QUESTION 1-48 Multiple choice (ACP)

1. Accounting is a service activity and its function is to provide quantitative information,

primarily financial in nature, about economic entities, that is intended to be useful in
making economic decision. This accounting definition is given by
a. Accounting Standards Council
b. AICPA Committee on Accounting Terminology
c. American Accounting Association
d. Board of Accountancy

2. The basic objective of accounting is

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

3. These are the events that affect the entity and in which other entities participate.
a. Internal events
b. External events
c. Current events
d. Past events

4. The communicating process of accounting includes all of the following, except

a. Recording
b. Classifying
c. Summarizing
d. Interpreting

5. What is the law regulating the practice of accountancy in the Philippines?

a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. R.A. No. 9892

6. It is the body authorized by law to promulgate rules and regulations affecting the
practice of the accountancy profession in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
c. Securities and Exchange Commission
d. Financial Reporting Standards Council

7. Accountants employed in entities in various capacity as accounting staff, chief

accountant or controller are said to be engaged in
 a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting

8. It is the accounting standard setting body in the Philippines at the present time.
a. Accounting Standards Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards Council

9. In the development of accounting standards, the FRSC employs a “due process”

system which
a. Is efficient for collecting dues from members.
b. Enables interested parties to express their views on accounting issues under
consideration.
c. Identifies the accounting issues that are the most important.
d. Requires that all CPAs must receive a copy of PFRS.

10. The Philippine Financial reporting Standards collectively include

I. PFRS corresponding to IFRS.
II. PAS corresponding to IAS.
III. Philippine Interpretations corresponding to IFRIC and SIC Interpretations and
Interpretations developed by PIC.

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

ANSWER 1-48
1. a
2. d
3. b
4. d
5. a
6. a
7. b
8. d
9. b
10. D
QUESTION 1-49 Multiple choice (IAA)

1. Financial accounting is concerned with

a. General-purpose reports on financial position and financial performance.
b. Specialized reports for inventory management and control.
c. Specialized reports for income tax computation and recognition.
d. General-purpose reports on changes in stock prices and future estimates of
market position.

2. Financial accounting can be broadly defined as the area of accounting that prepares
a. General purpose financial statements to be used by parties internal to the entity
only.
b. Financial statements to be used by investors only.
c. General purpose financial statements to be used by parties both internal and
external to the entity.
d. Financial statements to be used primarily by management.

3. Financial accounting is the area of accounting that emphasizes reporting to

a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors

4. Managerial accounting is the area of accounting that emphasizes

a. Reporting financial information to external users.
b. Reporting to the Securities and Exchange Commission.
c. Combining accounting knowledge with an expertise in data processing.
d. Developing accounting information for use within an entity.

5. One of the basic features of financial accounting is

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.

ANSWER 1-49
1. a
2. c
3. d
4. d
5. b
QUESTION 1-50 Multiple choice (IAA)

1. Generally accepted accounting principles

a. Are accounting adaptations based on the laws of economic science.
b. Derive their credibility and authority from legal rulings and court precedents.
c. Derive their credibility and authority from the national government through the
Securities and Exchange Commission.
d. Derive their credibility and authority from general recognition and acceptance by
the accountancy profession.

2. Which of the following statements best describes generally accepted accounting

principles?
a. They have been formulated in the public sector.
b. They have been developed on the basis of such factors as usage and practical
necessity.
c. They are the same as laws within our legal system.
d. They do not apply to small entities.

3. Proper application of accounting principles is most dependent upon

a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant

4. Financial accounting standard-setting

a. Is a democratic process in that a majority of practicing accountants must agree
with a standard before it becomes enforceable.
b. Is a legislative process based on rules promulgated by government agencies.
c. Is based solely on research.
d. Is a social process which incorporates political actions of various interested user
groups as well as professional research and logic.

5. Once an accounting standard has been established

a. The standard is continually reviewed to see if modification is necessary.
b. The standard is not reviewed unless the Securities and Exchange Commission
makes aa complaint.
c. The task of reviewing the standard to see if modification is necessary is given to
the PICPA.
d. The principle of consistency requires that no revisions ever be made to the
standard.

6. As independent or external auditors, CPAs are primarily responsible for

a. Preparing financial statements in conformity with GAAP.
b. Certifying the accuracy of financial statements.
c. Expressing an opinion as to the fairness of financial statements.
d. Filing financial statements with the SEC.
7. The singularly unique function performed by Certified Public Accountants is
a. Tax preparation
b. Management advisory services
c. The attest function
d. The preparation of financial statements

8. The purpose of the Interpretation Financial Reporting Standards is to

a. Issue enforceable standards which regulate the financial accounting and
reporting of multinational entities.
b. Develop a uniform currency in which the financial transactions of entities
throughout the world would be measured.
c. Promote uniform accounting standards among countries of the world.
d. Arbitrate accounting disputes between auditors and international entities.

9. The International Accounting Standards Board was formed to

a. Enforce IFRS in foreign countries.
b. Develop a single set of high quality IFRS.
c. Establish accounting standards for multinational entities.
d. Develop accounting standards for countries that do not have standard-setting
body.

10. It is a “global phenomenon” intended to bring about transparency and a higher degree
of comparability in financial reporting in order to achieve the goal of one uniform and
globally accepted financial reporting standards.
a. IFRS
b. Borderless accounting
c. World trade
d. Information technology

ANSWER 1-50

1. d
2. b
3. d
4. d
5. a
6. c
7. c
8. c
9. b
10. a
QUESTION 1-51 Multiple choice (IAA)

1. What is the only underlying assumption mentioned in the Conceptual Framework for
Financial Reporting?
a. Going concern
b. Accounting entity
c. Time period
d. Monetary unit

2. Which of the following statements best describes the term “going concern”?
a. When current liabilities of an entity exceed current assets.
b. The ability of the entity to continue in operation for the foreseeable future.
c. The potential to contribute to the flow of cash and cash equivalents to the entity.
d. The expenses of an entity exceed its income.

3. Which of the following is not 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 and noncurrent classification of assets and liabilities is justifiable
and significant.
d. Amortizing research and development costs over several periods is justifiable
and appropriate.

4. The relatively stable economic, political and social environment supports

a. Conservatism
b. Materiality
c. Timeliness
d. Going concern

5. Which basic assumption may not be followed when an entity in bankruptcy reports
financial results?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Monetary unit assumption

6. The financial statements that are prepared for the business are separate and distinct
from the financial statements of the owners.
a. Going concern assumption
b. Matching principle
c. Economic entity assumption
d. Accounting period assumption

7. 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.

8. Which underlying assumption serves as the basis for preparing financial statements at
regular artificial points in time?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit

9. Which basic accounting assumption is threatened by the existence of severe inflation in

an economy?
a. Monetary unit assumption
b. Periodicity assumption
c. Going concern assumption
d. Economic entity assumption

10. Which of the following is not an important characteristic of the financial statements
that accountants currently prepare?
a. The information in financial statements is expressed in units of money adjusted
for changing purchasing power.
b. Financial statements articulate with one another because measuring financial
position is related to measuring changes in financial position.
c. The information in financial statements is summarized and classified to help
meet users’ needs.
d. Financial statements can be justified only if the benefits they provide exceed the
costs.

ANSWER 1-51

1. a
2. b
3. d
4. d
5. b
6. c
7. d
8. c
9. a
10. a
QUESTION 1-52 Multiple choice (AICPA Adapted)

1. The concept of accounting entity is applicable

a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved

2. When a parent and subsidiary relationship exists, consolidated financial statements are
prepared in recognition of
a. Legal entity
b. Economic entity
c. Stable monetary unit
d. Time period

3. The valuation of a promise to receive cash in the future at present value is valid
because of the accounting concept of
a. Entity
b. Time period
c. Going concern
d. Monetary unit

4. What is the accounting concept that justifies the usage of accruals and deferrals?
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit

5. During the lifetime of an entity, accountants produce financial statements at arbitrary

points in time in accordance with what basic accounting concept?
a. Accrual
b. Periodicity
c. Unit of measure
d. Continuity

ANSWER 1-52
1. d
2. b
3. c
4. a
5. b
QUESTION 1-53 Multiple choice (Conceptual Framework)

1. This is a complete, comprehensive and single document promulgated by IASB

establishing the concepts that underlie financial reporting.
a. Conceptual Framework for Financial Reporting
b. Conceptual Framework for Financial Statements
c. Conceptual Framework for Business Entities
d. Conceptual Framework

2. The Conceptual Framework should

a. Lead to uniformity of financial statements among entities within the same
industry.
b. Eliminate alternative accounting principles and methods.
c. Guide the PICPA in developing generally accepted auditing standards.
d. Define the basic objectives, terms and concepts of accounting.

3. Which is not a basic purpose of the Conceptual Framework?

a. To assist the Financial Reporting Standards Council in developing accounting
standards.
b. To assist preparers of financial statements in applying accounting standards.
c. To assist the Financial Reporting Standards Council 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.

4. Which of the following is not a purpose of the Conceptual Framework?

a. To provide definitions of key terms and fundamental concepts.
b. To provide specific guidelines for resolving situations not covered by existing
accounting standards.
c. To assist accountants and others in selecting among alternative accounting and
reporting methods.
d. To assist the Financial Reporting Standards Council in the standard-setting
process.

5. Which is a basic purpose of the Conceptual Framework?

I. To assist users of financial statements in interpreting the information contained
in the financial statements.
II. To assist auditors in forming an opinion as to whether financial statements
conform with Philippine GAAP.
III. To provide information to those interested in the work of the Financial Reporting
Standards Council in the formulation of PFRS.

a. I and II only
b. I and III only
c. II and III only
d. I, II and III
6. What is the authoritative status of the Conceptual Framework?
a. The Conceptual Framework has the highest level of authority.
b. In the absence of a standard or an interpretation that specifically applies to a
transaction, the Conceptual Framework shall be followed.
c. In the absence of a standard or an interpretation that specifically applies to a
transaction, management shall consider the applicability of the Conceptual
Framework in developing and applying an accounting policy that results in
information that is relevant and reliable.
d. The Conceptual Framework applies only when the Financial Reporting
Standards Council develops new or revised standards.

7. The Conceptual Framework is intended to establish.

a. Generally accepted accounting principles in financial reporting by entities.
b. The meaning of “present fairly in accordance with GAAP.”
c. The objectives and concepts for use in developing standards of financial
accounting and reporting.
d. The hierarchy of sources of GAAP.

8. Which of the following statements is true concerning the Conceptual Framework.

I. The Conceptual Framework is concerned with general purpose financial
statements including consolidated financial statements.
II. Special purpose financial reports, for example , prospectuses and computations
prepared for taxation purposes, are within the scope of the Conceptual
Framework.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

9. Which is not included in the scope of the Conceptual Framework?

a. Qualitative characteristic of useful financial accounting information.
b. Definitions, recognition and measurement of the elements of financial
statements.
c. Objective of financial reporting.
d. Supplementary information.

10. As regards the relationship between PFRS and the Conceptual Framework, which of
the following statements is true?
I. The Conceptual Framework is a reporting standard.
II. In case of conflict, the requirements of the Conceptual Framework prevail over
those of the relevant PFRS.

a. I only
b. II only
c. Both I and II
 d. Neither I nor II

ANSWER 1-53
1. a
2. d
3. d
4. b
5. d
6. c
7. c
8. a
9. d
10. d
QUESTION 1-54 Multiple choice (IAA)

1. In the Conceptual Framework for Financial Reporting, what provides the “why” of
accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Element of financial statement
d. Objective of financial reporting

2. The underlying theme of the Conceptual Framework is

a. Decision usefulness
b. Understandability
c. Timeliness
d. Comparability

3. What is a purpose of the Conceptual Framework?

I. To enable the accountancy profession to solve more quickly emerging practical
problems.
II. To provide a foundation from which more useful financial accounting standards.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. Which of the following is not true concerning the Conceptual Framework?

I. The Conceptual Framework should be a basis for standard setting.
II. The Conceptual Framework should allow practical problems to be solved more
quickly.
III. The Conceptual Framework should be based on fundamental truths that are
derived from the laws of nature.

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

5. A soundly developed Conceptual Framework should

I. Increase financial statements users’ understanding and confidence in financial
reporting.
II. Enhance comparability of financial statements across entities.
III. Allow new emerging practical problems to be solved more quickly.

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

ANSWER 1-54
1. d
2. a
3. c
4. b
5. d
QUESTION 1-55 Multiple choice (Users of information)

1. The “primary users” of financial information include

I. Existing and potential investors

II. Existing and potential lenders and other creditors
III. User group such a employees, customers, governments and their agencies, and
the public
a. I only
b. I and II only
c. I and III only
d. I, II and III

2. Users of financial reports include which of the following?

I. Creditors
II. Government agencies
III. Unions
a. I only
b. I and II only
c. I and III only
d. I, II, and III

3. Which of the following is an internal user of financial information?

a. Board of Directors
b. Shareholder in the entity
c. Holder of the entity’s bonds
d. Creditor with long-term contract with the entity

4. These users require information on risk and return on investment

a. Investors
b. Employees
c. Lenders
d. Customers

5. These users are interested in information about the profitability and stability of an
entity in order to assess the ability of the entity to provide remuneration, retirement
benefits and employment opportunities.
a. Customers
b. The public
c. Governments and their agencies
d. Employees

6. These users are interested in information that enables them to assess whether their
loans, the related interest thereon, and other amounts owing to them will be paid when
due.
 a. Lenders and other creditors
b. Borrowers
c. Trade creditors
d. Owners

7. These users are interested in information about the continuance of an entity when they
have a long-term involvement with or are dependent on the entity.
a. Customers
b. Employees
c. Trade unions
d. Suppliers

8. These users are interested in information in order to regulate the activities of an entity,
determine taxation policies and provide a basis for national statistics.
a. Governments and their agencies
b. Major organization of users
c. Bureau of Internal Revenue
d. Department of Finance

9. These users need information on trends and recent developments where an entity
makes a substantial contribution to the local economy providing employment and using
local suppliers.
a. The public
b. Government and their agencies
c. Finance entities
d. Private entities

10. Which of the following statements in relation to information needs is true?

I. Information that meets the needs of specified primary users is likely to meet the
needs of other users, such as employees, customers, governments and their
agencies, and the public.
II. The management is also interested in financial information but it need not rely
on general purpose financial reports because it can access additional information
internally.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

ANSWER 1-55
1. b
2. d
3. a
4. a
5. d
6. a
7. a
8. a
9. a
10. c
QUESTION 1-56 Multiple choice (AICPA Adapted)

1. The accounting equation “assets = liabilities + equity” is

a. Entity theory
b. Fund theory
c. Proprietary theory
d. Residual equity theory

2. The equation “assets minus liabilities minus preference equity equals ordinary equity”
is
a. Fund
b. Entity
c. Proprietary
d. Residual equity

3. Classifying preference dividends as expenses is an application of what concepts?

a. Entity
b. Proprietary
c. Residual equity
d. Fund

4. The primary accounting objective is fair presentation of the financial performance of

the entity.
a. Entity
b. Proprietary
c. Residual equity
d. Fund

5. Fiduciary accounting is an application of

a. Entity theory
b. Proprietary entity
c. Residual equity theory
d. Fund theory

ANSWER 1-56
1. a
2. d
3. c
4. a
5. d
QUESTION 1-57 Multiple choice (IAA)

1. What is the objective of financial reporting?

a. To provide information about the financial position, financial performance and
changes in financial position of an entity.
b. To prepare and present a statement of financial position, an income statement, a
statement of comprehensive income, a statement of cash flows and a statement
of changes in equity.
c. To provide financial information about an entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
d. To prepare financial statements in accordance with all applicable standards and
interpretations.

2. The primary focus of financial reporting has been on meeting the needs of which of the
following groups?
a. Managers of an entity
b. Existing and potential investors, lenders, and other creditors
c. National and local taxing authorities
d. Independent CPAs

3. The overall objective of financial reporting is to provide information

a. That is useful for decision making
b. About an entity’s assets, liabilities and owner’s equity
c. About an entity’s financial performance during a period
d. That allows owners to assess management’s performance

4. Which is an objective of financial reporting?

a. To provide information that is useful to those making investing and credit
decisions.
b. To provide information that is useful to management.
c. To provide information about those investing in the entity.
d. To provide information about ways to solve internal and external conflicts about
the entity.

5. What is a major objective of financial reporting?

a. To provide information that is useful to management in making decisions.
b. To provide information that clearly portrays nonfinancial transactions.
c. To provide information that is useful to assess the amounts, timing, and
uncertainty of prospective cash receipts.
d. To provide information that excludes claims against the resources.

6. One element of the objective of financial reporting is to provide

a. Information about the investors in the entity.
b. Information about the liquidation value of the resources held by the entity.
c. Information that is useful in assessing cash flow prospects.
 d. Information that will attract new investors.

7. Which of the following statements best describes the term “financial position”?
a. The net income and expenses of an entity
b. The net of financial assets less liabilities of an entity
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The assets, liabilities and equity of an entity

8. Which of the following best describes “financial performance” of an entity?

a. The revenue, expenses and net income or loss for a period of an entity.
b. The assets, liabilities and owner’s equity of an entity
c. The total assets minus total liabilities
d. The total cash inflows minus cash outflows

9. As part of the objective of general-purpose financial reporting, there is an emphasis on

“assessing cash flow prospects.” This is interpreted to mean
a. Cash basis accounting is preferred over accrual basis accounting.
b. Information about the financial effects of cash receipts and cash payments is
generally considered the best indicator of an entity’s present and continuing
ability to generate favorable cash flows.
c. Over the long-run, trends in revenue and expenses are generally more
meaningful than trends in cash receipts and disbursements.
a. All of the choices are correct regarding “assessing cash flow prospects”.

10. Which of the following statements in relation to financial reporting is incorrect?

a. General purpose financial reports do not and cannot provide all of the
information that primary users need.
b. General purpose financial reports are designed to show the value of the reporting
entity.
c. General purpose financial reports are intended to provide common information
to users.
d. Financial reports are largely based on estimate and judgment rather than exact
depiction.

ANSWER 1-57
1. c
2. b
3. a
4. a
5. c
6. c
7. d
8. a
9. c
10. b
QUESTION 1-58 Multiple choice (AICPA Adapted)

1. The objective of financial reporting are based on

a. The need for conservatism
b. Reporting on management’s stewardship
c. Generally accepted accounting principles
d. The need of the users of the information

2. The information provided by financial reporting pertains to

a. Individual business entities, rather than to industries or an economy as a whole
or to members of society as consumers
b. Individual business entities and an economy as a whole or to members of society
as consumers
c. Individual business entities and economy as a whole, rather than to industries or
to members of society as consumers
d. Individual business entities, industries and an economy as a whole, rather than to
members of society as consumers

3. During a period when an entity is under the direction of a particular management,

financial reporting will directly provide information about
a. Both entity performance and management performance
b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance

4. Which one of the following is not listed as a major objective of financial reporting?
a. Financial reporting shall provide information about entity resources, claims to
those resources and changes in them.
b. Financial reporting shall provide information useful in evaluating management’s
stewardship.
c. Financial reporting shall provide information useful in investment, credit and
similar decisions.
d. Financial reporting shall provide information useful in assessing cash flow
prospects.

5. Which of the following statements is not normally an objective of financial reporting?

a. To provide information about an entity’s assets and claims against those assets
b. To provide information that is useful in assessing an entity’s sources and uses of
cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about an entity’s liquidation value

ANSWER 1-58
1. d
2. a
3. c
4. b
5. d
QUESTION 1-59 Multiple Choice (PHILCPA Adapted)

1. The principles which constitute the ground rules for financial reporting are termed
“generally accepted accounting principles”. To qualify as “generally accepted,” an
accounting principle must
a. Usually guide corporate managers in preparing financial statements, which will
be understood by widely scattered shareholders.
b. Guide corporate managers in preparing financial statements, which will be used,
for collective bargaining agreement with trade unions.
c. Guide an entrepreneur of the choice of an accounting entity like single
proprietorship, partnership or corporation.
d. Receive substantial authoritative support.

2. Under generally accepted accounting principles

a. Income and expenses, assets and liabilities are measured based on the occurrence
of changes in the economic resources and obligations.
b. Assets and liabilities are measured on the basis of their liquidation value.
c. Income and expenses are recognized on the basis of cash receipts and payments,
including depreciation of property, plant, and equipment.
d. Financial position and financial performance are measured on the basis of cash
received and cash paid.

3. The four phases of accounting are recording, classifying, summarizing and

interpreting. The phase whereby the liquidity, solvency and profitability of an entity
are significantly portrayed is known as
a. Summarizing
b. Classifying
c. Recording
d. Interpreting

4. Four types of money prices are used in measuring resources in financial accounting.
The measurement which uses such concepts as present value, discounted cash flow and
value in use is known as
a. Price in a current purchase exchange
b. Price in past purchase exchange
c. Price based on future exchange
d. Price in a current sale exchange

5. External events include all of the following, except

a. Sale of merchandise
b. Borrowing from bank
c. Donation received from shareholder
d. Casualty loss caused by flood, earthquake or other natural disaster

ANSWER 1-59
1. d
2. a
3. d
4. C
5. d