FINANCIAL ACCOUNTING AND REPORTING

TEST BANK – 01

COVERAGE
 Overview of Financial Accounting (1-15)
 Conceptual Framework (16-70)
 Statement of Financial Position (
True or False.
1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial
information needed by management to plan, evaluate, and control an organization’s operations. - True
2. Financial statements are the principal means through which financial information is communicated to those
outside an enterprise.
3. Users of the financial information provided by a company use that information to make capital allocation
decisions.
4. An effective process of capital allocation promotes productivity and provides an efficient market for buying and
selling securities and obtaining and granting credit.
5. Financial reports in the early 21st century did not provide any information about a company’s soft assets.
6. Accounting standards are now less likely to require the recording or disclosure of fair value information due to
its inherent subjectivity.
7. While objectives for financial reporting exist on an informal basis, no formal objectives have been adopted.
8. One weakness of accrual accounting is that it does not provide a good indication of the enterprise's present and
continuing ability to generate favorable cash flows.
9. Some generally accepted accounting principles have simply been accepted as appropriate because of their
universal application rather than due to the action of an authoritative accounting rule-making body.
10. Users of financial accounting statements have both coinciding and conflicting needs for information of
various types.

★★★
11. General-purpose financial statements are the product of
a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.
12. Users of financial reports include all of the following except
a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
13.. The financial statements most frequently provided include all of the following except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
14. The information provided by financial reporting pertains to
a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as
consumers.
Page 1 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as
consumers.
c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as
consumers.
d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or
industries.
15. The process of identifying, measuring, analyzing, and communicating financial information needed by management
to plan, evaluate, and control an organization’s operations is called
a. financial accounting.
b. managerial accounting.
c. tax accounting.
d. auditing.
16. Which statement is true about the Conceptual Framework for Financial Reporting?
a. The Conceptual Framework is not a Standard.
b. The Conceptual Framework describes the objective of financial reporting and the concepts for general purpose
financial statements.
c. In cases of conflict. the requirements of the relevant IFRS prevail over those of the Conceptual Framework.
d. All of these statements are true about the Conceptual Framework.
17. Which is not a purpose of having a Conceptual Framework?
a. To enable the profession to more quickly solve emerging practical problems.
b. To provide a foundation from which to build more useful standards.
c. To enable the standard-setting body to issue more useful and consistent pronouncements over time.
d. To assist regulatory agencies in issuing rules and regulations for a particular industry.
18. The Conceptual Framework provides the foundation for Standards that
a. contribute to transparency by enhancing international comparability and quality of financial information.
b. strengthen accountability of the people entrusted with the entity.
c. contribute to economic efficiency by helping investors to identify opportunities and risks across the world.
d. All of these are the results of Standards developed based on consistent concepts.
19. What provides “the why” or the goal and purpose of accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Element of financial statements
d. Objective of financial reporting
20. The objective of financial reporting in the Conceptual Framework
a. is the foundation for the Conceptual Framework.
b. includes the qualitative characteristics that make accounting information useful.
c. is not found in the Conceptual Framework.
d. All of the choices are correct regarding the objective of financial reporting.
21. Which statement is not an objective of financial reporting?
a. To provide information that is useful in investment and credit decisions.
b. To provide information about entity resources, claims against those resources and changes to those resources.

Page 2 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

c. To provide information on the liquidation value of an entity.

d. To provide information that is useful in assessing cash flow prospects.
28. The assumption that an entity will not be sold or liquidated in the near future is known as
a. Economic entity assumption
b. Monetary unit assumption
c. Time period assumption
d. Going concern assumption
29. Which statement is an implication of the going concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and significant.
d. All of these imply the going concern assumption.
30. The economic entity assumption
a. is inapplicable to unincorporated businesses.
b. recognizes the legal aspects of business organizations.
c. requires periodic income measurement.
d. is applicable to all forms of business organizations.
31. Consolidated financial statements are prepared when a parent-subsidiary relationship exists.
a. Economic entity assumption
b. Legal entity assumption
c. Consolidation standard
d. Neutrality
32. During the lifetime of an entity, accountants produce financial statements at arbitrary or artificial points in time in
accordance with which basic accounting concept?
a. Objectivity
b. Time period assumption
c. Materiality
d. Economic entity
33. Inflation is ignored in accounting due to
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. periodicity assumption.
34. In the Conceptual Framework, qualitative characteristics
a. are considered either fundamental or enhancing.
b. contribute to the decision-usefulness of financial reporting information.
c. distinguish better information from inferior information for decision-making purposes.
d. All of the choices are correct.
35. Fundamental qualitative characteristics of accounting information are
a. relevance and comparability.
Page 3 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

b. comparability and consistency.

c. faithful representation and relevance.
d. neutrality and verifiability.
36. Ennhancing qualitative characteristics of accounting information include
a. relevance, faithful representation and neutrality.
b. comparability, understandability, timeliness and reliability.
c. faithful representation and timeliness.
d. materiality and understandability.
37. When there is agreement between a measure or description and the phenomenon it purports to represent, the
information possesses which characteristic?
a. Faithful representation
b. Completeness
c. Neutrality
d. Free from error
38. The quality of faithful representation includes
a. predictive value and confirmatory value.
b. completeness, free from error and neutrality.
c. comparability and understandability.
d. timeliness and verifiability.
39. The qualitative characteristic of relevance includes
a. predictive value and confirmatory value.
b. completeness and neutrality.
c. comparability and understandability.
d. verifiability and timeliness.
40. Accounting information is considered relevant when it
a. can be depended on to represent the economic conditions that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
41. The underlying theme of relevance is
a. decision usefulness.
b. understandability.
c. reliability.
d. comparability.
42. Which of the following statements about materiality is not correct?
a. An item must make a difference, or it need not be disclosed.
b. Materiality is a matter of absolute size.
c. An item is material if the inclusion or omission would influence or change the judgment of a reasonable person.
d. Materiality is a subquality of relevance.
43. What is meant by comparability when discussing financial accounting information?

Page 4 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

a. Information has predictive and feedback values.

b. Information is reasonably free from error.
c. Information is measured and reported in a similar fashion across entities.
d. Information is timely.
44. What is meant by consistency when discussing financial accounting information?
a. Information is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.
45. The enhancing quality of understandability means that the information should be understood by
a. experts in the interpretation of financial statements.
b. users with reasonable understanding of business and economic activities.
c. financial analysts.
d. CPAs.
46. For information to be useful, the linkage between the users and the decisions made is
a. relevance.
b. reliability.
c. understandability.
d. materiality.
47. According to the Conceptual Framework, verifiability implies
a. Legal evidence
b. Logic
c. Consensus
d. Legal verdict
48. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for financial
reporting, statements prepared using historical cost are more
a. verifiable.
b. relevant.
c. indicative of the entity’s purchasing power.
d. conservative.
49. When an entity has started placing its quarterly financial statements on its website, thereby reducing ample time to
get information to users, the qualitative concept involved is
a. comparability.
b. understandability.
c. verifiability.
d. timeliness.
50. The Conceptual Framework includes which constraint?
a. Prudence
b. Conservatism
c. Cost
d. All of the other choices are constraints in the Conceptual Framework

Page 5 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

51. Which of the following best describes the cost-benefit constraint?

a. The benefit of the information must be greater than the cost of providing it.
b. Financial information should be free from cost to users of the information.
c. Cost of providing financial information is not always evident or measurable but must be considered.
d. All of the choices are correct.
52. Which statement is true about a reporting entity?
a. A reporting entity is an entity that is required or chooses to prepare financial statements.
b. A reporting entity can be a single entity or a portion of that entity or can comprise more than one entity.
c. A reporting entity is not necessarily a legal entity.
d. All of these statements are true about a reporting entity.
53. Which statement is true about financial statements of a reporting entity?
a. If the reporting entity comprises both the parent and its subsidiaries, the financial statements are referred to as
consolidated financial statements.
b. If the reporting entity is the parent alone, the financial statements are referred to as unconsolidated financial
statements.
c. If the reporting entity comprises two or more entities that are not linked by a parent-subsidiary relationship,
the financial statements are referred to as combined financial statements.
d. All of these statements are true about the financial statements of a reporting entity.
54. Which is within the definition of an asset under the Revised Conceptual Framework?
a. An asset is a present economic resource.
b. The economic resource is a right that has the potential to produce economic benefits.
c. The economic resource is controlled by the entity as a result of past event.
d. All of these statements define an asset.
55. Under the Revised Conceptual Framework, which of the following criteria must be satisfied for a liability to exist?
a. The entity has an obligation.
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of a past event.
d. All of these must be satisfied for a liability to exist.
56. A present obligation exists as a result of past event if
a. the entity has already obtained economic benefits.
b. the entity will have to transfer an economic resource that it would not otherwise have to do.
c. the entity has not yet obtained economic benefits and will have to transfer an economic resource to obtain the
economic benefits.
d. the entity has already obtained economic benefits and will have to transfer an economic resource that it would
not otherwise have to do.
57. Which statement is not true about income and expenses?
a. Income is increase in asset or decrease in liability that results in increase in equity other than that relating to
contribution from equity holders.
b. Expense is decrease in asset or increase in liability that results in decrease in equity other than that relating to
distribution to equity holders.
c. Income and expenses are the elements that relate to financial position.
d. Income encompasses revenue and gain.
Page 6 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

58. It is a process of capturing for inclusion in the statement of financial position or the statement of financial
performance an item that meets the definition of an element of the financial statements.
a. Recognition
b. Measurement
c. Derecognition
d. Disclosure
59. Under the Revised Conceptual Framework, what is the recognition principle?
a. It is probable that any future economic benefit associated with the item will flow to or from the entity.
b. The item has a cost or value that can be measured with reliability.
c. It is probable that any future economic benefit will flow to or from the entity and the element can be measured
reliably.
d. Only items that meet the definition of an asset, liability, equity, income and expense are recognized.
60. Which statement is not true about derecognition?
a. Derecognition is the removal of a recognized asset or liability from the statement of financial position.
b. Derecognition is the removal of a recognized income or expense from the income statement.
c. Derecognition for an asset normally occurs when the entity loses control of the recognized asset.
d. Derecognition for a liability normally occurs when the entity no longer has a present obligation for the
recognized liability.
61. Under the Revised Conceptual Framework, the measurement bases include
a. historical cost.
b. current value.
c. assessed value.
d. historical cost and current value.
62. Which statement is true about current value measurement?
a. Fair value of an asset is the price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date.
b. Value in use is the present value of the cash flows expected to be derived from the use and ultimate disposal
of an asset.
c. Fulfillment value is the present value of the cash expected to be transferred for the payment of a liability.
d. All of these statements are true about current value measurement.
63. The term “revenue recognition” conventionally refers to
a. the process of identifying transactions to be recorded as revenue in an accounting period.
b. the process of measuring and relating revenue and expenses of an entity for an accounting period.
c. the earning process which gives rise to revenue realization.
d. the process of identifying those transactions that result in an inflow of assets from customers.
64. Revenue may be recognized
a. at the point of sale.
b. during production
c. at the end of production
d. All of the choices may be acceptable for revenue recognition
65. The accounting principle of expense recognition is best demonstrated by

Page 7 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

a. not recognizing any expense unless some revenue is realized.

b. associating effort with accomplishment.
c. recognizing prepaid rent received as revenue.
d. establishing an appropriation for contingency.
66. Which of the following is not an acceptable basis for the recognition of expense?
a. Systematic and rational allocation
b. Cause and effect association
c. Immediate recognition
d. Cash disbursement
67. Which capital maintenance concept is applied to net income and other comprehensive income?
a. Financial capital
b. Physical capital
c. Financial capital for net income and physical capital for other comprehensive income
d. Physical capital for net income and financial capital for other comprehensive income
68. Financial capital is defined as the
a. net assets or equity of an entity in monetary terms.
b. net assets or equity of an entity in terms of physical or productive capacity.
c. legal capital.
d. share capital issued and outstanding.
69. The physical capital concept requires that productive assets shall be measured at
a. historical cost
b. current cost
c. lower of current cost and net realizable value
d. net realizable value
70. Under the financial capital concept, net income occurs when
a. the nominal amount of net assets at year-end exceeds the nominal amount of net assets at the beginning.
b. the physical productive capital at year-end exceeds the physical productive capital at the beginning after
excluding any distributions to and contributions from owners.
c. the nominal amount of net assets at year-end exceeds the nominal amount of net assets at the beginning after
excluding distributions to and contributions from owners.
d. the physical productive capital at year-end exceeds the physical productive capital at the beginning.

★★★
Alpha Company provided the following information at year-end:

Cash 300,000
Accounts receivable 1,200,000
Inventory, including inventory expected in the ordinary course of operations to be sold beyond
12 months amounting to P700,000 1,000,000
Prepaid expenses 100,000
Financial asset held for trading 200,000
Equity investment at fair value through other comprehensive income 800,000

Page 8 of 9
 FINANCIAL ACCOUNTING AND REPORTING
TEST BANK – 01

Deferred tax asset 150,000

71. What amount should be reported as total current assets at year-end?
a. 2,800,000
b. 2,550,000
c. 3,600,000
d. 2,000,000

★★★
Beta Company provided the following account balances

Page 9 of 9