FRAMEWORK OF ACCOUNTING

I – ACCOUNTING AND ACCOUNTANCY PROFESSION

1. Generally accepted accounting principles are:

(a) a set of standards and rules that are recognized as a general guide for financial
reporting.
(b) usually established by the bureau of internal revenue.
(c) the guidelines used to resolve ethical dilemmas.
(d) fundamental truths that can be derived from the laws of nature. A

2. What is the primary criterion by which accounting information can be judged?

(a) consistency (c) usefulness for decision-making
(b) predictive value (d) comparability C

C. SCOPE- QUALITATIVE CHARACTERISTICS

1. Verifiability is an ingredient of:

Relevance Reliability Relevance Reliability
(a) No No (c) Yes Yes
(b) No Yes (d) Yes No B

2. This refers to the tendency of accountants to resolve uncertainty in a way least likely to
overstate assets and revenues?
(a) comparability (c) conservatism
(b) materiality (d) consistency C

SOURCES & REFERENCES:

 Kimmel, Weygandt, Kieso, FINANCIAL ACCOUNTING (2ND Edition) – 2000 Edition, John Wiley &
Sons, Inc.

FRAMEWORK OF ACCOUNTING

I – ACCOUNTING AND ACCOUNTANCY PROFESSION

1. The purpose of accounting is:

(a) to provide comprehensive financial information about a business or other economic
entity.
(b) to provide comprehensive reports on the debits and credits.
 (c) to interpret the results of operations of a business entity.
(d) to classify the business transactions of a business entity. A

2. The principles, which constitute the ground rules for financial reporting, are termed as
generally accepted accounting principles. To qualify as generally accepted, an accounting
principle:
(a) must guide corporate managers in the preparation of financial statements which
should be understood by widely scattered stockholders.
(b) must guide corporate managers in the preparation of financial statements which will
be used in making collective bargaining agreements with trade unions.
(c) must guide entrepreneurs in the choice of investments.
(d) must receive substantial authoritative support from the public and the members of the
profession. D

3. The opinions and pronouncements of the ASC of the PICPA provide the highest
authoritative pronouncements on accounting principles. The authority of these opinions
rests upon their:
(a) rules and regulations of the SEC (c) integrity of the board
(b) management and their internal accounting staff. (d) opinions of authors. C

III – ACCOUNTING ASSUMPTIONS

1. The basic assumptions or fundamental propositions concerning the economic, political

and sociological environment in which accounting must operate are called:
(a) accounting postulate (c) accounting theories
(b) accounting principles (d) accounting opinions A

2. In accounting, those standards and practices that have won acceptance because of their
logic and proven usefulness are referred to as:
(a) accounting dogmas (c) accounting procedures
(b) accounting principles (d) accounting theories B

3. An accounting entity is created whenever there is a need to understand the economic and
financial activities of:
(a) an economic unit (c) a partnership
(b) a financial unit (d) a single proprietorship A

4. Strict adherence to the entity concept would not allow:

(a) the use of the account form of the balance sheet.
(b) the use of replacement cost as a basis of valuation on the financial statements of
branches.
(c) the capitalization of certain construction costs subsidiary companies.
 (d) a parent company to take up in its books its proportionate share in its subsidiary’s
profits and losses. D

5. Which of the following is the primary elements that distinguishes accounting for
corporations from accounting for legal forms of business (such as partnership)?
(a) The entity theory relates primarily to the other forms of business organization.
(b) The corporation draws a sharper distinction in accounting for sources of capital.
(c) In a corporation, retained earnings may be reduced only by the declaration of
dividends.
(d) Generally accepted accounting principles apply to corporations but have relatively little
applicability to other forms of business organizations. B

6. The accounting period convention regards the life of the entity as consisting of:
(a) a chain of one-year segments (c) the remaining corporate life of the business
(b) the entire life of the venture (d) the nature life of the owner(s) A

7. This is an assumption by accountants that a business will continue to operate indefinitely

unless specific evidences to the contrary exist, as for example, an impending bankruptcy.
(a) matching principle (c) cost principle
(b) going concern principle (d) objectivity principle B

8. The going concern concept assumes that:

(a) the business firm shall continue to operate indefinitely.
(b) the market value of assets are relevant.
(c) the long lived assets are adjusted for current prices.
(d) the building cost is shown at replacement value. A

9. Under the accounting concept of continuity, the accountant does not assume, in preparing
the financial statements, that the:
(a) firm is suffering from large and persistent losses.
(b) firm cannot fulfill existing commitments.
(c) firm operations are soon to be terminated.
(d) all of the above. D

10. Financial statements that are expressed assuming a stable monetary unit are:
(a) general price-level financial statements. (c) current value financial statements.
(b) historical peso financial statements. (d) fair-value financial statements. B

IV – CONCEPTUAL FRAMEWORK

A. DEFINITION, PURPOSE, AND STATUS

1. Under this theory of accounting equity, the assets belong to the accounting unit, and the
liabilities and capital are perceived as having equitable claims against the accounting unit
and its assets.
(a) proprietary theory (c) entity theory
(b) funds theory (d) financial theory C

2. The accounting equation “Asset-Liabilities= Proprietorship” is explained by the:

(a) proprietary theory (c) entity theory
(b) funds theory (d) cash theory A

C – SCOPE - QUALITATIVE CHARACTERISTICS

1. Which of the following interacts with both relevance and reliability to contribute to the
usefulness of information?
(a) comparability (c) neutrality
(b) timeliness (d) predictive value A

2. Which of the following is an ingredient of the primary quality of reliability?

(a) understandability (c) predictive value
(b) verifiability (d) materiality B

3. Predictive value is an ingredient of:

Relevance Reliability Relevance Reliability
(a) No No (c) Yes Yes
(b) No Yes (d) Yes No D

4. Which of the following is an ingredient of the primary quality of relevance?

(a) predictive value (c) understandability
(b) materiality (d) verifiability A

5. Feedback value is an ingredient of:

Relevance Reliability Relevance Reliability
(a) No No (c) Yes Yes
(b) No Yes (d) Yes No D

6. For general-purpose financial accounting, the advocates of the historical cost approach
say that this valuation method is:
(a) relevant. (c) conservative.
(b) objective. (d) subjective. B

7. As compared with other valuation alternatives that are used in the preparation of general-
purpose financial statements, historical cost is more:
 (a) objective. (c) indicative of the entity’s purchasing power.
(b) relevant. (d) conservative. A

8. Objectivity, in accounting, means that the data which enter into the accounting process
are based on:
(a) opinions of the auditor. (c) inferences and interpretations.
(b) objective and verifiable evidences.(d) conservative estimates. B

9. A policy of choosing the acceptable alternatives methods or presentation that will give the
least favorable effect on the owner’s equity is an application of:
(a) conservatism. (c) principle.
(b) concept. (d) disclosure. A

10. Which of the following is an example of the concept of conservatism?

(a) stating inventories at the lower of cost or market.
(b) stating inventories using the FIFO method in periods of rising prices.
(c) using the percentage-of-completion method in the first year of a long-term construction
contract.
(d) using the interest method instead of the straight-line method to record interest in the
first year of a long-term receivable. A

11. The conservative approach in the measurement of financial position is best illustrated in
the following practice?
(a) arbitrary reduction of property items to report a conservative asset position.
(b) recognition of fictitious liabilities.
(c) inventories valued at cost or market, whichever is lower.
(d) intangibles assets are reported at nominal amounts. C

12. Which of the following is considered as a constraint of a relevant and reliable information?
(a) conservatism (c) materiality
(b) benefits/costs (d) verifiability B

13. The cost of an inexpensive fountain pen which has an estimated life of five years was
treated as an expense of the period when purchased. It is an example of the application
of the:
(a) consistency principle. (c) materiality principle.
(b) matching principle. (d) cost principle. C

14. Overstating as expense in the current period is:

(a) acceptable because it relieves the future period of additional burden.
(b) accepted because it is conservative.
(c) acceptable only when the amount involved is immaterial.
 (d) acceptable as long as it is consistently done. C

D – DEFINITION, RECOGNITION AND MEASUREMENT OF ELEMENTS FROM

WHICH FINANCIAL STATEMENTS ARE CONSTRUCTED

1. The four measurements bases currently used in financial accounting for asset
measurement do not include the:
(a) amount of cash expected to be received in the future, as in the normal conversion of
an account receivable.
(b) price in a current purchase, a in applying the lower cost or market to inventories.
(c) price in a current sales, as in applying the lower of cost or market to temporary
investments.
(d) price of a past purchase adjusted fro changes in the general purchasing power of the
peso, as in the application of the LIFO inventory method. D

2. The use of original historical cost in the matching process is commonly referred to as an
application of the concept of:
(a) conservatism (c) cost
(b) consistency (d) answer not given C

3. This type of valuation is primarily justified by the fact it is objectively determinable with
regard to single cash price at acquisition.
(a) current selling price (c) historical cost valuation
(b) replacement cost (d) discounted cash flow valuation C

4. Which of the following asset valuation methods is not a violation of the accounting
concept of historical cost?
(a) net present value of future cash flows (c) market value
(b) replacement cost (d) general price-level restatement D

5. Which of the following should be recognized as an accountable event on financial

statements according to generally accepted accounting principles (assume all amounts
are material)?
(a) decline in market value of securities held
(b) increase in market value of securities held
(c) decrease in selling price of finished goods inventory and a normal profit is expected on
the new price
(d) answer not given A

6. Realized income generally refers to the:

(a) recognition of gain when there is good evidence that an asset has changed in value.
(b) recording of revenue at the time when cash is received from the sale of a commodity
or service.
(c) accounting for income in the period in which it is actually earned.
 (d) recognition of revenue when there is sufficient objective evidence to determine with a
fair degree of certainty the final amount to be received from operations. D

7. Periodic income are conventionally measured by a:

(a) market value approach including recognition of unrealized gains and losses.
(b) transactions approach.
(c) transactions approach including recognition of unrealized gains and losses.
(d) capital measurement approach. B

8. Conventionally, accountants measure income:

(a) by applying the value-added concept.
(b) by using the transactions approach.
(c) as a change in the value of owner’s equity.
(d) as a change in the purchasing power of owner’s equity. B

9. The compound amount which represents the difference between sales or other revenue
and the sum of costs expired and expenses incurred during the year is considered as the:
(a) return on investment. (c) accountings concept of income.
(b) economic measurement of profit. (d) return on total assets. C

10. The sum of the net income plus depreciation which is available fro dividends, replacement
of assets, expansion of facilities and for reserve is called:
(a) accounting profit (c) gross income
(b) economic profit (d) cash earnings D

11. The application of costs against revenue in measuring the periodic income is called:
(a) income statement preparation. (c) bookkeeping process.
(b) profit and loss preparation. (d) matching process. D

12. Revenue may be recognized:

(a) at the time of the delivery of goods sold to customers.
(b) when the sales commitments have been fulfilled.
(c) at the point completed production of goods which has firmly established market values
and assured marketability.
(d) all of the above. D

13. Generally, revenue should be recognized at a point when:

(a) management decides it is appropriate to do so.
(b) the product is available for sale to the ultimate consumer.
(c) an exchange has taken plant and the earnings process is virtually complete.
(d) a customer’s order for a definite amount of merchandise has been received for
shipment at FOB destination later. C
14. The term “matching costs and revenues” means that:
(a) All costs should be allocated to certain accounting periods on the basis of the effect on
revenues.
(b) Costs which can be associated directly with specific revenue should be carried
forward on the balance sheet until the associated revenue is recognized.
(c) Costs should be carried forward to future accounting periods if they have not resulted
in revenue during the current accounting period.
(d) If costs are charged off s expense in the accounting period when they are actually
incurred, they will be matched properly with revenues earned during that accounting
period. D

15. A theoretically valid system for allocating expenses would have to be rational as well.
Which of the following is not a theoretically valid system for allocating expenses?
(a) systematic and rational allocation (c) profit maximization
(b) cause and effect association (d) immediate recognition C

16. The matching concept of accounting is best demonstrated by:

(a) not recognizing any expense unless some revenue is realized.
(b) associating efforts (cost) with accomplishment (revenue).
(c) recognizing precollected rent received as revenue.
(d) establishing a reserve for possible market decline in inventory. B

17. Which of the following is a deferred cost that should be amortized over the periods
estimated to be benefited?
(a) prepayment of three-year insurance premiums on machinery.
(b) security deposit representing two-months rent on leased office space.
(c) advance from customer to be returned when sale is completed.
(d) property tax for this year payable next year. A

18. Which of the following is an application of the principle of systematic and rational
allocation?
(a) amortization of intangible assets (c) research and development costs
(b) sales commissions (d) officers’ salaries A

19. The term “expired cost” means:

(a) cost which is deductible from revenue.
(b) the amount of the consideration measured in money given in order to acquire goods
or services.
(c) the excess of all expenses over revenue for an accounting period.
(d) cost having no discernable benefit to future operations. D

20. An expiration of cost which is incurred without compensation or return, and which is not
absorbed as costs of revenue, is called:
(a) deferred charge. (c) deferred credit.
(b) loss. (d) profit. B
21. Which of the following is not a basis for the immediate recognition of a cost during a
period?
(a) The cost provides no discernable future benefit.
(b) The cost recorded in a prior period no longer produces discernable benefits.
(c) The income tax savings using the immediate write-off method exceed the savings
obtained by allocating the cost to several periods.
(d) Allocation of the cost on the basis of association with revenue or among several
accounting periods is considered to serve no useful purpose. C

V - FINANCIAL REPORTING

1. The most important single purpose of the general accounting reports of a corporation is
that:
(a) they show a fair valuation of the assets used in the business.
(b) they help in the fair determination of the assets used in the business.
(c) they are useful in the accomplishment of the business’ stewardship function.
(d) They serve as a useful tool in making economic decisions. D

SOURCES & REFERENCES:

 M.B. Kimwell, C.H. Moraza, THEORY OF ACCOUNTS (Part 1) – 1985, KIM-MOR Publishing Co.,
Inc. Makati, Metro Manila

FRAMEWORK OF ACCOUNTING

I – ACCOUNTING AND ACCOUNTANCY PROFESSION

1. Which accounting process is the recognition or nonrecognition of business activities as

accountable events?
(a) identifying (c) communicating
(b) measuring (d) summarizing A

2. These are events that affect the enterprise and in which other entities participate.
Internal External Internal External
(a) Yes Yes (c) No No
(b) Yes No (d) No Yes D

3. Which is an internal event?

(a) Casualty loss
 (b) Exchange
(c) Nonreciprocal transfer between the enterprise and its owners.
(d) Nonreciprocal transfer between the enterprise and other entities. A

4. The basic purpose of accounting is:

(a) to measure periodic income of the economic entity.
(b) to provide quantitative financial information about a business enterprise that is useful
in making rational economic decision.
(c) to provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
(d) to provide information that the managers of an economic entity need to control its
operations. B

5. It focuses on general purpose reports on financial position, performance and cash flows.
(a) financial accounting (c) management advisory services
(b) managerial accounting (d) auditing A

6. Which area of public accounting means the examination of financial statements by a CPA
for the purpose of expressing as opinion as to the fairness of the statements?
(a) external auditing (c) management advisory services
(b) taxation (d) internal auditing A

7. Many accountants are employed in business enterprises in various capacity as

accounting staff, chief accountant or controller. These accountants are said to be
engaged in:
(a) public accounting (c) government accounting
(b) financial accounting (d) private accounting D

8. They encompass the conventions, rules, and procedures necessary to define what is
accepted accounting practice.
(a) generally accepted accounting principles (c) qualitative characteristics
(b) accounting assumptions (d) recognition principles A

9. One of the basic features of financial accounting is the:

(a) direct measurement of economic resources and obligations and changes in them in
terms of money and sociological and psychological impact.
(b) direct measurement of economic resources and obligations and changes in them in
terms of money.
(c) direct measurement of economic resources and obligations and changes in them in
terms of money and sociological impact.
(d) direct measurement of economic resources and obligations and changes in them in
terms of money and psychological impact. B

III – ACOUNTING ASSUMPTIONS

1. These are the basic notions or fundamental premises on which the accounting process is
based.
(a) accounting assumptions (c) generally accepted accounting principles
(b) accounting standards (d) accounting concepts A

2. The ASC conceptual framework specifically mentions two underlying assumption. These
are:
(a) accrual and going concern (c) going concern and time period
(b) accrual and accounting entity (d) time period and monetary unit A

3. The effects of transactions and other events are recognized when they occur and not as
cash or its equivalent is received or paid, and they are recorded and reported in the
financial statements of the period to which they relate.
(a) accrual (c) time period
(b) going concern (d) monetary unit A

4. Which of the following statements is incorrect?

(a) The accrual method, which builds directly on the revenue and matching principles,
ignores the timing of cash receipts or payments when determining when to recognize
revenue or expenses.
(b) Expenses are matched with revenue, not the reverse.
(c) In accordance with the unit of measure assumption, accountants normally revise the
amounts to reflects the changing purchasing power of money due to inflation or
deflation.
(d) In accordance with the going concern assumption, the life of a business is presumed
to be indefinite. C

5. If a business is not being sold or closed, the amounts reported in the accounts for assets
used in the business operations are based on the cost of the assets. This practice is
justified by:
(a) accrual (c) continuity assumption
(b) time period (d) accounting entity C

6. John Frivs is the sole owner and manager of Ace Services. John purchased a car for
personal use. He uses a van in the business. Which of the following is violated if John
recorded the cost of the car as an asset of the business?
(a) conservatism (c) full disclosure
(b) going concern assumption (d) separate entity assumption D

7. What is the traditional accounting period?

(a) three months (c) two years
(b) six months (d) twelve months D

8. Which underlying concept serves as the basis for preparing financial statements at
regular intervals?
 (a) accounting entity (c) accounting period
(b) going concern (d) stable monetary unit C
9. Revenue is expressed as the number of pesos received or the peso equivalent of the
commodities of services received. Cost is expressed as the number of pesos paid out of
the peso equivalent of the items given up. Fluctuations in value of the peso are ignored.
The above describes what accounting assumption?
(a) going concern (c) historical cost
(b) unit of measure (d) realization B

10. The financial statements should be stated in terms of a common financial denominator.
(a) accrual (c) time period
(b) going concern (d) monetary unit D

11. The concept of accounting entity is applicable:

(a) only to be legal aspects of business organizations.
(b) only to the economic aspects of business organizations.
(c) only to business organizations.
(d) whenever accounting is involved. D

12. When a parent and subsidiary relationship exists, consolidated financial statements are
prepared in recognition of:
(a) legal entity (c) stable monetary unit
(b) economic entity (d) time period B

13. The valuation of a promise to receive cash in the future at present value on the financial
statement of a business entity is valid because of the accounting concept of:
(a) entity (c) going concern
(b) time period (d) monetary unit C

14. Continuation of an accounting entity in the absence of evidence to the contrary is an

example of the basic concept of:
(a) accounting entity (c) going concern
(b) time period (d) accrual C

15. This accounting concept justifies the usage of accruals and deferrals.
(a) going concern (c) consistency
(b) materiality (d) stable monetary unit A

16. During the lifetime of an entity, accountants produce financial statements at arbitrary
points in time in accordance with which basic accounting concepts?
(a) accrual (c) unit of measure
(b) periodicity (d) continuity B

IV – CONCEPTUAL FRAMEWORK
 A. DEFINITION, PURPOSE, AND STATUS

1. A conceptual framework is:

(a) a statements of financial accounting standard.
(b) an underlying accounting assumption.
(c) a theoretical foundation which guides the ASC, preparers and users of financial
accounting information.
(d) a financial statement. C

2. Which is not a basic purpose of a conceptual framework?

(a) to assist ASC in developing accounting standards.
(b) to assist preparers of financial statements in applying ASC accounting standards.
(c) to assist ASC in reviewing and adopting International Accounting Standards.
(d) to assist the Board of Accountancy in promulgating rules and regulations affecting
the practice of accountancy in the Philippines. D

3. The ASC conceptual framework is intended to establish:

(a) generally accepted accounting principles in financial reporting by business
enterprises.
(b) the meaning of “present fairly in accordance with generally accepted accounting
principles.”
(c) the objectives and concepts for use in developing standards of financial accounting
and reporting.
(d) the hierarchy of sources of generally accepted accounting principles. C

B. SCOPE – OBJECTIVES OF FINANCIAL STATEMENTS

1. Which is not included in the scope of the ACS conceptual framework?

(a) qualitative characteristics that determine usefulness of financial accounting
information
(b) definition, recognition and measurement of the elements of financial statements
(c) objective of financial statements
(d) generally accepted accounting principles D

2. What is the objective of financial statements?

(a) to disclose the market value of the firm’s assets and liabilities
(b) to determine compliance with tax laws
(c) to make forecasts about the economy
(d) to help users makes decisions D

3. It is the financial flexibility of an enterprise.

(a) liquidity (c) financial structure
(b) solvency (d) capacity for adaptation D
4. It is the level if income earned by an enterprise through the efficient and effective
utilization of resources.
(a) financial position (c) positive cash flows
(b) performance (d) negative cash flows B

5. Liquidity is defined as the :

(a) ability of the enterprise to pay currently maturing obligations.
(b) ability of the enterprise to meet obligations over a longer term.
(c) invested capital of the enterprise.
(d) borrowed capital of the enterprise. A

6. The theory of accounting which best describes the accounting equation expressed
“assets = Liabilities + proprietorship” is the :
(a) entity theory (c) proprietary theory
(b) fund theory (d) residual equity theory A

7. What theory of ownership equity is enumerated by the following equation: assets minus
liabilities minus preferred stock equity equals common stock equity?
(a) fund (c) proprietary
(b) enterprise (d) residual equity D

8. Classifying preferred dividends as expense is an application of what concept?

(a) entity (c) residual equity
(b) proprietary (d) fund C

9. The primary accounting is fair presentation of the performance of the enterprise.

(a) entity (c) residual equity
(b) proprietary (d) fund A

10. Government accounting is an application of:

(a) entity (c) residual equity
(b) proprietary (d) fund D

C. SCOPE – QUALITATIVE CHARACTERISTICS

1. It is the capacity of information to make a difference in a decision by helping users from

predictions about the outcome of past, present and future events, or confirm and correct
prior expectations.
(a) relevance (c) comparability
(b) reliability (d) understandability A
2. The attributes of relevance include ( choose the incorrect one):
(a) predictive value (c) timeliness
(b) feedback value (d) neutrality D

3. It is the quality of information that assures readers that the information is free from bias or
error and faithfully represents what it purports to show.
(a) understandability (c) reliability
(b) relevance (d) comparability C

4. Which of the following has the primary responsibility for the preparation, presentation and
reliability of information in the financial statements?
(a) management (c) external auditor
(b) internal audit staff (d) internal management accountant A

5. Verifiability of financial accounting information is synonymous with:

(a) faithful representation (c) prudence
(b) substance over form (d) completeness A

6. In the event of conflict between the economic substance of a transaction and its legal
form, the economic substance shall prevail. This concept is known as:
(a) form over substance (c) faithful representation
(b) substance over form (d) completeness B

7. The financial accounting information is directed toward the common needs of users and is
independent of presumptions about particular needs and desires of specific users.
(a) relevance (c) neutrality
(b) verifiability (d) completeness C

8. John Company does not know exactly how long its equipment will last. It decides to use
shorter rather than longer useful life for depreciating the equipment. What accounting
concept is being applied in this decision?
(a) reliability (c) materiality
(b) relevance (d) conservatism D

9. It is the exercise of care and caution in dealing with uncertainties in measurement so s

not to overstate assets and income and not understated liabilities and expenses.
(a) completeness (c) faithful representation
(b) prudence (d) neutrality B

10. It is the result of the standard of adequate disclosure.

(a) faithful representation (c) neutrality
(b) substance over form (d) completeness D
11. Which of the following improves the reliability of accounting information?
(a) accounting entity (c) verifiability
(b) going concern (d) time period C

12. The conceptual framework of accounting sets out certain essential characteristics of
accounting information. Which of the following is not as essential characteristic?
(a) understandability (c) reliability
(b) profit-oriented (d) comparability B

13. The financial information must be comprehensible or intelligible if it to be useful.

(a) relevance (c) understandability
(b) reliability (d) comparability C

14. Which qualitative characteristics relate to the content of the financial statements?
(a) relevance and reliability (c) relevance and understandability
(b) understandability (d) reliability and comparability A

15. Which qualitative characteristics relate to the presentation of financial statements?

(a) relevance and reliability (c) relevance and understandability
(b) understandability and comparability (d) reliability and comparability B

16. It is the ability to bring together for the purpose of noting similarities and dissimilarities.
(a) relevance (c) understandability
(b) reliability (d) comparability D

17. Which is incorrect concerning the conditions for comparability within a single enterprise?
(a) The presentations are in the same form.
(b) The contents of the statements are identical.
(c) Accounting principles are not changed or if they are changed, the financial effects
of the changes are not disclosed.
(d) Changes in circumstances or in the nature of underlying transactions are
disclosed. C

18. The ASC conceptual framework of accounting sets out two constraints when
implementing accounting procedures. What are they?
(a) cost-benefit and cost principle (c) cost principle and revenue principle
(b) timeliness and revenue principle (d) cost-benefit and timeliness D

19. According to the ASC conceptual framework, the usefulness of providing information in
financial statements is subject to the constraints of:
(a) consistency (c) reliability
 (b) cost-benefit (d) representational faithfulness B

20. Financial reporting is concerned only with information that is significant enough to affect
evaluation or decision.
(a) timeliness (c) materiality
(b) cost and benefit (d) comparability C

21. The ability through consensus among measures to ensure that information represents
what it purports to represents is an example of the concept of:
(a) relevance (c) comparability
(b) verifiability (d) feedback value B

22. Which of the following accounting concepts states that an accounting transaction should
be supported by sufficient evidence to allow two or more qualified individuals to arrive at
essentially similar conclusions?
(a) conservatism (c) periodicity
(b) objectivity (d) stable monetary unit B

23. Objectivity is assumed to be achieved when an accounting transaction:

(a) is recorded in a fixed amount of peso.
(b) involves the payment or receipt of cash.
(c) involves an arm’s length transaction between two independent parties.
(d) Allocates revenue or expenses in a rational and systematic manner. C

24. The principle of objectivity includes the concept of:

(a) summarization (c) conservatism
(b) classification (d) verifiability D

25. Proponents of historical costs maintain that in comparison with all other valuation
alternatives for general-purpose financial reporting, statements prepared using historical
costs are more:
(a) objective (c) indicative of the entity’s purchasing power
(b) relevant (d) conservative A

26. The consistency standard of reporting requires that:

(a) expenses be reported as charges against the period in which they are incurred.
(b) the effect of changes in accounting upon income be properly disclosed.
(c) extraordinary gains and losses should not appear on the income statement.
(d) accounting procedures be adopted which give a consistent rate of return. B
27. Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of:
(a) materiality (c) conservatism
(b) consistency (d) objectivity B

28. Timeliness is an ingredient of:

(a) reliability (c) verifiability
(b) relevance (d) adequate financial statements B

29. Which of the following situations violates the concept of reliability?

(a) Financial statements were issued nine months late.
(b) Report data on segments having the same expected risks and growth rates to
analysts estimating future profits.
(c) Financial statements included property with a carrying amount increases to
management’s estimate of market value.
(d) Management reports to stockholders regularly refer to new projects undertaken,
but the financial statements never report project results. C

30. What is the underlying concept that supports the immediate recognition of a contingent
loss?
(a) substance over form (c) matching
(b) consistency (d) conservatism D

31. What is the underlying concepts governing the GAAP pertaining to recording gain
contingencies?
(a) conservatism (c) consistency
(b) relevance (d) reliability A

32. Uncertainty and risks inherent in business situations should be adequately considered in
financial reporting. This statement is an example of the concept of:
(a) conservatism (c) neutrality
(b) completeness (d) representation faithfulness A

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

(a) It is probable at the date of the financial statements that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated.
(b) The loss has been incurred on the date of the financial statements and the amount
of the loss may be material.
(c) It is probable that a loss will be incurred in a future period and the amount of the
loss can be reasonably estimated.
(d) It is probable at the date of the financial statements that a loss has been incurred
and the amount of the loss may be material. A
34. How should a loss contingency that is reasonably possible and for which the amount can
be reasonably estimated be reported?
(a) accrues and disclosed (c) disclosed only
(b) accrued only (d) neither accrued nor disclosed C

35. Reserves for general contingencies should:

(a) be accrued in the financial statements and disclosed in the notes thereto.
(b) not be accrued in the financial statements but should be disclosed in the notes
thereto.
(c) not be accrued in the financial statements and need no be disclosed in the notes
thereto.
(d) be accrued in the financial statements but need not be disclosed in the notes
thereto. C

36. An estimated loss from a loss contingency that is probable and for which the amount of
the loss can be reasonably estimated should:
(a) not be accrued but should be disclosed in the notes to the financial statements.
(b) be accrued by debiting an appropriated retained earnings account and crediting a
liability account or an asset account.
(c) be accrued by debiting an expense account and crediting an appropriated retained
earnings account.
(d) be accrued by debiting an expense account and crediting a liability account or an
asset account. D

37. On December 20,2001, an uninsured property damage loss was caused by a company
car being driven on company business by a company salesman. The company did not
become aware of the loss until January 25, 2002. The amount of the loss was reasonably
estimable before the company’s 2001 financial statements were issued. The company’s
December 31, 2001 financial statements should report an estimated loss as:
(a) a disclosure, but not an accrual. (c) neither an accrual nor a disclosure.
(b) an accrual. (d) an appropriation of retained earnings. B

38. A company did not record an accrual for a contingent loss but disclose the nature of the
contingency and the range of the loss. How likely is the loss?
(a) remote (c) probable
(b) reasonably possible (d) certain B

39. A lawsuit in connection with a safety hazard exists for a manufactured product.
Occurrence of a loss is probable and reasonably estimable. The loss contingency should:
(a) be accrued and disclosed. (c) be disclosed.
(b) be accrued only. (d) neither be accrued nor disclosed. A
40. An expropriation of assets which is imminent and for which the amount of loss can be
reasonably estimated should be:
(a) accrued only. (c) accrued and disclosed.
(b) disclosed only. (d) neither accrued and disclosed. C
41. Management can estimate the amount of loss that will occur if a foreign government
expropriates some company assets. If the appropriation is reasonably possible, what is
the treatment of the loss contingency?
(a) disclosed but not accrued as a liability(c) accrued as a liability but not disclosed
(b) disclosed and accrued as a liability (d) neither accrued as a liability not disclosed
A
42. A company has a probable loss that can only be reasonably estimated within a range of
outcomes. However, no single amount within the range is a better estimate than any other
amount. The amount of the loss accrual should be:
(a) zero. (c) minimum of the range.
(b) maximum of the range (d) mean of the range. C

43. Ax Company is being used for illness caused to local residents as a result of negligence
on the company’s part in permitting local residents to be exposed to highly toxic
chemicals from its plant. Ax’s lawyer states that it is probable that Ax will loss the suit and
be found liable for a judgment costing anywhere from P500,000 to P2,500,000. However,
the lawyer states that the most probable costs is P1,000,000. As a result of the above
facts, Ax should accrue:
(a) a loss contingency of P500,000 and disclose a additional contingency of up to
P2,000,000.
(b) a loss contingency of P1,000,000 and disclose as additional contingency of up to
P1,500,000
(c) a loss contingency of P1,000,000 but not disclose any additional contingency.
(d) no loss contingency but disclose a contingency of P500,000 to P2,000,000. B

44. Ever Company has consigned that mortgage note on the home of its president,
guaranteeing the indebtedness in the event that the president should default. Ever
considers the likelihood of default to be remote. How should the guarantee be treated in
Ever’s financial statements?
(a) disclosed only (c) accrued and disclosed
(b) accrued only (d) neither accrued and disclosed A

45. Gain contingency is usually recognized when:

(a) realized.
(b) occurrence is reasonably possible and the amount is reasonably estimable.
(c) occurrence is probable and the amount is reasonably estimable.
(d) the amount is reasonably estimable. A

46. Which of the following is the proper accounting treatment of a gain contingency?
(a) an accrued account.
(b) deferred earnings.
(c) an account receivable with an additional disclosure explaining the nature of the
transaction.
 (d) a disclosure only. D

47. When the occurrence of a gain contingency is probable and its amount can be reasonably
estimated, the gain contingency should be:
(a) recognized in the income statement and disclosed.
(b) classified as an appropriation of retained earnings.
(c) disclosed, but not recognized in the income statement.
(d) neither recognized in the income statement not disclosed. C

48. Great Company operated a plant in a foreign country. It is probable that the plant will be
expropriated. However, the foreign government has indicated that Great will receive a
definite amount of compensation for the plant. The amount of compensation is less than
the fair market value but exceeds the carrying amount of the plant. The contingency
should be reported:
(a) as a valuation allowance as a part of stockholders' equity.
(b) as a fixed asset valuation allowance account.
(c) in the notes to the financial statements.
(d) in the income statement. C

49. At December 31, 2002, Cream Company was suing a competitor for patent infringement.
The award from the probable favorable outcome could be reasonably estimated. Cream’s
2002 financial statements should report the expected award as a :
(a) receivable and revenue. (c) receivable and deferred revenue.
(b) receivable and reduction of patent. (d) disclosure only D

D – DEFINITION, RECOGNITION AND MEASUREMENT OF ELEMENTS

FROM WHICH FINANCIAL STATEMENTS ARE CONSTRUCTED

1. These are related to the economic resources (assets), economic obligations (liabilities),
residual interest (equity) and changes in them (revenue and expense).
(a) basic elements (c) basic objectives
(b) basic principles (d) basic concepts A

2. The basic elements directly related to the measurement of financial position are:
(a) assets, liabilities, equity, revenue and expenses
(b) assets, liabilities, and equity
(c) revenue and expense
(d) assets and liabilities B

3. The basic elements directly related to the measurement performance or results of

operations are:
(a) assets, liabilities, equity, revenue and expenses
 (b) assets, liabilities and equity
(c) revenue and expense
(d) sales and cost of sales C

4. These are resources controlled by the enterprise as a result of past transactions or events
and from which future economic benefits are expected to flow to the enterprise.
(a) assets (c) equity
(b) liabilities (d) revenue A

5. These are present obligations of an enterprise arising from past transactions or events
the settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
(a) assets (c) equity
(b) liabilities (d) revenue B

6. It is the residual interest in the assets of the enterprise after deducting all its liabilities.
(a) revenue (c) net income
(b) expenses (d) equity D

7. It represents the gross inflows of economic benefits during the period arising in the course
of ordinary activities of an enterprise when these inflows result in increases in equity,
other than those relating to contributions from owners.
(a) assets (c) expense
(b) liabilities (d) revenue D

8. It represents the gross outflows of economic benefits during the period arising in the
course of ordinary activities of an enterprise when these outflows result in decreases in
equity, other than those relating to distributions to owners.
(a) assets (c) expense
(b) liabilities (d) revenue C

9. According to ASC conceptual framework, the process of reporting an item in the financial
statements of an enterprise is:
(a) allocation (c) realization
(b) matching (d) recognition D

10. The term “recognized” is synonymous with the term:

(a) recorded (c) matched
(b) realized (d) allocated A

11. Which condition is necessary for the recognition of an asset?

(a) It is probable that future economic benefits will flow to the enterprise.
(b) The cost of the asset can be measured reliably.
 (c) The asset is paid for.
(d) It is probable that future economic benefits will flow to the enterprise and the cost of
the asset can be measured reliably. D

12. Internally generated goodwill is:

(a) recognized as an asset because the inflow of future economic benefits is highly
probable and the cost of the goodwill can be measured reliably.
(b) not recognized as an asset because the cost cannot be measured reliably although
the inflow of future economic benefits is highly probable.
(c) recognized as expense.
(d) recognized as revenue. B

13. A company needed a new warehouse and a contractor quoted a P5,000,000 price to
construct it. A believed that is could build the warehouse for P4,300,000 and decided to
use company employees to build it. The final construction cost incurred by A company
was P4,800,000 but the asset was recorded at P5,000,000. What principle is this
violation of?
(a) cost principle (c) matching principle
(b) separate entity (d) conservatism A

14. According to GAAP, at what value should a company show its assets on the balance
sheet?
(a) market value at all times
(b) cash equivalent of asset given up or the asset received, whichever is more clearly
evident
(c) best estimate of an internal auditor
(d) cash outlay only, even if part of the consideration given was something other than
cash. B

15. Which of the following statements is not consistent with generally accepted accounting
principles as they relate to asset valuation?
(a) assets are generally recorded in the accounting records at cost to the enterprise.
(b) accountants assume that assets such as supplies, buildings and equipment will be
used in the business operations rather sold.
(c) subtracting total liabilities from total assets results in the current market value or
equity.
(d) accountants base asset valuation upon objective, verifiable evidence rather than on
personal opinion. C

16. The valuation basis used in conventional financial statement is:

(a) replacement cost (c) original cost
(b) market value (d) a mixture of cost and value D

17. Imputing interest for certain assets and liabilities is primarily based on the concept of:
(a) valuation (c) consistency
(b) conservatism (d) stable monetary unit A
18. In an arm’s-length transaction, Company A and Company B exchanged nonmonetary
assets with no monetary consideration involved. The exchange did not culminate an
earning process for both Company A and Company B, and the fair values of the
nonmonetary assets were both clearly evident. The accounting for the exchange should
be based on the:
(a) fair value of the asset surrendered (c) recorded amount of the asset surrendered
(b) fair value of the asset received (d) recorded amount of the asset received A

19. Company A and Company B exchanged nonmonetary assets with no monetary

consideration involved and no impairment of value. The exchange did not culminate an
earning process for either Company A or Company B. The accounting for the exchange
should be based on the:
(a) recorded amount of the asset received (c) fair value of the asset received
(b) recorded amount of the asset relinquished (d) fair value of the asset relinquished B

20. Revenue is recognized when:

(a) it is probable that future economic benefits will flow to the enterprise.
(b) the future economic benefits can be measured reliably.
(c) it is possible that reliably measurable future economic benefits will flow to the
enterprise.
(d) It its probable that reliably measurable future economic benefits will flow to the
enterprise. D

21. Normally, revenue is recognized:

(a) when the customer’s order is received.
(b) when the customer’s order is accompanied by a check.
(c) only if the transaction will create an account receivable.
(d) when the title to the goods changes. D

22. In accordance with the revenue principle, when should revenue be recognized?
(a) when the goods are shipped (c) when title to the goods passes
(b) when cash is collected (d) when goods are set aside C

23. Depending on the nature of the enterprise, revenue may be recognized based on
different acceptable criteria. Which of the following is not an accepted basis for
recognition of revenue?
(a) passage of time (c) completion of percentage of a project
(b) performance of service (d) upon signing of contract D

24. Which of the following bases of revenue recognition reflects the greatest degree of
uncertainty about future events?
 (a) sales method applied to sales of a department store
(b) cost recovery method applied to an installment sales contract
(c) production method for a gold mining operation
(d) percentage of completion on a construction contract B

25. Under what methods is revenue recognized prior to delivery?

(a) percentage of completion method (c) installment sales
(b) cost recovery method (d) accrual method A

26. This revenue recognition method is allowed when a sale is insured under a forward
contract or government guarantee or when a homogenous market exists and there is a
negligible risk of failure to sell.
(a) percentage of completion method (c) cash method
(b) production method (d) accrual method B

27. What is an example of an accounting principle?

(a) The fact that one type of accounting is designed to help managers identity, measure
and control operating costs
(b) The definition of when revenue is to be recognized
(c) The fact that business transactions involve a completed exchange of economic
transactions.
(d) The definition of assets minus liabilities equals shareholders’ equity. B

28. Which of the following is true?

(a) Net assets always increase when revenue is recorded.
(b) Generally accepted accounting principles are men-made rules that never change.
(c) The assumption that a business will continue to operate until it can sell its assets to
pay its creditors underlies the going concern concept.
(d) The Board of Accountancy is the body that currently has the authority to issue
pronouncement of GAAP. A

29. Which of the following statements about executory contracts is correct?

(a) They need not be disclosed.
(b) They occur when two parties agree to transfer resources or services but only one
party has performed.
(c) They must be recorded if material n amount.
(d) They must be disclosed if material n amount. D

30. 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 during the 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 to the
enterprise. A

31. Under what condition in it proper to recognize revenue prior to the sale of the
merchandise?
(a) when the concept of internal consistency is complied with.
(b) when the revenue is to be reported as an installment sale.
(c) when the ultimate sale of the goods is at an assured sales price.
(d) when management has a long-established policy to do so. C

32. Which of the following is the most precise sense means the process of converting
noncash resources and rights into cash or claims of cash?
(a) allocation (c) recognition
(b) collection (d) realization D

33. Gains on assets unsold are identified, in a precise sense, by the term:
(a) unrecorded (c) unrecognized
(b) unrealized (d) unallocated B

34. Which of the following statements conforms to the realization concept?

(a) Equipment depreciation was assigned to a production department and then to product
unit cost.
(b) Depreciated equipment was sold in exchange for a note receivable.
(c) Cash was collected on accounts receivable.
(d) Product unit costs were assigned to cost of goods sold when the units were sold. B

35. According to the FASB conceptual framework, an entity’s revenue may result from:
(a) a decrease in an asset from primary operations.
(b) an increase in an asset from incidental transactions.
(c) an increase in a liability from incidental transactions.
(d) a decrease in a liability from primary operations. D

36. It is proper to recognize revenue prior to the sale of merchandise when:

I. The revenue will be reported as an installment sale.
II. The revenue will be reported under the cost recovery method.
(a) I only (c) both I and II
(b) II only (d) neither I nor II D

37. Cash collection is a critical event for income recognition in the:

Cost recovery method Installment method
(a) No No
(b) Yes Yes
(c) No Yes
(d) Yes No B
38. For financial statements purposes, the installment method of accounting may be used if
the:
(a) collection period extends over more than 12 months.
(b) installment are due n different years.
(c) ultimate amount collectible is indeterminate.
(d) percentage of completion method is inappropriate. C

39. Income recognized using the installment method of accounting generally equals cash
collected multiplied by the:
(a) net operating profit percentage.
(b) net operating profit percentage adjusted for expected uncollectible accounts.
(c) gross profit percentage.
(d) gross profit percentage adjusted for expected uncollectible accounts. C

40. According to the installment method of accounting, gross profit on an installment sale is
recognized in income:
(a) on the date of sale.
(b) on the date the final cash collection is received.
(c) in proportion to the cash collection.
(d) after cash collections equal to the cost of sales have been received. C

41. According to the cost recovery method of accounting, gross profit on an installment sale
is recognized in income:
(a) after cash collections equal to the cost of sales have been received.
(b) in proportion to the cash collections.
(c) on the date the final cash collection is received.
(d) on the date of sale. A
42. Art Company is engaged in extensive exploration for water. If upon discovery of water,
the company need not recognize any revenue from water sales exceed the costs of
exploration, the basis of revenue recognition being employed is the:
(a) production method (c) sales or accrual basis
(b) cash or collection basis (d) sunk cost or cost recovery method D

43. Art Company sells equipment on installment contracts. Which of the statements best
justifies the use of the cost recovery method of revenue recognition to account for these
installment sales?
(a) The sales contract provides that title to the equipment only passes to the purchase
when all payments have been made.
(b) No cash payments are due until one year from the date of sales.
(c) Sales are subject to a high rate of return.
(d) There is no reasonable basis for estimating collectibility. D

44. X Company produces expensive equipment for sale on installment contracts. Where
there is doubt about eventual collectibility, the income recognition method least likely to
overstate income is:
 (a) at the time the equipment is completed. (c) the cost recovery method.
(b) the installment method. (d) at the time of delivery. C

45. When costs can be reasonably associated with specific revenue but not with specific
product, the cost should be:
(a) expensed in the period incurred.
(b) allocated to the specific produced based on the best estimate of the product
processing time.
(c) expensed in the period in which the related revenue is recognized.
(d) capitalized and then amortized over a reasonable period. C

46. Why are certain costs of doing business capitalized when incurred and then depreciated
or amortized over the periods benefited?
(a) to adhere to the concept of conservatism
(b) to reduce income tax liability
(c) to aid management in decision –making process
(d) to properly match costs of production with revenue earned D

47. Which of the following is an example of the expense recognition principle of associating
cause and effect?
(a) allocation of insurance cost (c) depreciation of property, plant and equipment
(b) sales commissions (d) officers’ salaries B

48. Which of the following principles best describes the conceptual rational for the method of
matching depreciation with revenue?
(a) associating cause and effect (c) immediate recognition
(b) systematic and rational allocation (d) partial recognition B

49. Which of the following is expensed under the principle of systematic and rational
allocation?
(a) salesmens’ monthly salaries (c) transportation to customers
(b) insurance premiums (d) electricity to light office building B

50. Which of the following would be matched with current revenue on a basis other than
association of cause and effect?
(a) Goodwill (c) sales commission
(b) cost of goods sold (d) warranty cost A

51. A patent with a ten-year life was determined to be worthless. The write off of the asset is
an example of which of the following principles?
(a) associating cause and effect (c) profit maximization
(b) immediate recognition (d) classification B

52. Which of the following is not a theoretical basis for the allocation of expense?
(a) immediate recognition (c) cause and effects association
(b) systematic and rational allocation (d) profit maximization D
53. Some costs cannot be directly related to particular revenues but are incurred to obtain
benefits that are exhausted in the period in which costs are incurred. An example of such
costs is:
(a) sales commissions (c) freight in
(b) sales salaries (d) prepaid insurance B

54. This measurement basis is the discounted value of future net cash inflows that an asset
is expected to generate in the normal course of business.
(a) historical cost (c) realizable value
(b) current cost (d) present value D

55. Historical cost is a measurement base currently used in financial accounting. Which of
the following measurement bases is also currently used in financial accounting?
Current selling price Discounted cash flow Replacement cost
(a) Yes No Yes
(b) Yes Yes Yes
(c) Yes No No
(d) No Yes Yes B

56. When discussing asset valuation, the following valuation bases are sometimes
mentioned: replacement cost, exit value, and discounted cash flow. Which of these bases
should be considered a current value measure?
(a) replacement cost and exit value
(b) replacement cost and discounted cash flow only
(c) exit value and discounted cash flow only
(d) replacement cost, exit value, and discounted cash flow D

57. According to the FASB conceptual framework, which of the following attributes would not
be used to measure inventory?
(a) historical cost (c) net realizable value
(b) replacement cost (d) present value of future cash flows D

58. Which of the most common measurements basis in accounting?

(a) historical cost (c) realizable value
(b) current cost (d) present value A

V. FINANCIAL REPORTING

1. What is the objective of financial reporting?

(a) to provide the necessary information for the management of an enterprise to
mangers of that enterprise.
 (b) to provide information that the creditors of an enterprise can use in deciding whether
to make additional loans to the enterprise.
(c) to measure the periodic net income of an enterprise.
(d) to provide external users with financial information that is useful in making rational
investment, credit and similar decisions. D

2. These include not only financial statements but also other information such as financial
highlights, analysis of financial statements, description of major products and list of
directors and officers.
(a) audit reports (c) note to financial statements
(b) financial reports (d) financial statements B

3. Which uses need financial information to enable them to asses the ability of the enterprise
to provide renumeration, retirement benefits and employment opportunities?
(a) customers (c) public, in general
(b) government and its agencies (d) employees D

4. The objectives of financial reporting for business enterprise are based on:
(a) the need for conservatism.
(b) reporting on management’s stewardship.
(c) generally accepted accounting principles.
(d) the needs of the users of the information. D

5. 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.
(b) individual business enterprises and an economy as a whole or to members of
society as consumers.
(c) individual business enterprises and n economy as a whole, rather than to industries
or to members of society as consumers.
(d) individual business enterprises, industries and an economy as a whole, rather than
to members of society as consumers. A

6. During a period when an enterprise is under the direction of a particular management,

financial reporting will directly provide information about:
(a) both enterprise performance and management performance.
(b) management performance but not enterprise performance.
(c) enterprise performance but not management performance.
(d) neither enterprise performance nor management performance. C

7. What is the objective of financial reporting?

(a) assist investor in analyzing the economy.
(b) assist inventor in predicting future cash flows.
(c) assist supplier in determining an appropriate discount to offer a particular company.
 (d) enable banks to determine an appropriate interest rate on their guaranteed
investment certificates. B

SOURCES & REFERENCES:

 Valix, Conrado T., THEORY OF ACCOUNTS – 2001 Edition, GIC Enterprises & Co., Inc., 2001