INTRODUCTION TO FINANCIAL STATEMENTS

Multiple Choice. Identify the letter of the choice that best completes the statement or answers the question.

1. Which of the following is not an objective of financial reporting? [A] To reflect prospective cash receipts to investors
and creditors. [B] To reflect prospective cash flows to an enterprise. [C] To reflect resources and claim to resources.
[D] To reflect current stock prices and information concerning stock markets. [E] None of the answers are correct.
2. Badyear, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan.
The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-
time television last night, you are aware that Schneider is a defendant in several lawsuits related to its defective tires
that cause vehicles to overturn. The information presented on television is an example of financial information that is
[A] Relevant. [B] Consistent. [C] Predictable. [D] Comparable. [E] None of the answers are correct.
3. Which of the following statements is true concerning external users of financial information? [A] External users need
detailed records of the business to make informed decisions. [B] External users are primarily responsible for the
preparation of financial statements. [C] External users rely on the financial statements to help make informed
decisions. [D] External users rely on management to tell them whether the company is a good investment. [E] None
of the answers are correct.
4. Who is responsible for the preparation and integrity of financial statements? [A] A cost accountant [B] Management.
[C] An auditor. [D] A bookkeeper. [E] The PFRSC.
5. In addition to the Statement of Financial Position, the Statement of Financial Performance, and the Statement of Cash
Flows, a complete set of financial statements must include [A] An auditor's opinion. [B] A ten-year summary of
operations. [C] A note disclosure of such items as accounting policies. [D] Historical common-size (percentage)
summaries. [E] A list of corporate officers.
6. The natural progression in items from one statement to another and preparation of financial statements is best
represented by the following order [A] Statement of Financial Position and Statement of Cash Flows > Statement of
Changes in Equity > Statement of Financial Performance. [B] Statement of Financial Position and Statement of Cash
Flows > Statement of Financial Performance > Statement of Changes in Equity. [C] Statement of Changes in Equity >
Statement of Financial Performance > Statement of Financial Position and Statement of Cash Flows. [D] Statement of
Financial Performance > Statement of Changes in Equity > Statement of Financial Position and Statement of Cash
Flows. [E] None of the answers are correct.
7. The Statement of Financial Position reports [A] The assets, liabilities, gains, and losses for a period of time. [B] The
changes in assets, liabilities, and equity for a period of time. [C] The assets, expenses, and liabilities as of a certain
date. [D] The probable future benefits, probable future sacrifices, and residual interest for a period of time. [E] The
financial condition of an accounting entity as of a particular date.
8. Which of the following best describes the term “assets”? [A] The amount of total profits earned by a business since it
began operations. [B] The amount of interest or claim that the owners have in the business. [C] The economic
resources of a business entity. [D] The cumulative profits earned by a business less any dividends distributed. [E] None
of the answers are correct.
9. You are a potential stockholder and are concerned that a particular company you are ready to invest in might have
too much debt. Which financial statement would provide you information needed in order to evaluate your concern?
[A] Statement of Financial Position. [B] Statement of Financial Performance. [C] Statement of Changes in Equity. [D]
Statement of public accounting. [E] All of the above.
10. How is the Statement of Financial Position linked to the other financial statements? [A] The amount of equity reported
on the Statement of Financial Position is equal to net income. [B] Equity is added to total assets and reported on the
Statement of Financial Position. [C] Net income increases equity on the Statement of Changes in Equity, which
ultimately increases equity on the Statement of Financial Position. [D] There is no link between the Statement of
Financial Position and other statements, as each contains different accounts and provides different information. [E]
None of the answers are correct.
11. Which one of the following items is correct concerning the time element of financial statements? [A] The Statement
of Financial Position covers a period of time. [B] The Statement of Changes in Equity explains changes during a
particular period. [C] An Statement of Financial Performance lists amounts at a specific point in time. [D] Both the
Statement of Financial Performance and the Statement of Financial Position cover a period of time. [E] None of the
answers are correct.
12. The term cash includes [A] Coins, currency (paper money), checks. [B] Money orders, and money on deposit that is
available for unrestricted withdrawal. [C] Short-term receivables. [D] Both A and B. [E] All of the above.
13. Which one of the following could never be considered to be cash equivalents? [A] Common stock issued by a
corporation. [B] Money market funds. [C] Corporate commercial paper. [D] Bangko Sentral Treasury bills. [E] None of
the answers are correct.
14. A characteristic of Property, Plant and Equipment is that it is [A] Intangible. [B] Used in the operations of a business.
[C] Held for sale in the ordinary course of the business. [D] A long term investment. [E] None of the answers are
correct.

1
 INTRODUCTION TO FINANCIAL STATEMENTS

15. Land acquired so it can be resold in the future is listed in the Statement of Financial Position as a(n) [A] Property, Plant
and Equipment. [B] Current asset. [C] Investment. [D] Intangible asset. [E] None of the answers are correct.
16. Property, Plant and Equipment are ordinarily presented in the Statement of Financial Position [A] At current market
values. [B] At replacement costs. [C] At cost less accumulated depreciation. [D] In a separate section along with
intangible assets. [E] None of the answers are correct.
17. A note receivable due in 18 months is listed on the Statement of Financial Position under the caption [A] Long-term
liabilities. [B] Fixed assets. [C] Current assets. [D] Investments. [E] None of the answers are correct.
18. Which of the following receivables would not be classified as an "other receivable”? [A] Advance to an employee. [B]
Interest receivable. [C] Refundable income tax. [D] Notes receivable. [E] None of the answers are correct.
19. Notes or accounts receivables that result from sales transactions are often called [A] Non-trade receivables. [B] Trade
receivables. [C] Merchandise receivables. [D] Sales receivables. [E] None of the answers are correct.
20. Charging off equipment that cost less than P20 would be an example of the application of [A] Going concern. [B] Cost.
[C] Matching. [D] Materiality. [E] Realization.
21. Which one of the following correctly represents one of the basic financial statement models? [A] Assets - Liabilities =
Net Income. [B] Assets + Liabilities = Owners’ Equity. [C] Revenues + Expenses = Net Income. [D] Beginning Equity +
Net Income - Dividends = Ending Equity. [E] None of the answers are correct.
22. The going concern assumption [A] Is applicable to all financial statements. [B] Primarily involves periodic income
measurement. [C] Allows for the statements to be prepared under generally accepted accounting principles. [D]
Requires that accounting procedures be the same from period to period. [E] None of the answers are correct.
23. Understating assets and revenues is justified based on [A] Realization assumption. [B] Matching. [C] Consistency. [D]
Realization. [E] None of the answers are correct.
24. The assumption that enables us to prepare periodic statements between the time that a business commences
operations and the time it goes out of business is [A] Time period. [B] Business entity. [C] Historical cost. [D]
Transaction. [E] None of the answers are correct.
25. Valuing assets at their liquidation values is not consistent with [A] Conservatism. [B] Materiality. [C] Going concern.
[D] Time period. [E] None of the answers are correct.
26. The business being separate and distinct from the owners is an integral part of the [A] Time period assumption. [B]
Going concern assumption. [C] Business entity assumption. [D] Realization assumption. [E] None of the answers are
correct.
27. An accounting period that ends when operations are at a low ebb is [A] A calendar year. [B] A fiscal year. [C] The
natural business year. [D] An operating year. [E] None of the answers are correct.
28. The accounting principle that assumes that inflation will not take place or will be immaterial is [A] Monetary unit. [B]
Historical cost. [C] Realization. [D] Going concern. [E] None of the answers are correct.
29. Valuing inventory at the lower of cost or market is an application of the [A] Time period assumption. [B] Realization
principle. [C] Going concern principle. [D] Conservatism principle. [E] None of the answers are correct.
30. The realization principle leads accountants to usually recognize revenue at [A] The end of production. [B] During
production. [C] The receipt of cash. [D] The point of sale. [E] None of the answers are correct.
31. The comment that “items that are not material may be recorded in the financial statements in the most economical
and expedient manner possible” is representative of [A] Matching. [B] Conservatism. [C] Realization. [D] Materiality.
[E] None of the answers are correct.
32. The assumption that deals with when to recognize the costs that are associated with the revenue that is being
recognized is [A] Matching. [B] Going concern. [C] Consistency. [D] Materiality. [E] None of the answers are correct.
33. Accountants face a problem of when to recognize revenue. Which of the following methods of recognizing revenue is
not used in practice? [A] Point of sale. [B] Point of order acceptance. [C] End of production. [D] Receipt of cash. [E]
Revenue recognized during production.
34. The assumption that allows accountants to accept some inaccuracy, because of incomplete information about the
future, in exchange for more timely reporting is [A] Conservatism. [B] Time period. [C] Business entity. [D] Materiality.
[E] Realization.
35. At the end of the fiscal year, an adjusting entry is made that increases salaries payable and increases salaries expense.
This entry is an application of which accounting principle? [A] Full disclosure. [B] Materiality. [C] Matching. [D]
Realization. [E] Historical cost.
36. Which of these measurement attributes is not currently used in practice? [A] Historical cost. [B] Relevant cost. [C]
Current market value. [D] Current cost. [E] Present value.
37. Which of the following would not appear on a conventional Statement of Financial Position? [A] Income taxes payable.
[B] Funds from operations. [C] Cash surrender value of life insurance. [D] Appropriation for contingencies (restriction
of equity). [E] Patents.
38. Ownership of debt instruments of the government and other companies that can be readily converted to cash are
best reported as. [A] Long-term investments. [B] Cash. [C] Marketable securities. [D] Intangibles. [E] Inventory of near-
cash items.

2
 INTRODUCTION TO FINANCIAL STATEMENTS

39. Tangible assets on the Statement of Financial Position should include [A] Equipment. [B] Taxes payable. [C]
Trademarks. [D] Bonds payable. [E] None of the answers are correct.
40. The current asset section of the Statement of Financial Position should include [A] Land. [B] Trademarks. [C]
Investment in C Company (for purposes of control). [D] Dividends payable. [E] Work in process inventory.
41. The current liability section of the Statement of Financial Position should include [A] Buildings. [B] Goodwill. [C] Land
held for speculation purposes. [D] Accounts payable. [E] None of the answers are correct.
42. Which of the following is not a current asset? [A] Marketable securities. [B] Material inventory. [C] Unearned rent
income. [D] Prepaid interest. [E] Prepaid insurance.
43. Lizabelle Products Inc. has issued redeemable preferred stock. For analysis purposes, these securities are best
classified as [A] Marketable securities. [B] Long-term investments. [C] Long-term debt. [D] Paid-in capital. [E] Equity.
44. Treasury stock is best classified as [A] A current asset. [B] A long-term investment. [C] A contra liability. [D] A reduction
of stockholders' equity. [E] A reduction of equity.
45. Which of the following is not a common characteristic of preferred stock? [A] Voting rights. [B] Preference as to
dividends. [C] Preference in liquidation. [D] Callability by the corporation. [E] None of the answers are correct.
46. Which of the following is not a problem inherent in Statement of Financial Position presentation? [A] Most assets are
valued at cost. [B] Varying methods are used for asset valuation. [C] Not all items of value to the firm are included as
assets. [D] Liabilities related to contingencies may not appear on the Statement of Financial Position. [E] The owners'
interest will be indicated.
47. Which of the following is not true relating to treasury stock? [A] A firm creates treasury stock when it repurchases its
own stock and does not retire it. [B] Treasury stock lowers the stock outstanding. [C] Treasury stock may be recorded
at the cost of the stock. [D] Treasury stock may be recorded at par or stated value. [E] Treasury stock is, in essence, an
increase in paid-in capital.
48. The most popular depreciation method for financial reporting is the following [A] Units-of-production. [B] Sum-of-the-
years’-digits. [C] Declining-balance. [D] Straight-line. [E] Other.
49. Which of the following is a current liability? [A] Prepaid insurance. [B] Account receivable. [C] Unearned rent revenue.
[D] Building. [E] Common stock.
50. Which of the following accounts would not be classified as an intangible? [A] Franchises. [B] Research and
development. [C] Patent. [D] Trademarks. [E] Goodwill.