and expenses, including gains and losses.
(5) Other changes in equity. (6) Cash flows.

That information, along with other information in the notes, assists users of financial statements in predicting the entity's
future cash flows and, in particular, their timing and certainty.

Complete Set of Financial Statements . A complete set of financial statements should include:

a statement of financial position at the end of the period,


a statement of comprehensive income for the period,
a statement of changes in equity for the period
statement of cash flows for the period, and
notes, comprising a summary of significant accounting policies and other explanatory information.
A statement of financial position as at the beginning of the earliest comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its FS, or when it reclassifies
items in its FS.

An entity may use titles for the statements other than those stated above.

Reports that are presented outside of the financial statements -- including financial reviews by management, environmental
reports, and value added statements -- are outside the scope of IFRSs.

Fair Presentation and Compliance with IFRSs . The financial statements must "present fairly" the financial position, financial
performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions,
other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to
result in financial statements that achieve a fair presentation.

IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of
such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with
all the requirements of IFRSs (including Interpretations).

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or
explanatory material.

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS
requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework.
In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons,
and impact of the departure.

Going Concern . An entity preparing IFRS financial statements is presumed to be a going concern. If management has
significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If
management concludes that the entity is not a going concern, the financial statements should not be prepared on a going
concern basis, in which case IAS 1 requires a series of disclosures.

Accrual Basis of Accounting . IAS 1 requires that an entity prepare its financial statements, except for cash flow information,
using the accrual basis of accounting.
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Consistency of Presentation . The presentation and classification of items in the financial statements shall be retained from
one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS.

Materiality and Aggregation . Each material class of similar items must be presented separately in the financial statements.
Dissimilar items may be aggregated only if the are individually immaterial.

Offsetting. Assets and liabilities, and income and expenses, may not be offset unless required or permitted by a Standard
or an Interpretation.

Comparative Information . IAS 1 requires that comparative information shall be disclosed in respect of the previous period
for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard
requires otherwise. If comparative amounts are changed or reclassified, various disclosures are required.

Consistency of presentation. An entity shall retain the presentation and classification of items in the FS from one period to
the next, unless it is apparent that another presentation or classification would be more appropriate; or an IFRS requires a
change in presentation.

Structure and Content of Financial Statements in General . Clearly identify:

the financial statements and the notes


the reporting enterprise
whether the statements are for the enterprise or for a group
the date or period covered
the presentation currency
the level of precision (thousands, millions, etc.)

Reporting Period . There is a presumption that financial statements will be prepared at least annually. If the annual reporting
period changes and financial statements are prepared for a different period, the enterprise must disclose the reason for the
change and a warning about problems of comparability.

Statement of Financial Position . An entity must normally present a classified statement of financial position, separating
current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable
and more relevant may the current/noncurrent split be omitted. In either case, if an asset (liability) category commingles
amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months,
note disclosure is required that separates the longer-term amounts from the 12-month amounts.

Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise's normal
operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent.

Current liabilities are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those
held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months.
Other liabilities are noncurrent.

Long-term debt expected to be refinanced under an existing loan facility is noncurrent, even if due within 12 months.

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan
agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and
before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach.
However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace
ending at least 12 months after the reporting date, within which the entity can rectify the breach and during which the lender
cannot demand immediate repayment.

Minimum items on the face of the statement of financial position

(a) property, plant and equipment;


(b) investment property;
(c) intangible assets;
(d) financial assets (excluding amounts shown under (e), (h) and (i));
(e) investments accounted for using the equity method;
(f) biological assets;
(g) inventories;
(h) trade and other receivables;
(i) cash and cash equivalents;
(j) the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in
accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
(k) trade and other payables;
(l) provisions;
(m) financial liabilities (excluding amounts shown under (k) and (l));
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(n) liabilities and assets for current tax, as defined in IAS 12 Income Taxes; ;
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12;
(p) liabilities included in disposal groups classified as held for sale in accordance with IFRS 5;
(q) minority interest, presented within equity; and
(r) issued capital and reserves attributable to equity holders of the parent.

Additional line items may be needed to fairly present the entity's financial position. An entity makes the judgment about
whether to present additional items separately.

IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa,
and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation
(assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere fixed assets + current
assets - short term payables = long-term debt plus equity is also acceptable.

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.76]

numbers of shares authorized, issued and fully paid, and issued but not fully paid
par value per share, or that the shares have no par value
reconciliation of shares outstanding at the beginning and the end of the period
description of rights, preferences, and restrictions attaching to that class including restrictions on the distribution of
dividends and the repayment of capital
treasury shares, including shares held by subsidiaries and associates
shares reserved for issuance under options and contracts for the sale of shares, including terms and amounts
a description of the nature and purpose of each reserve within owners' equity

Statement of Comprehensive Income . In the 2003 revision to IAS 1, the IASB is now using "profit or loss" rather than "net
profit or loss" as the descriptive term for the bottom line of the income statement. All items of income and expense
recognized in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise.

Minimum items on the face of the statement of income should include:

a) revenue
b) finance costs
c) share of the profit or loss of associates and joint ventures accounted for using the equity method
d) a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax
gain or loss recognized on the disposal of the assets or disposal group(s) constituting the discontinued operation
e) tax expense
f) profit or loss
g) each component of other comprehensive income classified by nature (excluding amounts in (h)
h) share of the other comprehensive income of associates and joint ventures accounted for using the equity method
i) total comprehensive income

The following items must also be disclosed on the face of the income statement as allocations of profit or loss for the
period:

profit or loss for the period attributable to minority interest, and owners of the parent
total comprehensive income for the period attributable to minority interest, and owners of the parent

Additional line items may be needed to fairly present the enterprise's results of operations.

No items may be presented on the face of the statement of income or in the notes as "extraordinary items".

Certain items must be disclosed either on the face of the statement of income or in the notes, if material, including:

write-downs of inventories to net realizable value or of property, plant and equipment to recoverable amount, as
well as reversals of such write-downs
restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinuing operations
litigation settlements
other reversals of provisions

Expenses should be analyzed either by nature (raw materials and consumables used, employee benefits expense,
depreciation and amortization expense, other expenses etc.) or by function (cost of sales, selling, administrative, other
expenses, etc.) either on the face of the statement of income or in the notes. If an enterprise categorizes by function,
additional information on the nature of expenses at a minimum depreciation, amortization, and staff costs must be
disclosed.
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Statement of Cash Flows . Rather than setting out separate standards for presenting the cash flow statement, IAS 1 refers
to IAS 7, Cash Flow Statements

Statement of Changes in Equity . IAS 1 requires an entity to present a statement of changes in equity as a separate
component of the financial statements. The statement must show:

total comprehensive income for the period showing separately the total amounts attributable to owners of the parent
and to minority interest
for each component of equity, the effects of changes in accounting policies and corrections of errors recognized in
accordance with IAS 8
profit or loss for the period
each item of income and expense for the period that is recognized directly in equity, and the total of those items;

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented
in the notes:

capital transactions with owners


the balance of accumulated profits at the beginning and at the end of the period, and the movements for the period
a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at
the beginning and at the end of the period, disclosing each movement

Notes to the Financial Statements . The notes must:

present information about the basis of preparation of the financial statements and the specific accounting policies used;
disclose any information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement
of changes in equity, or cash flow statement; and
provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes
in equity, or cash flow statement that is deemed relevant to an understanding of any of them.

Notes should be cross-referenced from the face of the financial statements to the relevant note.

IAS 1 suggests that the notes should normally be presented in the following order:

a statement of compliance with IFRSs


a summary of significant accounting policies applied, including:
o the measurement basis (or bases) used in preparing the financial statements
o the other accounting policies used that are relevant to an understanding of the financial statements
supporting information for items presented on the face of the balance sheet, income statement, statement of changes in equity,
and cash flow statement, in the order in which each statement and each line item is presented
other disclosures, including:
o contingent liabilities (see IAS 37) and unrecognized contractual commitments
o non-financial disclosures, such as the entity's financial risk management objectives and policies (see IAS 32)

Disclosure of judgments.. An entity must disclose, in the summary of significant accounting policies or other notes, the judgments, apart
from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the
most significant effect on the amounts recognized in the financial statements.

Examples cited in IAS 1 include management's judgments in determining:

whether financial assets are held-to-maturity investments


when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other
entities
whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and
whether the substance of the relationship between the entity and a special purpose entity indicates that the special purpose
entity is controlled by the entity

Disclosure of key sources of estimation uncertainty. An entity must disclose, in the notes, information about the key assumptions
concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial year. These disclosures do not involve
disclosing budgets or forecasts.

The following other note disclosures are required by IAS 1 if not disclosed elsewhere in information published with the financial statements:

domicile of the enterprise


country of incorporation
address of registered office or principal place of business
description of the enterprise's operations and principal activities
name of its parent and the ultimate parent if it is part of a group

Other Disclosures
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Disclosures about Dividends . The following must be disclosed either on the face of the income statement or the statement of changes
in equity or in the notes:

the amount of dividends recognized as distributions to equity holders during the period, and
the related amount per share.

The following must be disclosed in the notes:

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

Capital Disclosures. ( additional requirements for disclosures)

the entity's objectives, policies and processes for managing capital;


quantitative data about what the entity regards as capital;
whether the entity has complied with any capital requirements; and
if it has not complied, the consequences of such non-compliance.

Disclosures about Puttable Shares and Obligations Arising Only on Liquidation The following additional disclosures are required
if an entity has a puttable instrument that is presented as equity:

summary quantitative data about the amount classified as equity;


the entity's objectives, policies and processes for managing its obligation to repurchase or redeem the instruments when required
to do so by the instrument holders, including any changes from the previous period;
the expected cash outflow on redemption or repurchase of that class of financial instruments; and
information about how the expected cash outflow on redemption or repurchase was determined.

If an instrument is reclassified into and out of each category (financial liabilities or equity) the amount, timing and reason for that
reclassification must be disclosed. If an entity is a limited-life entity, disclosure is also required regarding the length of its life.

The reporting entity is required to:

Present all non-owner changes in equity (that is, 'comprehensive income' ) either in one statement of comprehensive income or
in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive
income may not be presented in the statement of changes in equity.
Present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set
of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement.
Disclose income tax relating to each component of other comprehensive income.
Disclose reclassification adjustments relating to components of other comprehensive income.

IAS 1 changes the titles of financial statements as they will be used in IFRSs:

'balance sheet' will become 'statement of financial position'


'income statement' will become 'statement of comprehensive income'
'cash flow statement' will become 'statement of cash flows').

Entities are not required to use the new titles in their financial statements. All existing Standards and Interpretations are being amended
to reflect the new terminology.

Comprehensive Income. Comprehensive income for a period includes profit or loss for that period plus other comprehensive income
recognized in that period. The components of other comprehensive income include:

changes in revaluation surplus (IAS 16 and IAS 38).


actuarial gains and losses on defined benefit plans recognized in accordance with paragraph 93A of IAS 19.
gains and losses arising from translating the financial statements of a foreign operation (IAS 21).
gains and losses on remeasuring available-for-sale financial assets (IAS 39).
the effective portion of gains and losses on hedging instruments in a cash flow hedge (IAS 39).

FINANCIAL STATEMENTS

1. The major financial statements include all of the following, except:


a. Statement of financial position
b. Statement of changes in financial position
c. Statement of comprehensive income
d. Statement of changes in equity

2. In analyzing a companys financial statements, which financial statement would a potential investor primarily use to
assess the companys liquidity and financial flexibility?
a. Statement of financial position.
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b. Income statement.
c. Statement of retained earnings.
d. Statement of cash flows.

3. Galaxy Corporation prepares its financial statements in accordance with IFRS. Galaxy intends to refinance a P10,000
note payable due on February 20, 2011. The company expects the note to be refinanced for a period of five years.
Under what circumstances can Galaxy report the note payable as a noncurrent liability on its December 31, 2010
statement of financial position?
a. If Galaxy has the intent and ability to refinance before December 31, 2010.
b. If Galaxy has executed an agreement to refinance before December 31, 2010.
c. If Galaxy has executed an agreement to refinance prior to the issuance of the financial statements in March 2011.
d. If Galaxy has the intent and ability to refinance before the issuance of the financial statements in March 2011.

4. Largo Corporation prepares its financial statements in accordance with IFRS. Which of the following items is required
disclosure on the income statement?
a. Revenues, cost of goods sold, and advertising expense.
b. Finance costs, tax expense, and income.
c. Operating expenses, nonoperating expenses, and extraordinary items.
d. Gross profit, operating profits, and net profits.

5. Which of the following may not be disclosed on the income statement for a company that prepares its financial
statements in accordance with IFRS?
a. Gain or loss.
b. Tax expense.
c. Gain or loss from extraordinary items.
d. Gain or loss from discontinued operations.

6. Glenda Corporation prepares its financial statements in accordance with IFRS. Glenda must report finance costs on the
statement of cash flows
a. In operating activities.
b. Either in operating activities or financing activities.
c. In financing activities.
d. In investing activities or financing activities.

7. Larimer Corporation prepares its financial statements in accordance with IFRS. Larimer acquired equipment by issuing
5,000 shares of its common stock. How should this transaction be reported on the statement of cash flows?
a. As an outflow of cash from investing activities and inflow of cash from financing activities.
b. As an inflow of cash from financing activities and an outflow of cash from operating activities.
c. At the bottom of the statement of cash flows as a significant noncash transaction.
d. In the notes to the financial statements as a significant noncash transaction.

8. For IFRS purposes, cash advances and loans from bank overdrafts should be reported on the statement of cash flows
as
a. Operating activities.
b. Investing activities.
c. Financing activities.
d. Other significant noncash activities.

9. Which of the following are acceptable methods for reporting comprehensive income under IFRS?
I. One comprehensive income statement.
II. Two statements: an income statement and a comprehensive income statement.
III. In the statement of owners equity.

a. I only.
b. I and II only.
c. I, II, and III.
d. I and III only.

10. Which of the following is true about financial statement requirements under IFRS?
a. Prior year comparative financial statements are required.
b. Income statements for three years are required.
c. Balance sheets for three years are required.
d. There are no specific requirements regarding comparative financial statements.

11. Under IFRS, operating expenses on the income statement may be classified by
Nature Function
a. Yes Yes
b. Yes No
c. No Yes
d. No No
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12. Under IFRS, the statement of cash flows may be presented on the
Direct Basis Indirect Basis
a. Yes Yes
b. Yes No
c. No Yes
d. No No

13. Which of the following reports is NOT a component of the financial statements according to PAS 1?
a. Statement of Financial Position c. Directors Report
b. Statement of Changes in Equity d. Notes to Financial Statements
14. Which of the following financial statements should an investor primarily use to assess the amounts, timing, and
uncertainty of investing and financing activities of the reporting entity?
a. Statement of comprehensive income c. Statement of changes in equity
b. Statement of financial position d. Statement of cash flows
15. Which of the following statements about financial statements about financial statements is incorrect?
a. They provide information about the financial position, performance, and cash flows of an enterprise that is useful
to a wide range of users in making economic decisions.
b. They are the primary responsibility of the management of the reporting entity.
c. They show the results of the stewardship of the management for the resources entrusted to it by the capital
providers.
d. They are prepared at least annually and are directed to both the common and specific information needs of a
wide range of statement users.
16. What is the first item item presented in the notes to financial statements?
a. Statement of compliance with PFRS.
b. Summary of significant accounting policies.
c. Supporting information for items presented on the face of the financial statement.
d. Other disclosures, including contingent liabilities, unrecognized contractual commitments and nonfinancial
disclosures.
17. Under PAS 1, all of the following are included within the components of financial statements, except:
a. Statement of comprehensive income c. Income statement
b. Accounting policies d. Statement of retained earnings
18. Which of the following statements is true in relation to financial statements?
Statement 1: An entity must disclose comparative information for 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 periods
financial statements.
Statement 2: The presentation and classification of items in the financial statements shall be retained from one period
to the next.
a. S1 only b. S2 only c. Both S1 and S2 d. Neither S1 nor S2
19. Per PAS 1, immaterial amounts of similar nature and function should be grouped together or condensed as one line item in
the financial statements. This known as:
a. Consistency b. Comparability c. Offsetting d. Aggregation
20. The profit or loss of a period and other gain gains and losses recognized directly in equity are presented in the

a.Statement of financial position b. Income statement c. Statement of cash flows d. Statement of changes in equity
COMPREHENSIVE INCOME
1. Profit + Other Comprehensive Income =
a. No meaningful amount b. Total comprehensive income c. Total net performance d. Total net equity
2. Under PAS 1, which is not included in the computation of profit?
a. Finance cost
b. Post- tax gain or loss on discontinued operations
c. Unrealized gain in change in value of available for sale securities
d. Unrealized gain in change in value of biological assets

3. Which is not included in the computation of Other Comprehensive Income?


a. Unrealized loss from derivative contracts designated as fair value hedge.
b. Unrealized gain on available for sale financial assets.
c. Unrealized changes in the balance of revaluation surplus
d. Loss from translating the financial statements of a foreign operation
4. What is the purpose of reporting comprehensive income?
a. To report changes in equity due to transaction with the owner
b. To report a measure of overall enterprise performance
c. To replace net income with a better measure from continuing operations and irregular items
d. To combine income from continuing operations and irregular items
5. The term comprehensive income
a. Includes all change in equity during a period except those from investment by and distribution to owners
b. Is the net change in owners equity for the period
c. Is synonymous with the term net income
d. Must be reported on the face of the income statement
6. Comprehensive income includes the following
a. Gross profit (No); Net Income (No)
b. Gross profit (Yes); Net Income (No)
c. Gross profit (No); Net Income (Yes)
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d. Gross profit (Yes); Net Income (Yes)

7. Comprehensive income excludes changes in equity resulting from which of the following?
a. Loss from discontinued operations
b. Prior period error correction
c. Dividends paid to stockholders
d. Unrealized loss on securities classified as available-for-sale
8. Profit plus Other Comprehensive Income
a. No meaningful amount c. Total net equity
b. Total net performance d. Total comprehensive income
9. Which of the following elements of financial statements is not a component of comprehensive income?
a. Revenues b. Distribution to owners c. Losses d. Expenses
10. Which is not considered in the computation of profit or loss?
a. Sales to related parties c. Financing charges
b. Distribution costs d. Revaluation surplus
11. Which is not included in other comprehensive income computation?
a. Unrealized gain on available for sale financial asset.
b. Loss from translating financial statements of a foreign operation.
c. Actuarial gain on defined benefit plan that is fully recognized.
d. Unrealized loss from derivative contracts designated as fair value hedge.
12. Under PAS 1, which of the following statements is true regarding comprehensive income?

Statement 1: Comprehensive income is the change in equity from transactions and other events, other than those
changes resulting from transactions with owners in their capacity as owners.
Statement 2: Other comprehensive income comprises items of income and expense, including reclassification
adjustments, that are not recognized in profit or loss as required or permitted by other PFRS.

a. S1 only b. S2 only c. Both S1 and S2 d. Neither S1 nor S2


13. Which of the following statements is incorrect in relation to fair presentation and compliance with PFRS?
a. Fair presentation requires faithful representation of the effects of transactions, other events and conditions in
accordance with the definition criteria for assets, liabilities, income and expense set out in the Framework.
b. An entity whose financial statements comply with PFRS shall make an explicit and unreserved statement of
such compliance in the notes.
c. An entity shall not describe financial statements as complying with PFRS unless they comply with all the
requirements of PFRS.
d. An entity can rectify inappropriate accounting policies either by disclosure of the accounting policies used or by
notes or explanatory material.
14. Which of the following are acceptable methods for reporting comprehensive income under PFRS?
I. One comprehensive income statement
II. Two statements: an income statement and a comprehensive income statement
III. In the statement of owners equity

a. I only b. I and II only c. I, II, and III d. I and III only

INCOME STATEMENT & STATEMENT OF CHANGES IN EQUITY


1. These are inflows of future economic benefits that increase equity other than investment or contributions by owners.
a. Expenses
b. Share Capital
c. Income
d. Share premium
2. These are outlays of future economic benefits that diminish equity other than withdrawals or distribution to owners
a. Revenues
b. Dividends
c. Prior to period
d. Expenses
3. Statement 1: According to the capital maintenance approach, net income is computed as the excess of beginning capital
over ending capital, excluding the effect of investments and withdrawals by owners.
Statement 2: According to the transactions approach, net income is computed as the excess of revenues and gains
over expenses and losses
a. True, true
b. True, false
c. False, true
d. False, false
4. Under a strict transaction approach to income measurement, which of the following would not be considered a
transaction?
a. Payments of taxes
b. Sale of merchandise inventory at 30% markup
c. Adjustment of investments to fair value from acquisition cost
d. Exchange of property valued at market price for another property
5. The single-step income statement emphasizes
a. Gross profit figure
b. Total revenues and total expenses
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c. Consolidated income and expenses


d. All of the above
6. The expenses are classified according to their function, as part of cost of sales, selling activities, administrative activities
and other operating activities.
a. Costs of sales method
b. Nature of expense method
c. Account form
d. Report form
7. Which of the following is not considered in the cost of goods sold?
a. Office supplies
b. Work-In-Process
c. Raw materials
d. Finished Goods
8. Which of the following is not a distribution cost?
a. Salesmens salaries
b. Depreciation of delivery equipment
c. Freight-out
d. Freight-in
9. Which of the following is not a general and administrative expense?
a. Depreciation of building
b. Advertising
c. Insurance expense
d. Office salaries
10. An entity shall disclose on the face of the income statement the allocation of profit or loss for the period attributable to
a. Ordinary and extraordinary activities
b. Parent and subsidiary companies
c. Head office and branches
d. Minority interest and equity holders of the parent
11. PAS 1 would require, as a minimum, the presentation of the following items on the face of the income statement, except
a. Income tax expense
b. Finance cost
c. Extraordinary activities
d. Share of income or loss of associates and joint venture (accounted under equity method)
12. A transaction that is material in amount, unusual in nature, and infrequent in occurrence, should be presented in the
income statement separately as a
a. Component of income from continuing operations
b. Component of pre-tax income from discontinued operations
c. Component of income from discontinued operations, net of tax
d. Prior period error
13. The results of discontinued operations should be shown
a. As a single amount in the income statement in juxtaposition with income from continuing operations
b. As a single amount, before tax, in the income statement separately from income from continuing operations
c. As a single amount, net of tax, in the income statement separately from income from continuing operations
d. As a single amount in the statement of changes in equity
14. A discontinued operation is a component of an entity that either has been disposed of or classified as held for sale and
a. Represents a separate major line of business or geographical area of operations
b. Is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations
c. Is a subsidiary acquired exclusively with a view to resale
d. Any of these
15. One of the following is NOT considered operation
a. Selling by communications company of all its radio stations order for the company to concentrate on TV stations
and publication activities
b. Selling by a frozen delights company of its only controlling interest in a fast food company
c. Selling a subsidiary whose activities are similar to those of other subsidiaries
d. Selling by a diversified enterprise of a major division that represents the only companys activities in the
electronics industry.
16. It comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity.
a. Component of an entity
b. Disposal group
c. Discontinued operations
d. Extraordinary activities
17. It is a group of assets to be disposed of by sale or otherwise, together as a group in a single transaction, and liabilities
directly associated with those assets that will be transferred in the transaction.
a. Disposal group
b. Discontinued operations
c. Noncurrent asset
d. Cash generating unit

18. An entity shall classify a noncurrent assets or disposal group as HELD FOR SALE when
a. The carrying amount of the asset or disposal group will be recovered through a sale transaction
10

b. The carrying amount of the asset or disposal group will be recorded through continuing use
c. The carrying amount of the asset or disposal group is to be abandoned
d. The noncorrent asset or disposal group is idle or retired from active use
19. An entity shall measure a noncurrent asset or disposal group classified as held for sale at
a. Carrying amount
b. Fair value less cost to sell
c. Lower of carrying amount and fair value less cost to sell
d. Higher of carrying amount and fair value cost to sell
20. If the fair value less cost to sell is lower than the carrying amount of noncurrent asset classified as held for sale, the
difference3 is treated as a (n)
a. Depreciation expense
b. Impairment loss
c. Prior period adjustment
d. Note disclosure
21. To be classified as held for sale, a noncurrent asset or disposal group must be available for immediate sale and the
sale is highly probable. Which of the following is not consistent with these conditions?
a. The management is committed to a plan to sell the asset
b. The asset must be actively marketed for sale at a reasonable price relative ti its fair value
c. An active program is initiated to locate a buyer
d. A completed sale is expected within two years from the date of classification of the asset as held for sale
22. In order for a non current asset to be classified as held for sale, the sale must be highly probable. Highly probable
means
a. The future sale is likely to occur
b. The future sale is more likely than not to occur
c. The sale is certain
d. The probability of future sale is higher than more likely than not
23. A change in accounting estimate is considered as a
a. Change in accounting policy
b. Correction prior period error
c. Normal recurring adjustment
d. Irregular book adjustment
24. The peso effect of change in accounting estimate
a. Should be shown as a correction of retained earnings
b. Should be treated as an extraordinary item, net of related tax
c. Should be accounted for in profit or loss in the period of change only
d. Should be accounted for in profit or loss in the period of change and future periods
25. Prospective application of the effect o change in estimate means that the change is effected to transactions from
a. Date of change in estimate
b. Balance sheet date
c. Beginning of the year of change
d. Date of issuance of financial statement
26. It is the specific principle, basis, convention, rule and practice adopted by an entity in preparing and presenting the
financial statements
a. Accounting policy
b. Accounting estimate
c. Prior period error
d. Generally accepted accounting principles
27. A change in accounting policy includes all of the following, except
a. The initial adoption of a policy to carry assets at revalued amount
b. The change from expensing to capitalizing borrowing costs
c. The change in inventory valuation from FIFO to weighted average method
d. The change in depreciation method straight line to double declining balance method
28. A change in policy is NOT necessarily effected when the change is
a. Required by PFRS
b. Required by an interpretation of PFRS
c. To result in more relevant or reliable financial information
d. More convenient in application
29. A change in accounting policy shall be treated
a. Prospectively only
b. Retrospectively only
c. Prospectively and, in rare cases, retrospectively
d. Retrospectively and, in rare cases, prospectively
30. Retrospective application means that any effect of change should be reported as
a. A current adjustment to profit or loss
b. A catch-up adjustment to the pending balance of retained earnings
c. An extraordinary
d. A component of discontinued operation

31. Prospective application of a change in accounting policy is required


a. When the retrospective application will tend to understate the equity position
b. When the amount of adjustment to the opening balance of retained earnings can be reasonably determined
c. When the retrospective application will tend to overstate the equity position
11

d. When the retrospective application will tend to overstate the equity position
32. If it is difficult to distinguish between a change in accounting estimate and a change in accounting policy, the change is
treated as a
a. Change in accounting policy
b. Change in accounting estimate
c. Prior period error
d. Current period error
33. Prior period errors discovered in the current period are reported as
a. Adjustments to the opening balance of retained earnings
b. Extraordinary items
c. Component of current income from continuing operations
d. Component of current in come from ordinary activities
34. A change from a non-GAAP method (that was never allowed) to a GAAP method is considered as a
a. Change in accounting estimate accounted fro prospectively
b. Change in accounting policy accounted fro retrospectively
c. Change in accounting policy accounted fro prospectively
d. Correction of prior period error accounted for retrospectively
35. A change in reporting entity is actually a change in accounting
a. Policy
b. Estimate
c. Assumption
d. Concept
36. A change in measurement basis is
a. A change in accounting estimate
b. A change in accounting policy
c. A correction of a prior error
d. Not an accounting change
37. An entity shall present a statement of changes in equity showing all of the following, except
a. Profit or loss for the period
b. Cash flows during the period
c. Retained earnings balance and the effect of changes in accounting policies and error correction
d. Each item of income or expense for the period recognized directly
38. One of these is NOT considered as a recognized gain or loss
a. Share premium arising excess over par value
b. Available-for-sale equity fair value adjustment
c. Revaluation surplus
d. Foreign currency translation adjustment
39. Comprehensive income includes all changes in equity during a period, except those resulting from distribution to and
contributions from owners. Which of the following is not a part of comprehensive income?
a. Dividend revenue
b. Share capital
c. Holding gains on available-for-sale securities
d. Loss on foreign exchange translation
40. Changes in accounting values and methods sacrifice accounting informations
a. Relevance
b. Reliability
c. Comparability
d. Understandability
41. Exchange differences arising from translation of financial statements of a foreign entity are
a. Recognized directly in the retained earnings.
b. Recognized as accumulated translation adjustments in profit or loss.
c. Recognized as accumulated translation adjustments in the equity section.
d. Capitalized if the differences resulted from severe devaluation of a currency.
42. A public utility reports noncurrent assets as the first item on its statement of financial position. This is an example of:
a. Improper statement presentation c. Industry practice
b. Prudence d. Substance over form
43. The following statements are based on the PAS 1-Presentation of Financial Statements:
Statement 1: The number of shares authorized for issue shall be shown in the statement of financial position or on the
statement of changes in equity or in the notes to the financial statements.
Statement 2: An entity presenting a separate income statement and a statement of comprehensive income shall present
a statement of changes in equity.
Statement 3: An income statement is prepared under the natural presentation when ot presents expenses based on
logistics, marketing and production.

a. All of the statements are true. c. Only Statement 1..


b. Only Statement 1 and 2 are true. d. All statements are false.
44. The following is no longer an allowable line item for presentation on the face of an income statement:
a. Extraordinary (abnormal) items c. Finance costs
b. Tax expense d. Pre-tax loss attributable to discontinuing operations
45. The single-step income statement emphasizes
a. The gross profit figure
12

b. Accounting changes more than these are emphasized in the multiple-step income statement.
c. Total revenues and total expenses
d. The various components of income from continuing operations.
46. If expense accounts in the income statement are not presented according to functions, they may be presented using
a. Functional presentation c. Report form
b. Natural presentation d. Account form
47. If the classification of expenses by function method is used for the presentation of an income statement, additional
information on the following items must be disclosed:
a. Revenue c. Gains on revaluation of assets
b. Gins on disposal of assets d. Depreciation and amortization
48. Conventionally, accountants measure income:
a. applying a value-added concept c. as a change in the value of shareholders equity
b. using a transaction approach d. as a change in the purchasing power of shareholders equity
49. How many earnings per share (EPS) amounts are required to be disclosed based on the following income statement
line items?
Income form operations
Income before income taxes
Income from continuing operations
Income from discontinued operations
Net income
a. 5 b. 3 c. 4 d. 2
50. When an entity opts to present the income statement classifying expenses by function, which of the following is not
required to be disclosed as additional information?
a. Depreciation expense c. Directors remuneration
b. Employee benefit expense d. Amortization expense

STATEMENT OF FINANCIAL POSITION & NOTES TO THE FINANCIAL STAMENTS


1. Which of the following should NOT be considered as a current asset in the statement of financial position?
a. Installment receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. The cash surrender value of life insurance policy carried by a corporation, the beneficiary, on its president.
d. Trading securities purchased as a temporary investment of cash available for current operation.
2. In a consolidated statement of financial position, the non-controlling (minority) interest under the entity concept is shown:
a. Separately within the non-current liabilities c. as part of the total current liabilities of the group
b. Separately within the equity section d. separately within the non-current investment
3. Which financial statement would a potential investor primarily use to assess the companys liquidity and financial
flexibility
a. Statement of Financial Position
b. Income statement
c. Statements of retained earning
d. Cash flow statement
4. The format wherein the asset section is shown side-by-side with the liabilities and equity section of the balance sheet
is known as
a. Report form
b. Account form
c. Functional presentation
d. Natural presentation
5. Under PAS 1, assets in the balance sheet are broadly classified in to
a. Tangible and intangible
b. Current and non-current
c. Depreciable and non-depreciable
d. Monetary and non-monetary
6. The basis of classifying trade assets as current assets is
a. The accounting cycle or one year, whichever is longer
b. The accounting cycle or one year, whichever is shorter
c. The operating cycle or one year, whichever is longer
d. The operating cycle or one year, whichever is shorter
7. Which of the following is a trade asset?
a. Due to employees
b. Due to employees
c. Receivable from customers
d. Advances to affiliates
8. Under PAS 1, which of the following is does not describe a current asset?
a. It is a cash or a cash equivalent restricted from being exchanged or used to settle liability
b. It is held primarily for the purpose of being traded
c. It is expected to be realized within twelve months after the balance sheet date
d. It is expected to be realized or intended for sale or consumption within the entitys normal
9. Which is not a line item required to be shown o9n the face of the balance sheet?
a. Intangible assets
13

b. Financial assets
c. Biological assets
d. Investments accounted fro using the cost method
10. It is property held by the owner or by the lessee under a finance lease to rentals or capital appreciation or both , rather
than for use or sale
a. Financial assets
b. Property, plant and equipment
c. Investment property
d. Non-current assets held for sale
11. Which of the following is NOT an allowed treatment of items shown on the face of the balance sheet?
a. Assets presented in the order of liquidity
b. Provisions as part of the liability section
c. Deferred tax liabilities (assets), presented as part of current liabilities (assets)
d. Minority interest within equity
12. Offsetting of assets and liabilities is
a. Allowed in all cases
b. Not allowed in all cases
c. Allowed unless not required nor permitted by a Standard or an Interpretation
d. Not allowed unless required or permitted by a Standard or an Interpretation
13. The application of Philippine Financial Reporting Standards is presumed to result in financial statements that achieve
a. Fair presentation
b. Materiality and aggregation
c. Comparable information
d. Consistency of presentation
14. Immaterial amounts of similar nature and function should be grouped or condensed as one of line item in the financial
statements
a. Fair presentation
b. Materiality and aggregation
c. Comparable information
d. Consistency of presentation
15. Under PAS 1, which of the following does not describe a current liability?
a. It is expected to be settles within the entitys normal operating cycle
b. It is held primarily for the purpose of being traded
c. It is due to be settled within twelve months after the balance sheet date
d. The entity has an unconditional right to defer settlement of the liability for at least twelve months after the
balance sheet date
16. When an entity BREACHES an undertaking under a long-term loan agreement with the effect that liability becomes
payable on demand, the liability is classified as
a. Current, even if the lender agrees not to demand payment as the consequence of the breach
b. Current, only if the lender demands immediate payment as a consequence of the breach
c. Non-current, even if the lender agrees not to demand payment as the consequence of the breach
d. Non-current, only if the lender demands immediate payment as a consequence of the breach
17. These provide narrative description or disaggregation of items disclosed on the face of the financial statements and
information about items that do not qualify for recognition
a. Accounting policies
b. Financial reports
c. Notes to the financial statements
d. Value-added statements
18. The normal order of presenting the notes to the financial statement is:
A. Statement of measurement basis and accounting policies applied
B. Supporting information or computation for line items presented and aggregated in the FS
C. Statement of compliance with GAAP (i.e., PFRS)
D. Commitments, contingencies and other required financial and non-financial disclosures
a. C,B,D,A
b. C,A,D,B
c. C,A,B,D
d. C,B,A,D
19. The summary of significant accounting policies section of the notes to the FS should NOT indicate
a. The measurement basis used in preparing the FS
b. The accounting policies used that are relevant to an understanding of the FS
c. The supporting computation for items aggregated on the face of the FS
d. Whether company is using FIFO or weighted average method for costing inventory

20. One of these is NOT disclosed in the Accounting Policies section of the notes to the FS
a. Inventory valuation method
b. Basis of revenue recognition
c. Reasonably possible contingent liability
d. Depreciation and amortization method

21. An entity is required to present the following non-financial disclosures, except


a. Nature of an entitys operation
b. Domicile and legal form of the entitys
14

c. Business directory of the companys board of directors


d. Name of parent and ultimate parent of the group of companies
22. In a consolidated statement of financial position, the non-controlling (minority) interest under the entity concept is shown:
a. Separately within the non-current liabilities c. as part of the total current liabilities of the group
b. Separately within the equity section d. separately within the non-current investments
23. Which of the following must be included as a line item in an entitys statement of financial position?
a. Investment property c. Contingent liability
b. Number of shares authorized d. Shares in an entity owned by the entity
24. In which section of the statement of financial position should cash that is restricted for the settlement of a liability due
18 months after the reporting period be presented?
a. Current assets b. Equity c. Noncurrent liabilities d. Noncurrent assets
25. The statement of financial position is useful for analyzing all of the following, except:
a. Liquidity b. Profitability c. Solvency d. Financial flexibility
26. Which of the following is not a non-current investment?
a. Cash surrender value of life insurance c. Sinking fund cash
b. Land held for speculation d. Franchise
27. Which item below is not a current liability?
a. Unearned revenue c. The currently maturing portion of long-term debt
b. Stock dividends distributable d. Trade accounts payable
28. Equity is generally classified into what two major categories?
a. Contributed capital and appropriated capital c. Retained earnings and unearned capital
b. Appropriated capital and retained earnings d. Earned capital and contributed capital
29. The line items in the statement of financial position include all of the following, except:
a. Non-controlling interest c. Property, plant & equipment analyzed by class
b. Financial assets and liabilities d. Totals assets classified as held-for-sale
30. Which of the following is not required to be presented as minimum information on the face of the statement of financial
position?
a. Investment property c. Biological assets
b. Investment accounted under the equity method d. Contingent liability
31. A financial liability that is due to be settled within 12 months after the end of the reporting period is classified as current:
Statement 1: When it is refinanced on a long-term basis after the end of the reporting period and before the authorization
of the the financial statements for issue.
Statement 2: When the entity has the discretion to refinance for at least 12 months after the end of the reporting period
under an existing loan facility
a. S1 only b. S2 only c. Both S1 and S2 d. Neither S1 nor S2
32. An entity is required to disclose which of the following?
Statement 1: A description of the nature if entitys operations and its principal activities.
Statement 2: Domicile and legal form of the entity, its country of incorporation and address of the registered office or
principal place of business.
Statement 3: The amount of dividend declared before the financial statements are authorized for issue but not
recognized as distribution to owners during the period and the related amount per share.

a. S1 and S2 only b. S1 and S3 only c. S2 and S3 only d. S1, S2, and S3.
33. Which one of the following is not included in the notes to financial statements to the financial statements?
a. Narrative description of items disclosed in the financial statements.
b. Information on disaggregation of items disclosed in the financial statements.
c. Information about items that do not qualify for recognition in the financial statements.
d. Information presented in the statement of financial position, income statement, and cash flow statement.

END

TOA 3-14- FINCL STATEMENTS