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Financial-Accounting-Theory

Bachelor of Secondary Education Major in Math (Manuel L. Quezon University)

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Chapter 1 a. A statement by the board of directors of compliance with

local legislation
1. A complete set of financial statements includes all of the b. A statement of changes in equity
following components, except c. Statements of financial position for the last five years
d. Value added statement
a. Statement of financial position, statement of
comprehensive income and statement of cash flows. 8. Which of the following is included within the financial
b. Statement of changes in equity statements?
c. Notes, comprising a summary of significant accounting
policies and other explanatory information a. A statement of retained earnings
d. Reports and statements such as environmental reports b. Accounting policies
and value added statements. c. An auditor’s report
d. A director’s report
2. What is objective of financial statements ?
9. An entity shall clearly identify each financial statement and
a. To provide information about the financial position, display all of the following, except
financial performance and changes in financial position of
an entity that is useful to a wide range of users in making a. Name of the reporting entity
economic decisions. b. Name of major shareholders of the entity
b. To prepare a statement of financial position, statement of c. The presentation currency
comprehensive income, statement of cash flows and d. Whether the financial statements cover the individual
statements of changes in equity. entity or a group of entities
c. To present relevant, reliable, comparable and
understandable information. 10. Which of the following statements is incorrect concerning fair
d. To prepare financial statements in accordance with all presentation of financial statements?
applicable standards.
a. Fair presentation requires the faithful representation of the
3. To meet the objective of providing information about financial effect of transactions and other events
position, financial performance and cash flows, financial b. Financial statements shall present fairly the financial
statements should provide all, except position, financial performance and cash flows of an entity
c. In virtually all circumstances, a fair presentation is achieved
a. Assets, liabilities and equity by compliance with applicable PFRS
b. Income and expenses, including gains and losses d. An entity whose financial statements comply with PFRS
c. Contributions by and distribution to owners shall not make an explicit and unreserved statement of
d. Nature of business activities such compliance in notes

4. The primary responsibility for the preparation and presentation 11. Which of the following cannot be considered fair presentation of
of the financial statements of an entity is reposed in the financial statements?

a. Management of the entity a. To present information in a manner that provides relevant

b. Internal auditor and faithfully represented financial information
c. External auditor b. To provide additional disclosures when compliance with
d. Controller specific PFRS is insufficient to understand the financial
position and financial performance
5. When an entity changed the reporting period longer or shorter c. To select and apply accounting policies in accordance with
than one year, an entity shall disclose all of the following, except applicable PFRS
d. To rectify inappropriate accounting policies either by
a. Period covered by the financial statements disclosure of the accounting policies used or by notes or
b. The reason for using a longer or shorter period explanatory information
c. The fact that amounts presented in the financial
statements are not entirely comparable 12. Which of the following statements indicates a going concern?
d. The fact that similar entities in the geographical area in
which the entity operates have done so. a. Management intends to liquidate the entity
b. Management intends to cease the operations of the entity
c. Management has no realistic alternative but to cease the
6. Which of the following is not a component of the financial operations of the entity
statements? d. None of these

a. Statement of financial position 13. An entity is permitted to depart from a particular standard if all
b. Statement of changes in equity of the following conditions are satisfied, except
c. Report of board of directors
d. Notes to financial statements a. In extremely rare circumstances
b. When management concludes that compliance with the
standard would be misleading
c. When the departure from the standard is necessary to
7. Which of the following is included in a complete set of financial achieve fair presentation
statements? d. When the Conceptual Framework for Financial Reporting
prohibits such a departure
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b. Must not be presented separately

14. The effects of transactions and other events on economic c. Must be presented separately in financial statements if
resources and claims are depicted in the periods in which those those items are material
effects occur even if the resulting cash receipts and payments d. Must be presented separately in financial statements even
occur in a different period if those items are immaterial

a. Accrual accounting 21. An entity must disclose comparative information for

b. Cash accounting
c. Modified accrual accounting a. The previous comparable period for all amounts reported
d. Modified cash accounting b. The previous comparable period for all amounts reported
and for all narrative and descriptive information
15. Financial statements must be prepared at least c. The previous comparable period for all amount reported,
and for all narrative and descriptive information when it is
a. Annually relevant to an understanding of the current period’s
b. Quarterly financial statements
c. Semiannually d. The previous two comparable periods for all amounts
d. Every two years reported

16. Technically, offsetting in financial statements is accomplished 22. When the classification of items in the financial statements is
when changed, the entity

a. The allowance for doubtful accounts is deducted from a. Must not reclassify the comparative amounts
accounts receivable b. Can choose whether to reclassify the comparative amounts
b. The accumulated depreciation is deducted from property, c. Must reclassify the comparative amounts unless it is
plant and equipment impracticable to do so
c. The total liabilities are deducted from total assets to arrive d. Must reclassify the current year amounts only
at net assets
d. Gain or loss from disposal of noncurrent asset is reported 23. An entity shall present
by deducting from the proceeds the carrying amount of
the asset and the related disposal cost a. The statement of cash flows more prominently thatn the
other statements
17. The presentation and classification of items in the financial b. The statement of financial position more prominently than
statements shall be retained from one accounting period to the the other statements
next c. The statement of comprehensive income more prominently
than the other statements
a. Consistency f presentation d. Each financial statement with equal prominence
b. Materiality
c. Aggregation 24. What is obhective of financial reporting under the Conceptual
d. Comparability Framework for Financial Reporting?

18. A third statement of financial position as at beginning of the a. To provide information about the financial position,
earliest comparative period presented is required performance and cash flows of an entity
I. When an entity applies an accounting policy b. To prepare and present a statement of financial position
retrospectively and a statement of comprehensive income
II. When an entity makes a retrospective restatement of c. To provide financial information about an entity that is
items in the financial statements useful to existing and potential investors, lenders
III. When an entity reclassifies items in the financial providing resources to the entity
statements d. To prepare financial statements in accordance with all
applicable standards and interpretations
a. I and II only
b. I and III only 25. The primary focus of financial reporting has been on meeting
c. II and III only the needs of which of the following?
d. I, II and III
a. Managers of an entity
19. An entity shall prepare how many statements of financial b. Existing and potential investors, lender and other
position as a result of retrospective application, retrospective creditors
restatement and reclassification of items in the financial c. National and local taxing authorities
statements? d. Independent CPAs

a. Two 26. Which of the following statements best describes the term
b. Three “financial position”?
c. Four
d. One 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
20. Items of dissimilar nature or function equivalents to the entity
d. The assets, liabilities and equity of an entity
a. Must always be presented separately
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27. Which of the following best describes the term :financial a. Individual business entities, rather than to industries or an
performance”? economy as a whole or to members of society as
consumers
a. The revenue, expenses and net income or loss for a period b. Individual business entities and an economy as a whole or
of an entity to members of society as consumers
b. The assets, liabilities and equity of an entity c. Individual business entities and an economy as a whole,
c. The total assets minus total liabilities rather than to industries or to members of society as
d. The total cash inflows minus total cash outflows consumers
d. Individual business entities, industries and an economy as a
28. The overall objective of financial reporting is to provide whole, rather than to members of society as consumers
information
35. Which of the following is not an objective of financial reporting?
a. That is useful for decision making
b. About assets, liabilities and equity a. Financial reporting shall provide information about
c. About financial performance during a period resources, claims against those resources and changes in
d. That allows owners to assess performance of management them
b. Financial reporting shall provide information useful in
29. Which is an objective of financial reporting? evaluating stewardship of management
c. Financial reporting shall provide information useful in
a. To provide information that is useful in making investing investment, credit and similar decision
and credit decision d. Financial reporting shall provide information useful in
b. To provide information that is useful to management assessing cash flow prospects
c. To provide information to those investing in the entity
d. To provide information about ways to solve internal and 36. Which of the following is not an objective of financial reporting?
external conflicts about the entity
a. To provide information about assets and claims against
30. An objective of financial reporting is to provide those assets
b. To provide information that is useful in assessing sources
a. Information about the investors in the entity and uses of cash
b. Information about the liquidation value of the resources of c. To provide information that is useful in lending and
the entity investing decisions
c. Information that is useful in assessing cash flow prospects
d. Information that will attract new investors 37. Which would likely prepare the most accurate financial forecast
for an entity based on empirical evidence?
31. As part of the objective of financial reporting, the phrase
“assessing cash flow prospects” is interpreted to mean a. Investors using statistical models
b. Corporate management
a. Cash basis accounting is preferred over accrual basis c. Financial analysts
accounting d. Independent certified public accountants
b. Information about the financial effects of cash receipts and
cash payments is generally considered the best indicator of 38. The most useful information in predicting future cash flows is
an entity’s present and continuing ability to generate
favorable cash flows a. Information about current cash flows
c. Over the long run, trends in revenue and expenses are b. Current earnings based on accrual accounting
generally more meaningful than trends in cash receipts c. Information regarding the accounting policies used
and disbursement d. Information regarding the results obtained by using a wide
d. All of the choices are correct regarding “assessing cash flow variety of accounting policies
prospects”.
39. The accrual basis of accounting is most useful for
32. The objective of financial reporting is based on
a. Determining the amount of income tax liability
a. The need for conservatism b. Predicting short-term financial performance
b. Reporting on management’s stewardship c. Predicting long-term financial performance
c. Generally accepted accounting principles d. Determining the amount of dividends to shareholders
d. The needs of the users of the information
40. The financial statements prepared under GAAP
33. During a period when an entity is under the direction of a
particular management, financial reporting will directly provide a. Do not articulate with one another
information about b. Reflect a single measurement which is historical cost
c. Are not highly precise because estimate and judgment
a. Both entity performance and management performance must be made
b. Management performance but not management d. Contain a limited number of future projections
performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance 41. In measuring financial performance, accrual accounting is used
because
34. Financial reporting pertains to
a. Cash flows are considered less important
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b. It provides a better indication of ability to generate cash c. An extensive use of estimate

flows than cash basis d. Failure to include items of financial value
c. It recognizes revenue when cash is received and expense
when cash is paid 9. The statement of financial position
d. It is one of the implicit assumptions
a. Omits many items that are of financial value
Chapter 2 b. Makes very limited use of judgment and estimate
c. Uses fair value for most assets and liabilities
1. The components financial statements include all of the d. All of the choices are correct regarding the statement of
following, except financial position

a. Statement of financial position 10. Which of the following is a limitation of the statement of
b. Income statement financial position?
c. Statement of cash flows
d. Statement of retained earnings a. Many items that are of financial value are omitted
b. Judgment and estimate are used
2. The major financial statements include all, except c. Current fair value is not reported
d. All of these are considered limitation of the statement of
a. Statement of financial position financial position.
b. Statement of changes in financial position
c. Statement of comprehensive income 11. In presenting a statement of financial position, an entity
d. Statement of changes in equity
a. Must make the current and noncurrent presentation
3. Which following represents a form of communication through b. Must present assets and liabilities in order of liquidity
financial reporting but not through financial statements? c. Must choose either the current and noncurrent or the
liquidity presentation
a. Statement of financial position d. Must make the current and noncurrent presentation
b. President’s letter except when a presentation based on liquidity provides
c. Income statement information that is reliable and more relevant.
d. Notes to financial statements
12. Current and noncurrent presentation of assets and liabilities
4. The satatement of financial position is useful for analyzing all of provides useful information when the entity
the following, except
a. Supplies good or services within a clearly identifiable
a. Liquidity operating cycle
b. Solvency b. Is a financial institution
c. Profitability c. Is a public utility
d. Financial flexibility d. Is a nonprofit organization

5. The amount of time that is expected to elapse until an asset is 13. A presentation of assets and liabilities in increasing or
realized or otherwise converted into cash is referred to as decreasing order of liquidity provides information that is
faithfully represented and more relevant for
a. Solvency
b. Financial flexibility a. Financial institution
c. Liquidity b. Public utility
d. Exchangeability c. Government-owned entity
d. Service provider
6. The statement of financial position provides a basis for all of the
following, except 14. Which of the following statements in relation to financial
statements is incorrect?
a. Computing rate of return
b. Evaluating capital structure a. General purpose financial statements do not and cannot
c. Determining increase in cash due to operations provide all of the information that primary users need
d. Assessing liquidity and financial flexibility b. General purpose financial statements are designed to
show the value of the reporting entity
7. The information reported in the statement of financial position c. General purpose financial statements are intended to
is useful for all of the following, except provide common information to users
d. Financial statements are largely based on estimate and
a. To compute rate of return judgment rather than exact depiction
b. To analyze cash inflows and outflows for the period
c. To evaluate capital structure 15. Which obligations are classified as current even if the obligations
d. To assess future cash flows are due to be settled after more than twelve months from the
end of reporting period?
8. Which criticism is not normally aimed at the statement of
financial position? a. Trade payables
b. Current portion of noncurrent financial liabilities
a. Failure to reflect current value information c. Bank overdrafts
b. The extensive use of separate information d. Dividends payable
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16. In the Philippines, the common practice is to present in the a. Definitely exist as a liability but the amount and due date
statement of financial position are indeterminable
b. Is accrued even though not reasonably estimated
a. Current assets before noncurrent assets, current liabilities c. Is the result of a loss contingency
before noncurrent liabilities and equity after liabilities d. Is not recognized in the financial statements
b. Noncurrent assets before current assets, noncurrent
liabilities before current liabilities and equity after liabilities 22. Which of the following statements is incorrect concerning
c. Current assets before noncurrent assets, noncurrent contingent liability?
liabilities before current liabilities and equity after liabilities
d. Noncurrent assets before current assets, current liabilities a. A contingent liability is not recognized In the financial
before noncurrent liabilities and equity after liabilities statements
b. A contingent liability is disclosed only
17. An entity shall classify an asset as current under all of the c. If the contingent liability is remote, no disclosure is
following conditions, except required
d. A contingent liability is both probable and measurable
a. The entity exact to realize the asset or intends to sell or
consume the asset within the entity’s normal operating 23. It is a possible asset that arises from past event and whose
cycle existence will be confirmed only by the occurrence or
b. The entity holds the asset for the purpose of trading nonoccurrence of one or more uncertain future events not
c. The entity expects to realize the asset within twelve wholly within the control of the entity
months after the reporting period
d. The asset is cash or a cash equivalent that is restricted to a. Contingent asset
settle a liability for more than twelve months after the b. Other asset
report period c. Suspense account
d. Current asset
18. An entity shall classify a liability as current under all of the
following conditions, except 24. Which of the following statements is incorrect concerning a
contingent asset?
a. The entity expects to settle the liability within the entity’s
normal operating cycle a. A contingent asset is not recognized in the financial
b. The entity holds the liability primarily for the purpose of statements because this may result to recognition of
trading income that may never be realized
c. The liability is due to be settled within twelve months after b. When the realization of income is virtually certain, the
the reporting period related asset is no longer contingent asset and its
d. The entity has an unconditional right to defer settlement recognition is appropriate
of the liability for at least twelve months after the c. A contingent asset is only disclosed when the occurrence
reporting period of the future event is possible or remote
d. The related gain arising from the contingent asset is
19. A financial liability that is due to be settled within twelve months recognized usually when it is realized
after the reporting period shall be classified as noncurrent
25. In which section of the statement of financial position should
a. When it is refinanced on a long-term basis before the issue cash that is restricted for the settlement of a liability due 18
of financial statements months after the reporting period be presented?
b. When the entity has no discretion to refinance for at least
twelve months a. Current assets
c. When it is refinanced on a long-term basis after the end of b. Equity
reporting period c. Noncurrent liabilities
d. When it is refinanced on a long-term basis on or before d. Noncurrent assets
the end of reporting period.
26. Which one of the following is not required to be presented as
20. When an entity breaches under a ong-term loan agreement on minimum information on the face of the statement of financial
or before the end of the reporting period with the effect that position?
the liability becomes payable on demand, the liability becomes
payable on demand, the liability is classified as a. Investment property
b. Investment accounted for under the equity method
a. Current under all circumstances c. Biological asset
b. Noncurrent under all circumstances d. Contingent liability
c. Current if the lender has agreed after the reporting period
and before the issuance of the statement not to demand 27. Which of the following must be included in the statement of
payment as a consequences of the breach financial position?
d. Noncurrent if the lender agreed after the end of the
reporting period to provide a grace period for at least a. Contingent asset
twelve months after the reporting period b. Property, plant and equipment analyzed by class
c. Share capital and reserves analyzed by class
d. Deferred tax

21. A contingent liability

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28. Which of the following must be included on the face of the continue indefinitely and the arrangement is acceptable to the
statement of financial position? bank to which the note was issued. The proper classification of
the note in the year-end statement of financial position is
a. Investment property
b. Number of shares authorized a. Dependent on the intention of management
c. Contingent liability b. Dependent on the actual ability to refinance
d. Shares in an entity owned by that entity c. Current liability, unless specific refinancing criteria are net
d. Noncurrent liability
29. Which of the following statements in relation to the statement
of financial position is true? 35. In analyzing financial statements, which financial statement
would a potential investor primarily use to assess liquidity and
I. Biological assets must be shown in the statement of financial flexibility?
financial position
II. The number of shares authorized for issue may be a. Statement of retained earnings
shown in the statement of financial position or the b. Income statement
statement of changes in equity or in the notes c. Statement of changes in equity
d. Statement of financial position
a. I only
b. II only 36. Which of the following is an essential characteristic of an asset?
c. Both I and II
d. Neither I nor II a. The claims to an asset’s benefits are legally enforceable
b. An asset is tangible
30. Which is not in accordance with IFRS regarding the presentation c. An asset is obtained at a cost
of current liabilities? d. An asset provides future benefits

a. The noncurrent liabilities follow the current liabilities 37. Working capital is
b. Current liabilities may be listed in order of maturity, in
descending order of magnitude or in order of liquidity a. The group of assets which enables the entity to operate
preference profitability
c. Current liabilities are generally recorded at full maturity b. Total current assets
value c. Total current assets minus total current liabilities
d. Current liabilities should not be offset against the assets d. Capital invested in business
used for liquidation
38. Conceptually, asset valuation accounts are
31. In which section of the statement of financial position should
employment taxes due for settlement in 15 months’ time be a. Assets
presented? b. Neither assets nor liabilities
c. Part of shareholder’s equity
a. Current liabilities d. Liabilities
b. Current assets
c. Noncurrent liabilities 39. The term “net assets” represent
d. Noncurrent assets
a. Retained earnings
32. An entity has a loan due for repayment in six months’ time, but b. Current assets less current liabilities
the entity has the option to refinance for repayment two years c. Total paid in capital
later. The entity plans to refinance this loan. In which section of d. Total assets less total liabilities
the statement of financial position should this loan be
presented? 40. When classifying assets as current and noncurrent for reporting
purposes
a. Current liabilities
b. Current assets a. The amounts at which current assets are reported must
c. Noncurrent liabilities reflect realizable cash value
d. Noncurrent assets b. Prepayments are included in other assets
c. Current assets are determined by the seasonal nature of
33. The short-term obligations of an entity at the end of reporting the business
period include 90-day notes payable renewable for another 90- d. Assets are classified as current if these are reasonably
day period. The notes payable shall be classified in the expected to be realized in cash or consumed during the
statement of financial position as normal operating cycle
41. The operating cycle concept
a. Current liabilities
b. Deferred charges a. Causes current and noncurrent items to depend on
c. Noncurrent liabilities whether they will affect cash within one year
d. Intermediate debt b. Permits some asset to be classified as current even if more
than one year removed from becoming cash
34. At the end of reporting period, an entity has a 120-day note c. Has become obsolete
payable outstanding. The entity has followed the policy of d. Affects the income statement
replacing the note rather than repaying it over the last three
years. The entity’s treasurer says that this policy is expected to
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42. The basis for classifying assets as current or noncurrent is the a. Plant expansion fund
period of time normally elapsed from the time the accounting b. Prepaid rent
entity expends cash to the time it converts c. Supplies
d. Goods in process
a. Inventory back into cash or 12 months, whichever is shorter
b. Receivables back into cash or 12 months, whichever is 51. Which of the following items would normally be excluded from
longer the computation of working period
c. Tangible fixed assets back into cash, or 12 months,
whichever is longer a. Advance from customers
d. Inventory back into cash or 12 months, whichever is b. The portion of long-term debt that matures within one year
longer after the reporting period
c. Prepaid insurance
43. Which of the following should be classified as current asset? d. Cash surrender value of life insurance policy

a. Trade installment accounts receivable normally collectible 52. Accrued revenue would normally appear in the statement of
in 18 months financial position under
b. Preference share redemption fund
c. Cash surrender value of a life insurance policy a. Noncurrent assets
d. A deposit on machinery ordered, delivery of which will be b. Current liabilities
made within six months c. Noncurrent liabilities
d. Current assets
44. The essential characteristics of an asset include all, except
53. An operating cycle
a. The asset is the result of pass event
b. The asset provides future economic benefit a. Is twelve months or less in length
c. The cost of the asset can be measured reliably b. Is the average time required for an entity to collect account
d. The asset is tangible receivable
c. Is used to determine current assets when the operating
45. Which statement is incorrect regarding assets? cycle is longer than one year
d. Starts with accounts receivable and ends with cash
a. An asset represents a probable future economic benefit
b. An asset is obtained or controlled as a result of probable 54. For liability to exist
future event
c. Assets reported in the statement of financial position a. There must be a past event
include current and noncurrent assets b. The exact amount must be known
d. Assets include costs that have not yet been matched with c. The identity of the party to whom the liability is owed must
revenue be known
d. There must be an obligation to pay cash in the future
46. Equity investments held to finance future construction of
additional plant should be classified as 55. Which of the following best describes the term “liability”?

a. Current assets a. An excess of equity over current assets

b. Property, plant and equipment b. Resources to meet financial commitments when due
c. Intangible assets c. The residual interest in the assets of the entity after
d. Long-term investments deduction all of the liabilities
d. A present obligation arising from past event
47. Which of the following is not a noncurrent investment?
56. Which item is not a current liability?
a. Cash surrender value of life insurance
b. Franchise a. Unearned revenue
c. Land held for speculation b. Stock dividend payable
d. A sinking fund c. The currently maturing portion of long-term debt
d. Trade account payable
48. The term “deficit” to
57. Noncurrent liabilities include
a. An excess of current assets over current liabilities
b. An excess of current liabilities over current assets a. Bonds payable
c. A debit balance in retained earnings b. Accrued benefit cost
d. A loss that is reported as a prior period error c. Deferred tax liability
49. The correct order to present current assets is d. All of these are noncurrent liabilities

a. Cash, inventories, prepaid items, account receivable 58. Which is not within the definition of a liability?
b. Cash, inventories, account receivable, prepaid items
c. Cash, accounts receivable, prepaid items, inventories a. The signing of a three-year employment contract at a fixed
d. Cash, account receivable, inventories, prepaid items annual salary
b. An obligation to provide goods or services in the future
50. Which should be classified as a noncurrent asset? c. A note payable with no specified maturity date
d. A present obligation that is estimated in amount
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b. Describe depreciation method employed

Chapter 3 c. Describe the principles and methods peculiar to the
industry in which the entity operates
1. Which of the following is not a purpose of notes to financial d. Correct an improper presentation in the financial
statements? statements

a. To present information about the basis of preparation of 6. The cross-reference between each line item in the financial
the financial statements and the specific accounting statements and any related information disclosed in the notes to
policies used the financial statements
b. To disclose the information required by Philippine Financial
Reporting Standards that is not presented elsewhere in the a. Is voluntary
financial statements b. Is mandatory
c. To provide additional information which is not presented in c. Depends on the industry
the financial statements but that is necessary for a fair d. Is either voluntary or mandatory
presentation
d. To provide information about the financial position, 7. The presentation of the notes to the financial statements in a
financial performance and cash flows of an entity that is systematic manner
useful to wide range of users in making economic
decisions a. Is voluntary
b. Is mandatory
2. What is the proper order of presenting the notes to financial c. Is mandatory, as far as practicable
statements? d. Depends on the industry

I. Statement of compliance with PFRS 8. An entity shall disclose in the summary of significant accounting
II. Other disclosures, such as contingent liabilities, policies
unrecognized contractual commitments and other
nonfinancial disclosures a. The measurement basis used
III. Supporting information for items presented on the b. All the measurement basis specified in IFRS
face of the financial statements c. The measurement basis and the accounting policies used
IV. Summary of significant accounting policies in preparing the financial statements
d. All the measurement basis and the accounting policy
a. I, II, III and IV choices specified in IFRS
b. I, IV, III and II
c. I, III, IV and II 9. Disclosure of information about key sources of estimation
d. I, IV, II and III uncertainty

3. Which of the following statements is true concerning a. Is voluntary

compliance with PFRS? b. Is mandatory
c. Is either voluntary or mandatory
I. An entity whose financial statements comply with d. Depends on the industry
Philippine Financial reporting Standards shall make an
explicit and unreserved statement of such compliance 10. Disclosure of information about judgment
in the notes.
II. An entity shall not describe financial statements with a. Is voluntary
PFRS unless they comply with all the requirements of b. Is mandatory
each applicable Philippine Financial Reporting c. Is either voluntary or mandatory
Standard. d. Depends on the industry
a. I only
b. II only 11. Which of the following statements is incorrect regarding notes
c. Both I and II to the financial statements?
d. Neither I and II
a. IFRS requires specific note disclosures including
4. An entity is required to disclose certain non financial disaggregation of inventories into classifications such as
information. Which of the following is not embraced in this merchandise, production supplies, work in process and
disclosure? finished goods
b. IFRS requires a maturity analysis for receivables
a. A description of the nature of the entity’s operations and c. IFRS requires that all notes should be clear, simple to
the principal activities understand and nontechnical in nature
b. The name of the parent entity and the ultimate parent of d. All of the choices are correct regarding notes to financial
the group state
c. Domicile and legal of the entity, the country of 12. Notes to financial statements
incorporation and address of the registered office
d. Names and addresses of the corporate directors and a. Must be quantifiable
officers b. Must qualify as element
c. Amplify or explain items presented in the financial
5. Notes to the financial statements should not be to used to statements
d. All of the choices are correct regarding notes to financial
a. Describe significant accounting policies statements
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20. Application of the standard of adequate disclosure

13. Which of the following is not a method of disclosing pertinent
information? a. Is theoretically desirable nut not practical because the
cause of complete disclosure exceeds the benefit
a. Supporting schedule b. Is violated when important financial information is buried
b. Parenthetical explanation in the notes to financial statements
c. Cross reference and contra item c. Is demonstrated by the use of supplementary information
d. All of these are methods of disclosing pertinent presenting the effects of changing prices
information d. Requires that the financial statements should be consistent
and comparable
14. The disclosure of accounting policies is important to financial
statement readers in determining 21. What is the purpose of information presented in the notes to
financial statements?
a. Net income for the year
b. Whether accounting policies are consistently applied from a. To provide disclosures required by generally accepted
year to year accounting principles
c. The value of obsolete goods included in ending inventory b. To correct improper presentation in the financial
d. Whether the working capital position is adequate for future statements
operations c. To provide recognition of amounts not included in the total
of the financial statements
15. Accounting policies disclosed in the notes to financial d. To present management response to auditor comments
statements typically include all of the following, except
22. Which of the following information should be disclosed in the
a. The cost flow assumption summary of significant accounting policies?
b. The depreciation method
c. Significant estimates a. Refinancing of debt subsequent to the reporting period
d. Significant inventory purchasing policies b. Guarantee of indebtedness of other
c. Criteria for determining which investments are treated as
16. Significant accounting policies may not be cash equivalents
d. Adequacy of pension plan assets relative to the defined
a. Selected on the basis of judgment benefit obligation
b. Selected from existing acceptable alternatives
c. Unusual or innovative in application 23. Which of the following should be disclosed in a summary of
d. Omitted from financial statement disclosure significant accounting policies?

17. Which of the following should be defined as intentional a. Type of executor contract
distortion of financial statement? b. Amount for cumulative effect of change in accounting
policy
a. Error c. Claims of equity holders
b. Fraud d. Depreciation method followed
c. Error and fraud
d. Neither error nor fraud 24. Which of the following is not a required disclosure of accounting
policies?
18. An example of an inventory accounting policy that should be
disclosed in a summary of significant account policies is a. The measurement basis used
b. Key management personnel involved in drafting the
a. Composition of inventory into raw materials, work in summary of significant accounting policies
process and finished goods c. Disclosures required by standards
b. Major backlog of inventory orders d. The nature of operations and the policies that the users of
c. Method used for pricing inventory the financial statements would expect to be disclosed
d. All of these should be disclosed in the summary of Chapter 4
significant accounting policies
1. A party is related to an entity if the party, directly or indirectly,
19. The standard of adequate disclosure is best described by which through one or more intermediaries
of the following?
a. Controls, is controlled by or is under common control with
a. All information related to the business of an entity and the entity
operating objective is required to be disclosed in the b. Has an interest in the entity that gives it significant
financial statements influence over the entity
b. Information about each account balance appearing in the c. Has joint control over the entity
financial statements is to be included in the notes to d. All of these define a related party
financial statements
c. Enough information should be disclosed in the financial 2. Related parties include all of the following, except
statements so a person wishing to invest in the entity can
make a wise decision a. Parent, subsidiary and fellow subsidiaries
d. Disclosure of any financial facts significant enough to b. Associate
influence the judgment of an informed user c. Key management personnel and close family members
d. Two venturers simply because they share joint control
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10. Which of the following is not a mandated disclosure about

3. A related party transaction is a transfer of resources or related party transactions?
obligations
a. Relationship between parent and subsidiaries irrespective
a. Between related parties when a price is charged of whether there have been transactions between the
b. Between related parties, regardless of whether a price is related parties
charged b. Names of all the associates that an entity has dealt with
c. Between unrelated parties when a price is charged during the year
d. Between unrelated parties, regardless of whether a price is c. Name of the entity’s parent and, if different, the ultimate
charged controlling party
d. If neither the entity’s parent nor the ultimate controlling
4. Unrelated parties include which of the following? entity produces financial statements available for public
use, then the name of the next most senior parent that
a. Providers of finance in the course of their normal dealings does so
with an entity by virtue only of these dealings
b. Government agencies 11. Which of the following is not a required minimum disclosure
c. Single customer with whom an entity transacts a significant about related party transaction?
volume of business merely by virtue of the resulting
economic dependence a. The amount of related party transaction
d. All of these are unrelated parties b. The amount of the outstanding balance
c. The amount of similar transaction with unrelated parties
5. This is pricing policy between related parties which sets the to establish that comparable related party transaction has
price by reference to comparable goods sold in an economically been entered at arm’s strength
comparable market to a buyer unrelated to the seller d. Doubtful debt related to the outstanding balance

a. No price method 12. Which of the following is not required as a separate related
b. Cost plus method party disclosure?
c. Resale price method
d. Uncontrolled price method a. The son of the chief executive officer of the entity
b. The parent of the entity
6. Close family members if of an individual include all of the c. An entity that has a common director with the entity
following, except d. Joint venture in which the entity is a venturer

a. the individual’s spouse and children 13. All of the following are related parties, except
b. children of the individual’s spouse
c. dependents of the individual or individual’s spouse a. Joint venture in which the entity is a venturer
d. brothers and sisters of the individual b. A postemployment benefit plan for the employees
c. An executive director of the entity
7. the minimum disclosures about related party transactions d. The partner of a key manager is a major supplier of the
include all of the following, except entity

a. the amount of the transaction 14. Which of the following should be included in key management
b. amount of outstanding balance personnel compensation?
c. allowance for doubtful accounts related to the outstanding
balance a. Social security contributions
d. nature of the relationship b. Postemployment benefits
c. Social security contribution and postemployment benefits
8. an entity that entered into certain related party transactions d. Social security contributions, postemployment benefits and
would be required to disclose all of the following information, dividends to shareholders
except 15. Which of the following is not a related party of an entity?

a. nature of the relationship between the parties to the a. A shareholder of the entity owning twenty percent
transactions b. An entity providing banking facilities to the entity
b. nature of any future transactions planned between the c. An associate of the entity
parties and the terms involved d. Key management personnel of the entity
c. peso amount of the transactions
d. amount due from or to related parties at the end of 16. All of the following are related party transactions, except
reporting period
a. Transferred goods from inventory to a subsidiary
9. which would not be considered key management personnel b. Sold an entity car to the wife of the managing director
compensation? c. Sold an asset to an associate
d. Took out a huge bank loan
a. Short-term benefits
b. Share-based payments 17. Disclosures of related party transactions include all, except
c. Termination benefits
d. Reimbursement of out-of-pocket expenses a. Nonmonetary exchange by affiliates
b. Sales of inventory by a subsidiary to the parent

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c. Expense allowances for executives which exceed normal

business practice 3. Which of the following events after the reporting period would
d. An entity’s agreement to act as surety for a loan to the require adjustment?
chief executive officer
a. Loss of plant as a result of fire
18. Related party transactions include all of the following, except b. Change in the market price of investment
c. Loss on inventory resulting from flood loss
a. A venturer sold goods to the joint venture d. Loss on a lawsuit the outcome of which was deemed
b. Sold a car to the uncle of the entity’s finance director uncertain at year-end
c. Sold goods to another entity owned by the daughter of the
entity’s managing director 4. Which of the following events after the end of reporting period
d. All of these are related party transactions would generally require disclosure?

19. Which of the following most likely would be a related party a. Retirement of key management personnel
transaction requiring disclosure? b. Settlement of litigation when the event that gave rise to the
litigation occurred in a prior period
a. The entity borrowed P1,000,000 from the southwest bank c. Strike of employees
issuing a noninterest-bearing note d. Issue of a large amount of ordinary shares
b. The entity borrowed P500,000 from Eastwest bank with
no scheduled term for how or when fund will be prepaid 5. Events after the reporting period are favorable or unfavorable
c. The entity borrowed P2,000,000 from northwest bank at a events that occur between
rate significantly above the prevailing market rate
d. All of these are related party transactions a. The end of the reporting period and the date of the next
annual financial statements
20. A parent entity has a wholly-owned subsidiary. During the b. The end of the reporting period and the date of the next
current year, the parent sold goods to the subsidiary. The interim or annual financial statements
subsidiary paid a party of the debt before the year-end and then c. The end of the reporting period and the date when the
encountered financial difficulties. The subsidiary is not expected financial statements are authorized for issue
to be able to pay the remainder of the balances and therefore it d. The end of reporting period and the date of the next
has been provide as uncollectible. Administration cost are interim statements
incurred as a result of the current credit controllers chasing the
debt. All of the following are required to be disclosed in relation 6. Adjusting events are those that
to this arrangement, except
a. Provide evidence of condition that exited at the end of the
a. The administration cost of the credit control department reporting period
incurred in chasing the debt b. Are indicative of conditions that arose after the end of the
b. Details of any guarantee received in relation to the reporting period
outstanding balance c. Are indicative of conditions that arose after the approval of
c. The provision in relation to the debt being uncollectible the financial statements by shareholders
d. The amount of the transaction and outstanding balance d. Provide for conditions that existed after the date the
financial statements were issued
Chapter 5
7. Non adjusting event include all, except
1. Financial statements are authorized for issue
a. The entity announced the discontinuation of an operation
a. When the board of directors reviews and authorized the b. The entity entered into an agreement to purchase the
financial statements for issue leased building
b. When the shareholders approve the financial statements at c. Destruction of a major production plant by fire
their annual meeting d. A mistake in the calculation of allowance for uncollectible
c. When the financial statements are filed with the regulatory accounts receivable
agency
d. When a supervisory board made solely of nonexecutives 8. Events that occur after the current year-end but before the
approves the financial statements financial statements are issued and affect the realizability of
accounts receivable should be
2. Adjusting events after the reporting period include all of the
following, except a. Discussed only in the management annual report
b. Discussed only in the notes to financial statements
a. The settlement of a court case after the issuance of the c. Used to record an adjustment to bad debt expense
financial statements that confirms that the entity had d. An adjustment directly to retained earnings
already a present obligation
b. Bankruptcy of a customer which occurs after the end of 9. At the end of the current reporting period, an entity carried a
reporting period but before issuance of financial receivable from a major customer who declared bankruptcy
statements after the end of reporting period and before the issuance of
c. Discovery of errors that show that the financial statements financial statements. What should be reported at the current
were incorrect year-end?
d. Determination after the end of reporting period and before
issuance of financial statements of the cost of asset a. Disclose the fact that the customer has declared
purchased before end of reporting period bankruptcy
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b. Make a provision for the event after reporting period in statements on April 30 need to reflect adjusting and non
the financial statements adjusting events?
c. Ignore the event and wait for the outcome of the
bankruptcy a. July 7
d. Reverse the sale pertaining to the receivable in the b. July 10
comparative statement for the prior period c. July 15
d. July 20
10. An entity decided to build and operate an amusement park next
year. The entity has applied for a letter of guarantee which was Chapter 6
issued before the issuance of the financial statements of the
current year. What is the adjustment required at the current 1. It is the change in equity during a period resulting from
year-end? transactions and other events, other that changes resulting from
transactions with owners in their capacity as owners
a. Book a long-term payable for the amount of guarantee
b. Disclose the guarantee as a contingent liability a. Comprehensive income
c. Increase the contingency reserve b. Other comprehensive income
d. Do nothing c. Profit or loss
d. Retained earnings
11. An entity built a new factory building during the current year.
Subsequent to the current year-end and before issuance of 2. It is the total of income less expenses, excluding the
financial statements, the building was destroyed by fire and the components of other comprehensive income
claim against the insurance entity proved futile because the
cause of the fire was negligence on the part of the caretaker of a. Comprehensive income
the building. What should be reported at the current year-end? b. Profit or loss
c. Accounting income
a. Write off the carrying amount of the building d. Economic income
b. Make a provision for one-half of the carrying amount of the
building 3. This term comprises items of income and expense including
c. Make a provision for three-fourths of the carrying amount reclassification adjustments that are not recognized in proft or
of the building loss as required or permitted by PFRS
d. Disclose the non adjusting event in the notes to financial
statements a. Comprehensive income
b. Other comprehensive income
12. An entity deals extensively with foreign currency transactions. c. Profit or loss
Subsequent to the end of reporting period and before the date d. Retained earnings
of authorization of the issuance of the financial statements,
there were abnormal fluctuations in foreign currency rate. What
should be reported at the current year-end?
4. The components of other comprehensive income include all of
a. Adjust the foreign exchange year-end balances to reflect the following, except
the abnormal adverse fluctuations
b. Adjust the foreign exchange year-end balances to reflect all a. Unrealized gain on derivative contract designated as cash
abnormal fluctuations and not just adverse movements flow hedge
c. Disclose the post-reporting period event b. Loss from translating the financial statements of a foreign
d. Ignore the post-reporting period event operation
c. Actuarial gain on defined benefit plan
13. Which of the following statements is true in relation to events d. Dividend paid to shareholders
after reporting period?
5. Which of the following is not a component of other
a. Notes to the financial statements should give details of comprehensive income?
material adjusting events included in those financial
statements a. Foreign currency translation adjustment
b. Notes to the financial statements should give details of b. Unrealized gain and loss on financial asset held for trading
material non adjusting events which should influence the c. Deferred loss on derivative financial instrument designated
economic decisions of users as cash flow hedge
c. A decline in the market value of investments would d. Change in revaluation surplus
normally be classified as an adjusting event
d. The settlement of a long-running court case would normally 6. Which of the following components of other comprehensive
be classified as a non adjusting event income shall be reclassified subsequently to profit or loss?

14. An entity’s financial statements for the year ended April 30 were a. Change in revaluation surplus
approved by the finance director on July 7 an a public b. Remeasurement of defined benefit plan
announcement of the profit for the year was made on July 10. c. Gain or loss from equity investment measure at fair value
The board of directors authorized the financial statements for through other comprehensive income
issue on July 15 and the financial statements were approved by d. The effective portion of gain and loss on hedging
the shareholders on July 20. After what date should instrument in a cash flow hedge
consideration no longer be given as to whether the financial

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7. The two-statement approach of presenting comprehensive 14. Which of the following approaches to income measurement
income is preparing underlies financial reporting?

a. A comparative statement of comprehensive income a. Transaction approach

b. A combined statement of comprehensive income and b. Economic approach
retained earnings c. Valuation approach
c. A combined income statement and a statement of changes d. Capital maintenance approach
in equity
d. A separate income statement and a separate statement of 15. The income statement reveals
comprehensive income
a. Assets and equity at a point in time
8. Total comprehensive income is presented b. Assets and equity for a period of time
c. Net income at a point of time
a. Showing separately the total amount attributable to d. Net income for a period of time
owners of the parent and the noncotrolling interest
b. Showing an analysis of expenses by function 16. Which of the following is not a generally accepted method of
c. Showing an analysis of expenses by nature presenting the income statement?
d. Showing profit or loss and the total of other comprehensive
income a. Including prior period errors in determining net income
b. The condensed income statement
9. Which of the following terms cannot be used to describe a line c. The consolidated income statement
item in the statement of comprehensive income? d. Including gain and loss from disposal of asset in
determining net income
a. Revenue
b. Gross profit 17. Comprehensive income includes all of the following, except
c. Profit before tax
d. Extraordinary item a. Dividend revenue
b. Loss on disposal of asset
10. An entity shall present an analysis of expenses using a c. Investment by owners
classification based on d. Unrealized holding gain

a. The nature of expenses 18. The income statement would help in which of the following?
b. The function of expenses
c. Either the nature of expenses or the function of expenses, a. Evaluate liquidity
whichever provides information that is reliable and more b. Evaluate solvency
relevant c. Estimate future cash flows
d. Either the nature of expenses or the function of expenses, d. Estimate future financial flexibility
whichever the entity would prefer to present
19. Which is not a limitation of the income statement?
11. Separate line items in an analysis of expenses by nature include
a. Items that cannot be measured reliably are not reported
a. Purchases, transport costs, employee benefits, b. Only actual amounts are reported in determining income
depreciation, extraordinary items c. Income measurement involves judgment
b. Purchases, distribution expenses, administrative expenses, d. Income numbers are affected by the accounting method
employee benefits, depreciation
c. Depreciation, purchases, transport cost, employee 20. The income statement provides information that helps predict
benefits and advertising
d. Cost of goods sold, administrative expenses, transport costs a. The amount of future cash flows
and distribution expenses b. The timing of future cash flows
c. The uncertainty of future cash flows
12. Separate line items in an analysis of expenses by function d. All of these are provided by the income statement
include
21. Which of the following would represent the least likely use of an
a. Purchases, transport costs, employee benefits, income statement?
depreciation, extraordinary items
b. Purchases, distribution expenses, administrative expenses, a. Use by customers to determine ability to provide needed
employee benefits, depreciation goods and services
c. Depreciation, purchase, employee benefits and advertising b. Use by labor unions to examine earnings closely as a basis
d. Costs of goods sold, distribution expenses and for salary discussion
administrative expenses c. Use by government agencies to formulate tax policy
d. Use by investors interested in the financial position
13. Conceptually, net income is a measure of
22. Investors and creditors use an income statement for all of the
a. Wealth following, except
b. Change of wealth
c. Capital maintenance a. To evaluate the future performance of the entity
d. Cash flow b. To provide a basis for predicting future performance

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c. To help assess the risk and uncertainty of achieving future 30. Which of the following options for displaying other
cash flows comprehensive income is preferred?
d. To evaluate past performance of an entity
a. A continuation from net income in the income statement
23. What is the purpose of reporting comprehensive income? b. A separate statement that begins with net income
c. In the statement of changes in equity
a. To report changes in equity due to transactions with d. A continuation from net income in the income statement
owners or separate statement that begins with net income
b. To report a measure of overall entity performance
c. To replace net income with a better measure 31. Income determination is arrived at by
d. To combine income from continuing operations with
income from discontinued operations a. Measuring the change in equity
b. Identifying the change in the purchasing power
24. The term “comprehensive income” c. Using a transaction approach
d. Applying the value added concept
a. Must be reported on the face of the income statement
b. Includes all changes in equity during a period except those 32. Under a strict transaction approach to income measurement,
resulting from investments by and distributions to owners which of the following would not be considered a transaction?
c. Is the net change in owners’ equity for the period
d. Is synonymous with the term “net income” a. Sale of goods at certain markup
b. Payment of salaries
25. When a complete set of general-purpose financial statements is c. Adjustment of inventory at the lower of cost and net
presented, comprehensive income and its components should realizable value when net realizable value is below cost
d. Exchange of inventory for an equipment
a. Appear as a part of discontinued operations
b. Be reported net of related income tax effect, in total and 33. How should exchange gain or loss resulting from foreign
individually currency transaction be accounted for?
c. Appear in a supplemental schedule in the notes to the
financial statements a. Included as component of income from continuing
d. Be displayed in a statement that has the same operations for the period in which the rate changes
prominence as other financial statements b. Included as component of other comprehensive income for
the period in which the rate changes
c. Included in the statement of financial position
26. Which of the following is not an acceptable option of reporting d. Included in net income for gain but deferred for loss
components of other comprehensive income?
34. A transaction that is unusual in nature and infrequent in
a. In a separate statement of comprehensive income occurrence should be presented as
b. In a single statement of comprehensive income
c. In the notes a. Component of income from continuing operations, but
d. In a statement of changes in equity not net of applicable income tax
b. Component of income from continuing operations, net of
27. Why is reclassification adjustment used when reporting other applicable income tax
comprehensive income? c. Component of income from discontinued operation, net of
applicable income tax
a. To reclassify an item of comprehensive income as another d. Prior period error, net of applicable income tax
item of comprehensive income
b. To avoid double counting of items
c. To make net income equal comprehensive income
d. To adjust for the income tax effect of reporting other
comprehensive income

28. Which of the following items would cause net income to differ
from comprehensive income?

a. Unrealized loss on financial asset measured at fair value

through other comprehensive income
b. Unrealized loss on financial asset held for trading
c. Loss on exchange of similar asset
d. Loss on exchange of dissimilar asset

29. Other comprehensive income should be reported as component

of

a. Retained earnings
b. Share premium
c. Both retained earnings and share premium
d. Neither retained earnings nor share premium

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