TFA COMPILED (AutoRecovered)

CHAPTER 36
QUESTION 36-16 Multiple choice (PAS 16)

1. Property, plant and equipment are defined as
a. Tangible assets held for sale in the ordinary course of the business.
b. Tangible assets held to earn rentals or for capital appreciation.
c. Tangible assets held for use in the production or supply of goods or services or for
administrative purposes.
d. Tangible assets held for use in the production or supply of goods or services, for rentals
to others, or for administrative purposes and expected to be used during more than one
reporting period
Answer: D
2. Which of the following is not a characteristic of property, plant and equipment?
a. The property, plant and equipment are tangible assets.
b. The property, plant and equipment are used in business.
c. The property, plant and equipment are expected to be used over a period of more than
one year.
d. The property, plant and equipment are subject to depreciation.
Answer: D
3. Spare parts and servicing equipment that can be used only in connection with an item of
property, plant and equipment are accounted for as property, plant and equipment and
depreciated over
a. Their useful life
b. The useful life of the related asset
c. Their useful life or the useful life of the related asset, whichever is longer
d. Their useful life or the useful life of the related asset whichever is shorter
Answer: D
4. What valuation model should an entity use to measure property, plant and equipment?
a. The revaluation model or the fair value model
b. The cost model or the revaluation model
c. The cost model or the fair value through profit or loss model
d. The cost model or the fair value model
Answer: B
5. The cost of property, plant and equipment comprise all of the following, except
a. Purchase price
b. Import duties and nonrefundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for the
intended use
d. Initial estimate of the cost of dismantling the asset for which the entity has no present
obligation.
Answer: D
6. Costs directly attributable to bring the asset to the location and condition for the intended use
include all, except
a. Cost of employee benefit not arising directly from the acquisition of property, plant and
equipment
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
Answer: A
7. Which cost should be expensed immediately?
a. Cost of opening new facility
b. Cost of introducing a new product or service, including cost of advertising and
promotional activities
c. Cost of conducting business in a new location
d. All of these are expensed immediately
Answer: D
8. Which cost should be expensed immediately?
a. Administrative overhead
b. Initial operating cost
c. Cost of relocating or recognizing part or all of an entity’s operation
d. All of these are expensed immediately
Answer: D
QUESTION 36-17 Multiple choice (IAA)
1. A nonmonetary exchange is recognized at fair value of the asset exchanged unless
a. Exchange has commercial substance.
b. Fair value is not determinable.
c. The assets are similar in nature.
d. The assets are dissimilar.
Answer: B
2. In an exchange with commercial substance
a. Gain or loss is recognized entirely.
b. Gain or loss is not recognized.
c. Only gain should be recognized.
d. Only loss should be recognized.
Answer: A
3. The cost of property, plant and equipment acquired in an exchange measure at the
a. Fair value of the asset given plus cash payment.
b. Fair value of the asset received plus cash payment.
c. Carrying amount of the asset given plus cash payment
d. Carrying amount of the asset received plus the cash payment
Answer: A
4. Which exchange has commercial substance?
a. Exchange of assets with no difference in future cash flows.
b. Exchange by entities in the same line of business.
c. Exchange of assets with difference in future cash flows.
d. Exchange of assets that causes the entities to remain in essentially the same economic
position.
Answer: C
5. For a momentary exchange, the configuration of cash flows includes which of the following?
a. The implicit rate, maturity date of loan and amount of loan
b. The risk, timing and amount of cash flows of the asset
c. The entity-specific value of the asset
d. The estimated present value of the assets exchange
Answer: B
6. If an entity is able to determine reliably the fair value of the asset received and the fair value
of the asset given in an exchange transaction, the cost is measured at
a. Fair value of asset given
b. Fair value of asset received
c. Either the fair value of asset received or the fair value of asset given
d. Neither the fair value of asset received nor the fair value of asset given
Answer: A
7. Which statement is true concerning acquisition of property, plant and equipment by self-
construction?
a. The cost of self-constructed asset is determined using the same principles as for an
acquired asset.
b. Any internal profit is eliminated in arriving at the cost of self-constructed asset.
c. The cost of abnormal amount of wasted material is not included in the cost of the asset
d. All of the statements are true
Answer: D
8. Which terms best describes the removal of carrying amount of property, plant and equipment
from the statement of financial position?
a. Derecognition
b. Impairment
c. Writeoff
d. Depreciation
Answer: A
9. The carrying amount of property, plant and equipment shall be derecognized
a. On disposal
b. When no future economic benefits are expected from the use of the asset
c. On acquisition
d. On disposal and when no future economic benefits are expected from the use of the asset
Answer: D
QUESTION 36-18 Multiple choice (IFRS)
1. Which of the following is not capitalized into the cost of property, plant and equipment?
a. Cost of excess materials from a purchasing error
b. Cost of testing whether the asset works correctly
c. Initial delivery and handling cost
d. Cost of preparing the site for installation
Answer: A
2. As entity purchased a machinery that it does not have to pay until after three years. The total
payment on maturity will include both principal and interest. The cost of the machine would be
the total payment multiplied by what time value of money concept?
a. Present value of annuity of 1
b. Present value of 1
c. Future amount of annuity of 1
d. Future amount of 1
Answer: B
3. The initial operating loss should be
a. Deferred and amortized over a reasonable period.
b. Expensed and charged to the income statement.
c. Capitalized as part of the cost of plant.
d. Charged to retained earnings.
Answer: B
4. An entity imported machinery to be installed in the new factory premises before year-end.
What is the proper treatment of freight and interest on the loan to fund the cost of machinery?
a. Both freight and interest are capitalized.
b. Interest may be capitalized but freight is expensed.
c. Freight is capitalized but interest cannot be capitalized.
d. Both freight and interest are expensed.
Answer: C
QUESTION 36-19 Multiple choice (AICPA Adapted)
1. The cost of property, plant and equipment comprises the purchase price and
a. The implied interest on the debt financing
b. The fair value of any noncash asset surrendered
c. The estimated residual value of the asset
d. All directly attributable costs necessary to bring the asset to the location and condition for
the intended use.
Answer: D
2. When property is acquired by issuing equity shares, which of the following is best basis for
establishing the historical cost of the acquired asset?
a. Historical cost of the asset to the seller
b. Historical cost of a similar asset
c. Fair value of the asset received
d. Fair value of shares issued
Answer: C
3. When a plant asset is acquired by deferred payment, which condition generally does not
indicate the need to consider the imputation of interest?
a. The interest rate stated on the deferred obligation is significantly different from the
deferred obligation.
b. The cash prize of the plant asset is significantly different from the deferred obligation.
c. The instrument representing the deferred obligation is noninterest bearing.
d. The face amount of the deferred obligation is equal to the fair value of the plant asset
exchanged.
Answer: D
4. If the present value of a note issued in exchange for a plant asset is less that the face amount,
the difference is
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance
Answer: B
5. An entity purchased a plant asset under a deferred payment contract. The agreement was to
pay P10, 000 per year for five years. The plant asset is initially measured at
a. P50,000
b. P50,000 plus imputed interest
c. Present value of P10,000 annuity for five years at an imputed interest
d. Future value of a P10,000 annuity for five years
Answer: C
6. An entity purchased a plant asset under a deferred payment contract. The agreement was to
pay P10, 000 at the time of purchase and P10, 000 at the end of each of the next five years. The
plant asset is measured initially at
a. The present value of a P10,000 ordinary annuity
b. P60,000
c. P60,000 plus imputed interest
d. P60,000 less imputed interest
Answer: D
7. Which of the following is the most appropriate policy as regards the allocation of joint
overhead cost to plant and equipment constructed by the entity for own use?
a. Assign no overhead.
b. Assign only variable overhead.
c. Assign overhead equal to the amount that would have been assigned to production that is
curtailed.
d. Assign a proportionate share of overhead to the construction on the same basis as that
used for the assignment to normal production.
Answer: D
8. A donated plant asset for which the fair value has been determined, and for which directly
attributable costs were incurred, shall be recorded at an amount equal to
a. Directly attributable costs incurred.
b. Fair value and directly attributable costs incurred.
c. Zero
d. Carrying amount.
Answer: B
1. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair value. The retail
price of the car that Vik gave up is less than the retail price of the clothes received. What profit
should Vik recognize for the nonmonetary exchange?
a. A profit is not recognized
b. A profit equal to the difference between the retail price of the clothes received and the car
c. A profit equal to the difference between the retail price and the cost of the car
d. A profit equal to the difference between the fair value and the carrying amount of the car
Answer: D
An exchange transaction that is deemed to have commercial substance is accounted for on the
basis of fair value.
The difference between the fair value and carrying amount of the asset transferred is recognized
as gain or loss.
2. Scott Company exchanged nonmonetary assets with Dale Company. No cash was
exchanged. The carrying amount of the asset surrendered by Scott exceeded both the fair value
of the asset received and Dale’s carrying amount of that asset. Scott should recognize the
difference between the carrying amount of the asset it surrendered and
a. The fair value of the asset it received as a loss
b. The fair value of the asset it received as a gain
c. Dale’s carrying amount of the asset it received as a loss
d. Dale’s carrying amount of the asset it received as a gain
Answer: A
Since no cash was exchanged, the fair value of the asset transferred and the fair value of the asset
received are equal.
Thus, the excess of the carrying amount of the asset transferred over its fair value is recognized
as loss.
3. Solen Company and Nolse Company exchange truck with fair value in excess of carrying
amount. In addition, Solen paid Nolse to compensate for the difference in truck fair value. As a
consequence of the exchange, Solen shall recognize
a. A gain equal to the difference between the fair value and carrying amount of the truck
given
b. A gain determined by the proportion of cash paid to the total consideration
c. A loss determined by the proportion of cash paid to the total consideration
d. Neither a gain nor a loss
Answer: A
The excess of the fair value of the truck given by Solen over the carrying amount is recognized
as gain
4. Slate Company and Talse Company exchanged plots of land with fair value on excess of
carrying amount. In addition, Slate received cash from Talse to compensate for the difference in
land value. As a result, of the exchange, Slate shall recognize
a. A gain equal to the difference between the fair value and the carrying amount of the land
given
b. A gain in an amount determined by the ratio of cash received to total consideration
c. A loss in an amount determined by the ratio of cash received to total consideration
d. Neither gain nor a loss
Answer: A
The excess of the fair value of the land given by Slate over the carrying amount is recognized as
gain.
1) The cost of land usually includes all, except
a. Commission related to acquisition
b. Property tax after date of acquisition
c. Property tax to date of acquisition
d. Cost of survey
Answer B
2) The cost of land typically includes all, except
a. Grading, filling, draining and cleaning cost
b. Special assessment for drainage system
c. Private driveway and parking lot
d. Assumption of any lien on the property
Answer C
3) Fence and parking lot are reported as
a. Building
b. Land improvement
c. Land
d. Expense
Answer B
4) Which should be capitalized as cost of land?
a. Filling in dirt to level the property prior to excavation
b. Excavation cost
c. Cost incurred to construct sidewalk and fence
d. All of these are capitalized as cost of land
Answer A
5) Which cost should be charged to land improvement?
a. Clearing of trees and grading
b. Architect fee
c. Installation of a septic system
d. Cost of demolishing an old building
Answer C
QUESTION 39-10 Multiple choices (PIC Interpretation)
1. The single cost of acquiring land and usable old building is
a. Charged to the land only
b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount
Answer C
2. The single cost of acquiring land and an unusable old building is
a. Charged to the land only
b. Charged to the building only
c. Allocated between land and building based on relative fair value
d. Allocated between land and building based on carrying amount
Answer A
3. The cost of demolishing an old building to make room for make room for construction
for a new building should be
a. Expensed immediately
b. Charged to the land
c. Charged to the new building
d. Allocated between land and building based on relative fair value
Answer C
4. When land and old building are acquired, the cost of immediately demolishing the old
building to prepare the land for the intended use as investment property should be
b. Charged to the land
c. Accounted for as deferred charge
d. Charged to retained earnings
Answer B
5. The carrying amount of an existing old building demolished to make room for the
construction of a new building should be
a. Accounted for as loss
b. Capitalized as cost of the new building
c. Charged to the land
d. Charged to the new building if accounted for as inventory
Answer A
1. When an entity acquired land with an old building and immediately demolished the old
building so that the land can be used for the construction of a plant, the cost incurred to
demolish the old building should be
a. Expensed as incurred
b. Added to the cost of plant
c. Added to the cost of land
d. Amortized over the estimated time period between the demolition of the building
and the completion of the plant
Answer B
2. If an entity purchased a lot and an old building and demolished the old building to make
room for the construction of a new building, the proper accounting treatment of the
allocated carrying amount of the old building would depend on
a. The significance of the cost allocated to the building in relation to the combined
cost of the lot and building
b. The length of tine for which the building was held prior to demolition
c. The contemplated future use for the old building
d. The intention of the management for the property when the new building was
constructed
Answer D
3. An entity purchased land to be used as investment property. Timber was cut from the
site so development of the land could begin. The proceeds from the sale of the timber
should be
a. Classified ad other income
b. Credited to retained earnings
c. Deducted from the cost of land
d. Classified as deferred income and amortized over five years
Answer C
4. An entity purchased land and hotel with the plan to tear down the hotel and build a new
hotel. The allocated cost of the old hotel should be
a. Depreciated over the remaining life of the old hotel
b. Written off as loss in the year the hotel is torn downs
c. Capitalized as part of the cost of the land
d. Capitalized as parts of the cost of the new hotel
Answer B
5. An entity’s forest land was condemned for use as a national park. Compensation for the
condemnation exceeded the forest land’s carrying amount. The entity purchased similar,
but larger, replacement forest land for an amount greater than condemnation award. As a
result of the condemnation and replacement, what us the net effect on the carrying
amount of forest land reported in the statement of financial position?
a. The amount is increased by the excess of the replacement forest land’s cost over
the condemned land’s carrying amount
b. The amount is increased by the excess of the replacement forest land’s cost over
the condemnation award
c. The amount is increased by the excess of the condemnation award over the
condemned forest land’s carrying amount
d. No effect, because the condemned forest land’s carrying amount is used as the
replacement forest land’s carrying amount
Answer A
1. The term betterment refers to
a. An expenditure made for the new facilities which increase capacity.
b. An expenditure made to restore capacity after abandonment or retirement.
c. An expenditure made to improve existing facilities by increasing capacity.
d. An expenditure made to help insure continuity of service capacity.
Answer C
2. Which type of expenditure occurs when an entity installs a higher capacity boiler to heat
the plant?
a. Rearrangement
b. Ordinary repair and maintenance
c. Addition
d. Betterment
Answer D
3. An improvement made to a machine which increased the fair value and production
capacity without extending the useful life of the machine should be
b. Debited to accumulated depreciation
c. Capitalized in the machine account
d. Allocated between accumulated depreciation and the machine account
Answer C
4. Which of the following would ordinarily be treated as a revenue expenditure rather than a
capital expenditure?
a. Cost of servicing and overhaul to restore or maintain the originally assessed
standard of performance.
b. The replacement of a major component of building
c. An addition to an existing building
d. Cost of improvement that us expected to provide discernible future benefit
Answer A
5. A building suffered uninsured fire damages. The damaged portion of the building was
refurbished with higher quality materials. The cost and related accumulated depreciation
of the damaged portion are identifiable. What is the accounting for these events?
a. Capitalize the cost of republishing and record a lose in the current period equal to
the carrying amount of the damaged portion of the building
b. Capitalize the cost of refurbishing by adding the cost to the carrying amount of
the building
c. Record a loss in the current period equal to the cost of refurbishing and continue
to depreciate the original cost of the building
d. Record a loss in the current period equal to the sum of the cost of refurbishing and
the carrying amount of the damaged portion of the building
Answer A
6. An entity incurred cost to modify a building and to rearrange a production line. As a
result, an overall reduction in production cost is expected. However, the modification did
not increase the fair value of the building and the rearrangement did not extend the life of
the production line. Should the building modification cost and the production line
rearrangement cost be capitalized?
a. Only the building modification cost should be capitalized.
b. Only the production line rearrangement cost should be capitalized.
c. Both the building modification cost and production line rearrangement cost
should be capitalized.
d. The building modification cost and production line rearrangement cost should be
expensed.
Answer C
7. Which of the following costs should not be capitalized?
a. Replacement of roof of building every 15 years
b. Cost of site preparation
c. Installation and assembly cost
d. Replacement of small spare parts annually
Answer D
8. Which of the following expenditure may properly be capitalized?
a. Expenditure for massive advertising campaign
b. Insurance on plant during construction
c. Research and development related to a long-term asset giving the entity a
competitive market advantage
d. Title search and other legal cost related t9 a piece of property which was not
acquired
Answer B
9. Which of the following subsequent expenditures should be expensed immediately?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset
c. Expenditure made to maintain an existing asset in operating condition
d. Expenditure made to add new asset
Answer C
10. An expenditure made in connection with a machine being used by an entity should be
a. Expensed if it merely extends the useful life but does not improve the quality.
b. Expensed if it merely improves the quality but does not extend the useful life.
c. Capitalized if it maintains the machine in normal operating condition.
d. Capitalized if it is increases the quantity of units produces by a machine.
Answer D
40-11 Multiple choice (PAS 16)

1. Which statement best describes the term depreciation?
a. The systematic allocation of the cost of an asset less residual value over the useful life.
b. The removal of an asset from the statement of financial position.
c. The amount by which the recoverable amount of an asset exceeds carrying amount.
d. The amount by which the carrying amount of an asset exceeds recoverable amount.
2. Carrying amount is
a. Cost of an asset or the amount substituted for cost in the financial statements, less
residual value.
b. Amount of cash paid or the fair value of the other consideration given to acquire an
asset at the tirne of acquisition or construction.
c. Net amount which the entity expects to obtain for an asset at the end of the useful life
after deducting the expected cost of disposal.
d. Amount at which an asset is recognized in the statement of financial position after
deducting any accumulated depreciation and accumulated impairment loss.
3. Which statement is incorrect with respect to depreciation?

a. The depreciation method shall reflect the pattern in which the asset's economc benefits
are consumed by the entity.
b. Depreciation of an asset begins when it is available for use or when it is in the location
and condition necessary for the intended use.
c. Depreciation ceases at the earlier between the date the asset is classified as held for
sale and the date the asset is derecognized.
d. Depreciation is not recognized if the fair value of an asset exceeds carrying amount.
4. Which statement is true with respect to residual value?

a. Residual value is the estimated net amount currently obtainable if the asset is at the end
of the useful life.
b. The residual value of an asset may increase to an amount equal to or greater than
carrying amount in which case the deprecation charge is zero.
c. The residual value of an asset shall be reviewed at least at each financial year-end and
any change is accounted for as a change in accounting estimate.
d. All of these statements are true.
5. The useful life of property, plant and equipment is

I. The period of time over which an asset is expected to beused by the entity.
II. The number of production or similar unite expected to be obtained from the asset by the
entity.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value
7. The production method of depreciation results in

a. Constant charge over the useful life of the asset.
b. Decreasing charge over the useful life of the asset.
c. Increasing charge over the useful life of the asset.
d. Variable charge based on the expected use or output the asset.
8. Which statement is true in relation to depreciation?

a. Depreciation is not a matter of valuation.
b. Depreciation is part of the matching of revenue and expense.
c. Depreciation retains funds by reducing income tax and dividend.
d. Allof the statements are true about depreciation.
9. Economic factors that shorten the useful life of an asset include
a. Wear and tear
b. Deterioration or decay through aging or passage of time
c. Damage or destruction due to fire, flood, earthquake and other casualty
d. Obsolescence, supersession and inadequacy
10. Technical or commercial obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Change or improvement in production or change in the market demand for the product
output of the asset
d. Expiry date of related lease of the asset
ANSWER 40-11
1. a 6. d
2. d 7. d
3. d 8. d
4. d 9. d
5. c 10. c
QUESTION 40-12 Multiple choice (AICPA
Adapted)
1. Which statement is the assumption on which straight line depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.
2. The straight line depreciation is not appropriate for

a. An entity that is neither expanding nor contracting an investment in equipment
because it is replacing equipment as the equipment depreciates.
b. Equipment on which maintenance and repairs increase substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment used consistently every period.
3. The principal objection to the straight line method of depreciation is that it

a. Provides for the declining productivity of an aging asset
b. Ignores variation in the rate of asset use
c. Tends to result in a constant rate of return on a diminishing investment base
d. Gives smaller periodic writeoff than a decreasing charge mtethod
4. In which of the following situations is the production method of depreciation most

appropriate?
a. An asset's service potential declines with use
b. An asset’s service potential declines with the passage of time
c. An asset is subject to rapid obsolescence
d. And asset incurs increasing repairs and maintenance with use
5. Which statement provides the best theoretical support for accelerated depreciation?
a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in the manner that “smooths” earnings.
c. Repairs and maintenance costs probably would increase in later periods so depreciation
should decrease.
d. Accelerated depreciation provides easier replacement because of the time value of
money.
6. An asset has a nine-year useful life and is to be appreciated under the sum of year’s digits
method. The annual depreciation expense would be the same as that under the straight line
method in the
a. Third year
b. Fifth year
c. Seventh year
d. Ninth year
7. The composite depreciation method
a. Is applied to a group of homogeneous assets
b. Is an accelerated method of depreciation
c. Does not recognize gain or loss on the retirement of single asset in the group
d. Excludes residual value from the base of the depreciation calculation
8. An entity using the composite depreciation method for a fleet of trucks, cars and campers
retired one of the trucks and received cash from a salvage entity. The net carrying amount of
these composite asset accounts would be decreased by the
a. Cash proceeds received and original cost of the truck
b. Cash proceeds received
c. Original cost of the truck less the cash proceeds
d. Original cost of truck
9. A machine with a four-year estimated useful life and an estimated 15% residual value was
acquired at the beginning of the current year. The increase in accumulated depreciation for the
second year using the double declining balance method would be
a. Original cost x 85% x 50%
b. Original cost x 50%
c. Original cost x 85% x 50% x 50%
d. Original cost x 50% x 50%
10. A machine with a 5-year estimated useful life and an estimated residual value was acquired
at the beginning of the current year. At the end of the fourth year, accumulated depreciation
using the sum of years' digits method would be
a. Original cost less residual value multiplied by 1/15
b. Original cost less residual value multiplied by 14/15
c. Original cost multipled by 14 / 15
d. Original cost multiplied by 1 / 15
ANSWER 40-12
1. b 6. b
2. b 7. c
3. b 8. b
4. a 9. d
5. a 10. b
40-13 Multiple choice (IAA)
1. Depreciation is best described as a method of
a. Asset valuation
b. Current value allocation
c. Cost allocation
d. Useful life determination
2. Which depreciation method is not based on the passage of time?

a. Production method
b. Sum of years’ digits
c. Declining balance
d. Straight line
3. A method which excludes residual value from the base for the depreciation calculation is
a. Straight line
b. Sum of year's digits
c. Double declining balance
d. Output method
4. The double declining balance method

a. Results in a decreasing depreciation charge.
b. Means residual value is not deducted in computing the depreciation base.
c. Means the carrying amount should not be reduced below residual value.
d. All of these describe double declining balance
5. Which depreciation method applies a uniform depreciation rate each period to the carrying
amount of an asset?
a. Straight line
b. Declining balance
c. Output method
d. Sum of years' digits
6. What factor must be present to use the production method of depreciation?

a. Total units to be produced can be estimated
b. Production is constant over the life of the asset
c. Repair costs increase with use
d. Obsolescence is expected
7. The sun of years' digits method

a. Results in residual value being ignored.
b. Means the denominator is the number of years remaining at the beginning of the year.
c. Means the carrying amount should not be reduced below residual value.
d. Results in an increasing depreciation charge.
8. In order to calculate. the depreciation of asset for the third year using the sum of years’ digits
method, which of the following must be known about the asset?
a. Acquisition cost
b. Residual value
c. Useful life
d. All must be known
9. Which depreciation method is not appropriate for situations involving a large number of
similar items, each having a small peso cost?
a. Inventory method
b. Retirement method
c. Replacement method
d. Composite method
10. Which statement regarding depreciation is true?

a. An asset must be depreciated from the date of purchase.
b. The annual depreciation charge must be constant
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than hi residual value, depreciation is not
charged.
ANSWER 40-13
1. c 6. a
2. a 7. c
3. c 8. d
4. d 9. d
5. b 10. d
1. The most common method of computing depletion is
a. Percentage depletion method
b. Decreasing charge method
c. Straight line
d. Production or output method
2. Depletion expense
a. Is usually part of cost of goods sold.
b. Includes tangible equipment in the depletable amount.
c. Excludes intangible development cost from the depletable amount.
d. Excludes restoration cost from the depletable amount.
3. Information needed to compute a depletion charge per unit includes the

a. Amount of resources sold during the period.
b. Cumulative amount of resources removed.
c. Estimated total amount of resources available for removal.
d. Amount of resources removed during the period.
4. Which accurately describes the GAAP regarding the acounting for the costs of drilling dry
holes in the oil and gas industry?
a. Successful effort method
b. Full cost method
c. Both successful effort and full cost
d. Neither successful effort nor full cost method
5. Which of the following is not part of depletable amount?

a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment used to extract the mineral resource
d. Intangible development cost such as drilling and tunnel
ANSWER 41-7
1. d
2. a
3. a
4. c
5. c
1. Exploration and evaluation expenditures are incurred
a. When searching for an area that may warrant detailed exploration even though the
entity has not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained but the technical
feasibility and commercial viability of extracting a mineral resource are not yet demonstrable.
c. When a specific area is being developed and preparation, for commercial extraction are
being made.
d. In extracting mineral resource and processing the resource to make it marketable or
transportable.
2. When is an entity required to recognize exploration and evaluation expenditure as an asset?

a. When such expenditure is recoverable in future periods.
b. When the technical feasibility and commercial viability of extracting the associated
mineral resource have been demonstrated.
c. When required by the entity's accounting policy for recognizing exploration and
evaluation-asset.
d. Such expenditure is always expensed as incurred.
3. Which of the following expenditures would never qualify a8 an exploration and evaluation
asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resource
d. Expenditures for activities in relation to evaluating * technical feasibility and
commercial viability of extracting a mineral resource
4. An entity is required to consider which of the following developing accounting policy for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar
and related issue
b. The definitions, recognition criteria and measurement concepts for assets, liabilities,
income, and expenses
c. Recent pronouncements of standard-setting bodies
d. Whether the accounting policy results in information that is relevant and reliable
5. Which of the following is not a disclosure required in relation to exploration and evaluation
expenditures?
a. Information about commercial reserve quantity
b. Accounting policy for exploration and evaluation expenditures
c. The amounts of operating and investing cash flows arising from exploration and
evaluation of mineral resources
d. Information recognized in the financial statements arising from the exploration and
evaluation of mineral resources
ANSWER 40-12
1. b
2. c
3. c
4. d
5. a
1. Which statement best describes impaiment loss?
a. The removal of an asset from the statement of financial position.
b. The amount by which carrying amount of an asset exceeds the recoverable amount.
c. The systematic allocation of cost of an asset less residual value over the useful life.
d. The amount by which the recoverable amount of an asset exceeds the carrying amount.
2. What is the recoverable amount of an asset?
a. Fair value less cost of disposal
b. Value in use
c. Fair value less cost of disposal or value in use, whichever is higher
d. Fair value less cost of disposal or value in use, whichever is lower
3. What is fair value of an asset?
a. The price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.
b. The price that would be paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
c.The discounted value of future cash flows expected to be derived from an asset.
d. The undiscounted value of future cash flows expected to be derived drom an asset.
4. Which statement bests describes value in use?
a. The present value of estimated future cash flows expected to arise from the continuing use of an
asset and from the ultimate disposal
b. The amount of cash that could currently be obtained by selling an asset in an orderly disposal
c. The amount which an entity expects to obtain for an asset at the end of the useful life
d. Undiscounted future net cash flows
5.What is the best evidence of fair value?
a. Quoted price in an active market for identical asset.
b. Quoted price in an active market for similar asset.
c. Quoted price in an inactive market for identical asset.
d. Quoted price in an inactive market for similar asset.
6. Which statement is incorrect concerning the estimate of future cash flows?

a. Future cash flows shall be based on reasonable and supportable assumptions.
b. Future cash flows shall be based on the most recent budget, usually up to a maximum of 5 years,
c. Future cash flows do not include income tax.
d. The discount rate used in estimating future cash flows shall be the current rate after tax.
7.The estimates of future cash flows in calculating value in use include all of the following, except
a. Cash inflows from the continuing use of the asset
b. Cash outflows incurred to generate the cash inflows from the continuing use of the asset
c. Net cash flows from the disposal of the asset at the end of the useful life
d. Income tax payments
8. What is a cash generating unit?
a. The smallest business segment
b. Any group of assets that generate cash flows
c. Any group of assets reported separately to management
d. The smallest group of assets that generate independent cash flows from continuing use
ANSWER 43-7
1. b
2. c
3. a
4. a
5. a
6. d
7. d
8. d
1. If the fair value less cost of disposal cannot be determined
a. The asset is not impaired.
b. The recoverable amount is the value in use.

c. The net realizable value is used.
d. The carrying amount of the asset remains the same.
2. If the assets are to be disposed of
a. The recoverable amount is the fair value less cost of disposal.
b. The recoverable amount is the value in use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.
3. When deciding on the discount rate to be used, which factor should not be taken into account?
a. The time value of money.
b. Risk specific to the asset for which future cash flow estimate has not been adjusted.
c. Risk specific to the asset for which future cash flow estimate has been adjusted.
d. Pretax rate.
4. What is the allocation of an impairment loss recognized for a cash generating unit?
a. Across the assets of the units based on carrying amount.
b. Across the assets of the unit based on the fair value.
c. First, to any goodwill, and the balance to the other assets prorata based fair value.
d. First, to any goodwill, and the balance to the other assets prorata based on carrying amount.
5. An impairment loss that relates to an asset that has been revalued shall be recognized in
a. Profit or loss
b. Revaluation surplus that relates to the revalued asset
c. Opening retained earnings
d. Any reserve in equity
6. Which of the following is not relevant in determining value in use?
a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money
7. Which of the following statements is not true with regard to impairment of asset?
a. If impairment indicators are present, the entity must conduct an impairment test.
b. The impairment test compares the carrying amount of the asset with the lower of fair value less cost
of disposal and value in use.
c. If the recoverable amount is lower than carrying amount, an impairment loss is recognized.
d. If recoverable amount is higher than carrying amount, no impairment loss is recognized.
8. When impairment testing a cash generating unit, any corporate assets should
a. Be allocated on a reasonable and consistent basis.
b. Be separately impairment tested.
c. Be included in the head office assets and impairment tested along with that cash generating unit.
d. Not be allocated to cash generating units.
ANSWER 43-8
1. b
2. a
3. c
4. d
5. b
6. b
7. b
8. a
1. Impairment loss for productive asset is reported
a. As an extraordinary items.
b. As a component of discontinued operation.
c. As a component of income from continuing operations.
d. As a change in accounting estimate.
2. Long-lived assets are reviewed for impairment
a. Every three years at the end of reporting period.
b. When the asset is fully depreciated.

c. When circumstances indicate that the carrying amount of an asset might not be recoverable.
d. Every year at the end of reporting period.
3. Which condition must exist in order for an impairment loss to be recognized?
a. The carrying amount is less than fair value.
b. The carrying amount of the asset is not recoverable.
c. The carrying amount is less than value in use.
d. The carrying amount is recoverable.
4. The impairment rules for long-lived assets apply to all, except
a. Building currently used in business
b. Financial instrument
c. Land
d. Computer used to run a production process
5. Estimates of future cash flows normally would cover projections over a maximum of
a. Five years
b. Ten years
c. Fifteen years
d. Twenty years
ANSWER 43-9
1. c
2. c
3. b
4. b
5. a
TFA CHAPTER 47 (Liabilities)
1. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day
period. What is the classification of the notes payable?
a. Current liabilities
b. Deferred credits
c. Noncurrent liabilities
d. Intermediate debt
2. At year-end, an entity has 120-day note payable outstanding. The entity has followed the
policy of replacing the note rather than repaying it over the last three years. The entity's treasurer
says that this policy is expected to continue indefinitely, and the arrangement is acceptable to the
bank to which the note was issued. What is the proper classification of the note in the year-end
statement of financial position?
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability
3. An entity had a note payable due next year. After the end of reporting period and before the
issuance of the current year financial statements, the entity issued long-term bonds payable.
Proceeds from the bonds were used to repay the note when due. How should the entity classify
the note payable at current year-end?
a. Current liability with separate disclosure of the note refinancing
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of the note refinancing
d. Noncurrent liability with no separate disclosure required
4. A entity has a loan due for repayment in six months’ time, but the entity has the option to
refinance or repayment two years later. The entity plans to refinance this loan. In which section
of the statement of financial position should this loan be presented?
a. Current liability
b. Current asset
c. Noncurrent liability
d. Noncurrent asset
5. At year-end, an entity classified a note payable as current liability. Under what condition could
the entity reclassify the note payable from current to noncurrent?
a. If the entity has the intent and ability to reclassify the note before the end of reporting
period.
b. If the entity has executed an agreement to refinance the note before issuance of the
financial statements.
c. If the entity has the intent and ability to reclassify the note before the issuance of the
financial
d. If the entity has executed an agreement to refinance the note before the end of
reporting period.
1. The most relevant measurement of liabilities at initial recognition should always reflect
a. The expectation of the management
b. Historical cost
c. The credit standing of the entity
d. The single most likely minimum possible amount
2. Which statement best describes the term liability?

a. An excess of equity over current assets
b. Resources to meet financial commitments when due
c. The residual interest in the assets of the entity
d. A present obligation arising from past event
3. What is the relationship between present value and liability?

a. Present value is used to measure certain liabilities.
b. Present value is not used to measure liabilities.
a. Present value is used to measure all liabilities.
c. Present value is used to measure current liabilities.
4. If a long-term debt becomes callable due to the violation of a loan covenant

a. The debt may continue to be classified as noncurrent
b. The debt should be reclassified as current.
d. Cash must be reserved to pay the debt.
e. Retained earnings must be restricted.
5. What is the classification of debt callable by the creditor?

a. Noncurrent liability
b. Current liability
c. Current liability if the creditor intends to call the debt within one year
a. Current liability if it is probable that the creditor will call the debt within one year
QUESTION 47-11 Multiple Choice (IAA)
1. Advance payments from customers represent
a. Liabilities until the product is provided.
b. A component of shareholders' equity.
c. Assets until the product is provided.
d. Revenue upon receipt of the advance payment.
2. Revenue associated with gift card sales is recognized

a. When the gift card is sold.
b. No later than the last day of the reporting period.
c. When the probability of gift card redemption is viewed as remote.
d. Under no circumstances
3. All else equal, a large increase in unearned revenue in the current period would be expected to
produce what effect on revenue in a future peri0d?
a. Large increase in future revenue
b. Large decrease in future revenue
c. No effect
d. Large decrease because unearned revenue indicates collection problems
4. When a customer advance has been previously received, the appropriate journal entry includes
a. A debit to revenue and credit to liability
b. A debit to revenue and credit to asset
c. A debit to asset and credit to revenue
d. A debit to liability and credit to revenue
5. When refundable deposit is received, cash is increased with a corresponding increase in

a. Current liability
a. Revenue
b. Shareholders' equity
c. Noncurrent liability
1. A department store received cash and issued a gift certificate that is redeemable in
merchandise. When the gift certificate was issued
a. Deferred revenue account should be decreased
b. Deferred revenue account should be increased
c. Revenue account should be decreased
d. Revenue account should be increased
2. A retail store received cash and issued gift certificates that are redeemable in merchandise.
How would the deferred revenue account be affected by the redemption and nonredemption of
certificates, respectively?
a. Decrease and No effect
b. Decrease and Decrease
c. No effect and No effect
d. No effect and Decrease
3. An entity received an advance payment for special order goods that are to be manufactured
and delivered within six months. How should the advance payment be reported?
a. Deferred charge
b. Contra asset account
c. Current liability
4. At year-end, an entity sold refundable merchandise coupons. The entity received a certain
amount for each coupon redeemable next year for merchandise with a certain retail price. At
year-end, how should the entity report these coupon transactions?
a. Unearned revenue at the merchandise's retail price
b. Unearned revenue at the cash received
c. Revenue at the merchandise's price
d. Revenue at the cash received
5. How would the proceeds received from the advance sale of nonrefundable tickets for a
theatrical performance be reported in the statement of financial position before performance?
a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expanded
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds
6. Magazine subscriptions collected in advance should be accounted for as

a. A contra account to magazine subscriptions receivable
b. Deferred revenue in the liability section
c. Deferred revenue in the shareholders' equity section
d. Magazine subscription revenue in the income statement in the period collected
7. Under a royalty agreement with another entity, an entity will receive royalties from the
assignment of a patent for four years. The royalties received in advance should be reported as
revenue
a. In the period received
b. In the period earned
c. Evenly over the life of the royalty agreement
d. At the date of the royalty agreement
8. An entity is a retailer of home appliances and offers a service contract on each appliance sold.
Collections received for contracts should be recorded as an increase in a
a. Deferred revenue account
b. Sales contracts receivable valuation account
c. Shareholder’s equity valuation account
d. Service revenue account
9. An entity sells appliances that include a three-year warranty. Service calls under the warranty
are performed by an independent mechanic under a contract with the entity. Based on
experience, warranty costs are expected to be incurred for each machine sold.
When should the entity recognize the warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold
10. At the end of the current year, an entity received an advance payment of 60% of the sales
price for special order goods to be manufactured and delivered within five months. At the same
time, the entity subcontracted for production of the special-order goods at a price equal to 40%
of the main contract price.
What liabilities should be reported in the year-end statement of financial position?
a. None
b. Deferred revenue equal to 60% of the main contract price and payable to subcontractor
equal to 40% of the main contract price
c. Deferred revenue equal to 60% of the main contract price and no payable to
subcontractor
d. No deferred revenue but payable to subcontractor 18 reported at 40% of the main contract
price
1. The cost of customer premium offer should be charged to expense
a. When the related product is sold.
b. When the premium offer expires.
c. Over the life cycle of the product.
d. When the premium is claimed.
2. The accounting concept that requires recognition of a liability for customer premium offer is
a. Time period
b. Prudence
c. Historical cost
d. Matching principle
3. Accounting for cost of incentive program for frequent customer purchases involves
a. Recording an expense and a liability each period.
b. Recording a liability and a reduction of revenue.
c. Recording an expense and an asset reduction.
d. Recording an expense and revenue each period.
4. Accounting for cost of customer incentive program

a. Requires probability estimation.
b. Follows the matching principle.
c. Is a loss contingency situation.
d. All of these are correct.
5. Providing a monetary rebate program

a. Is accounted for similarly to a premium offer
b. Creates an expense for the seller in the period of sale.
c. Creates a liability for the seller at the time of sale.
d. All of these are correct.
1. The accrual approach in accounting for warranty
a. Is required for income tax reporting.
b. Is frequently justified on the basis of expediency.
c. Finds the expense account being charged when the seller performs in compliance with the
warranty.
d. Should be used whenever the warranty 18 an integral and inseparable part of the
sale.
2. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
3. Which of the following best describes the expense as incurred approach of accounting for
warranty cost?
a. Expensed based on estimate in year of sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred
4. What is the classification of the estimated warranty liability in a three-year warranty?

a. Noncurrent
b. Current
c. Partly current and partly noncurrent
d. No need for disclosure
5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?
a. Warranty liability
b. Warranty expense
a. Unearned warranty revenue
c. Warranty revenue
Chapter 48 PROVISION
1, Which is the correct definition of a provision?
a. A possible obligation arising from past event

b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
2. A provision shall be recognized as liability when
a. An entity has a present obligation as a result of a past event.

b. It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation.
c. The amount of the obligation can be measured reliably.
d. All of these are required for the recognition of a provision as liability.
3. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation
b. A contract
c. Other operation of law
d. An established pattern of past practice
4. A constructive obligation is an obligation
I. That is derived from an entity's action that the entity will accept certain responsibilities
because of past practice, published policy or current statement.
II. The entity has created a valid expectation in o parties that it will discharge those
responsibilities.
a. I only
b. II only
c. Both I and II
d. Either I or II
5. It is an event that creates a legal or constructive obligation because the entity has no other
realistic alternative but to settle the obligation.
a. Obligating event
b. Past event
c. Subsequent event
d. Current event
6. An outflow of resources embodying economic benefits is regarded as "probable" when
a. The probability that the event will occur is greater than the probability that the
event will not occur.
b. The probability that the event will not occur is greater than the probability that the event
will occur.
c. The probability that the event will occur is the same as the probability that the event will
not occur.
d. The probability that the event will occur is 90% likely.
7. Where there is a continuous range of possible outcomes, and each point in that range is as
likely as any other, the range to be used is the
a. Minimum
b. Maximum
c. Midpoint
d. Sum of the minimum and maximum
8. When the provision involves a large population of items, the estimate of the amount items
a. Reflects the elects the weighting of all possible outcomes by their associated
probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome adjusted for the effect of other possible
outcomes.
d. Midpoint of the possible outcomes.
9. When the provision arises from a single obligation, the estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities.

b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other possible
outcomes.
d. Midpoint of the possible outcomes.
10. Which statement is incorrect where the expenditure required to settle a provision is expected
to be reimbursed by another party?
a. The reimbursement shall be recognized only when it is virtually certain that the
reimbursement would be received if the entity settles the obligation.
b. The amount of the reimbursement shall not exceed the amount of the provision.
c. In the income statement, the expense relating to the provision may be presented net of the
reimbursement.
d. The reimbursement shall not be treated as separate asset but "netted" against the
estimated liability for the provision.
QUESTION 48-11 Multiple Choice (PAS 37)
1. Which statement is not true in relation to the measurement of a provision?

a. The risks and uncertainties that inevitably surround many events and circumstances
shall be taken into account in reaching the best estimate of a provision.
b. Where the effect of the time value of money is material, the amount of provision shall
be the present value of the expenditure expected to settle the obligation.
c. Future events that may affect the amount required to settle the obligation shall be
reflected in the amount of the provision where there is sufficient objective evidence
that the future events will occur.
d. Gains from expected disposal of assets shall be taken into account in measuring
a provision.
2. Provisions shall be discounted if the effect of the time value of money is material. Which
of the following is incorrect regarding the discount rate?
a. Reflects current market assessment of the time value of money.
b. Reflects risks specific to the liability
c. Does not reflect risks for which future cash flow estimates have been adjusted
d. Is a post-tax discount rate
3. Which statement is incorrect concerning recognition of a provision?

a. Provisions shall be reviewed at the end of each reporting period and adjusted to
reflect the current best estimate.
b. A provision shall be used only for expenditures for which the provision was
originally recognized.
c. Provisions shall be recognized for future operating losses.
d. If an entity has an onerous contract, the present obligation under the contract shall be
recognized and measured as a provision.
4. It is a contract in which the unavoidable costs of meeting the obligation under the
contract exceed the economic benefits to be received under the contract.
a. Onerous contract
b. Executory contract
c. Executed contract
b. Sale contract
5. The unavoidable costs under an onerous contract represent the "least net cost of exiting
from the contract" which is equal to
a. Cost of fulfilling the contract

b. Penalty arising from failure to fulfill the contract
c. Lower of the cost of fulfilling the contract or the penalty arising from
failure to fulfill the contract
d. Higher of the cost of fulfilling the contract or the penalty arising from failure
to fulfill the contract
1.This is defined as a structured program that is planned and controlled by the management that
materially changes either the scope of a business of an entity or the manner in which that
business is conducted.
a. Restructuring
b. Liquidation
c. Recapitalization
d. Corporate Revamp
2. Events that quality as restructuring include all of the following, except
a. Sale or termination of business

b. Closure of business location in a region or relocation of business from one location to
another
c. Change in management structure such as elimination of a layer of management
d. Fundamental reorganization of an entity that has an immaterial and insignificant
impact on the operations.
3. Which is a cost of restructuring?
a. Cost of retraining or relocating continuing staff

b. Marketing or advertising cost distribution network
c. Investment in new system and distribution network
d. Cost of relocating business activities from one location
4.It is the abusive practice of manipulation and creative to another creative accounting by
dumping all kinds of provisions under the banner of provision for restructuring.
a. Big Bath provision

b. Creative Accounting
c. Cookie Jar
d. General reserve
1.For which of the following should a provision be recognized?
a. Future operating losses

b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs
2. Provisions shall be recognized for all of the following, except
a. Cleaning-up costs of contaminated land when an oil entity has a published policy
that it will undertake to clean up all contamination that it causes.
b. Restructuring costs after a binding sale agreement has been signed.
c. Rectification costs relating to defective products sold
d. Future refurbishment costs due to introduction of a new computer system.
3. An entity is closing one of its operating divisions, and the conditions for making restructuring
provision have been met. The closure will happen in the first quarter of the next financial year.
At the current year-end, the entity has announced the formal plan publicly and is calculating the
restructuring provision.
Which of the following costs should be included in the restructuring provision?
a. Retraining staff continuing to be employed

b. Relocation costs relating to staff moving to other divisions
c. Contractually required costs of retiring staff being made redundant from the
division being closed
d. Future operating losses of the division being closeup to the date of closure
4.An entity operates chemical plants. The published policies include a commitment to making
good any damage caused to the environment by the operations. The entity has always honored
this commitment.
Which of the following scenarios would give rise to an environmental provision?

a. On past experience it is likely that a chemical spill which would result in having to pay
fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity’s actions may damage
surrounding wildlife.
c. The government has outlined plans for a new law requiring all environmental damage to
be rectified.
d. A chemical spill from one of the entity’s plants has caused harm to the surrounding
area and wildlife.
5.An entity has been served a legal notice at year-end by the Department of Environment and
Natural Resources to fit smoke detectors in its factory on or before middle of next year. The cost
of fitting smoke detector can be measured reliably.
How should the entity treat this in the financial statements at year-end?
a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one-half only of the estimated
amount.
c. No provision is recognized at year-end because there is no present obligation for the
future expenditure since the entity can avoid the future expenditure by changing the
method of operations but disclosure is required.
d. Ignore the event.
QUESTION 49-5 Multiple choice (LAA)

1. Contingent Liability will or will not become actual liabilities depending on
a. Whether probable and measurable.
b. The degree of uncertainty.
c. The present condition suggesting a liability.
d. The outcome of a future event.
2. A contingent liability shall be recognized when

a. Any lawsuit is actually filed against an entity.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred but the amount cannot be reliably
measured.
d. The amount of the loss can be reliably measured and is probable prior to issuance
of financial statements that a liability has been incurred.
3. How should a contingent liability be reported in the financial statements when it is

reasonably possible?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable
4. Disclosure usually is not required for

a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured
d. Contingent loss that is remote and measurable
5. Reporting in the financial statements is required for

a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies
6. A contingent liability
a. Definitely exists as a liability but the amount and due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.
7. A contingent liability is
a. An estimated liability.
b. An event which is not recognized because it is not probable that an outflow will be
required or the amount cannot be reliably estimated.
c. A potential large liability.
d. A potential small liability.
8. Which statement is incorrect concerning a contingent liability?

a. A contingent liability is not recognized.
b. A contingent liability is disclosed only.
c. No disclosure is required for remote contingent liability.
d. A contingent liability is both probable and measurable.
9. A contingent liability
a. Has a most probable value of zero but may require a payment if a given future
event occurs.
b. Definitely exists as a liability.
c. Is reported as current liability.
d.1s not disclosed in the financial statements.
10. Which of the following is not considered when evaluating whether or not to record a
liability for pending litigation?
a. Time period of the underlying cause of action
b. The type of litigation involved.
c. The probability of an unfavorable outcome
d. The ability to make a reliable estimate of the loss
QUESTION 49-6 Multiple choice (IAA 37)

1. Contingent asset is usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and measurable
d. The amount can be reliably measured
2. Which is the proper treatment of contingent asset?

a. An accrued account
b. Deferred income
c. An account receivable
d. A disclosure only
3. Gain contingency that is remote and measurable

a. Must be disclosed in a note to financial statements
b. May be disclosed in a note to financial statements
c. Must be reported in the body of the financial statements
d. Should not be reported or disclosed.
4. A probable and measurable contingent asset should be

a. Recognized and disclosed.
b. Classified as an appropriation of retained earnings.
c. Disclosed but not recognized.
d. Neither recognized nor disclosed.
5. Which is the proper way to report a contingent asset, receipt of which is virtually certain?
a. As an asset
b. As unearned revenue
c. As a disclosure only
d. No disclosure and no accrual
1. An entity did not record an accrual for a present obligation but disclose the nature of the
obligation and the range of the loss. How likely is the loss?
a. Remote
b. Reasonably possible
c. Probable
d. Certain
2. The likelihood that the future event will or will not occur can be expressed by a range of
outcome. Which range means that the future event occurring is very slight?
a. Probable
b. Reasonably possible
c. Certain
d. Remote
3. An expropriation asset which is imminent and for which the loss can be reasonably
estimated should be
a. Accrued
b. Disclosed
c. Accrued and disclosed
d. Ignored
4. A present obligation that is probable and for which the amount can be reliably estimated
should
a. Not be accrued but disclosed.
b. Be accrued by debiting retained earnings and crediting a liability.
c. Be accrued by debiting an expense and crediting retained earnings.
d. Be accrued by debiting an expense and crediting a liability.
5. General or unspecified contingencies should

a. Be accrued in the financial statements and disclosed.
b. Not be accrued and need not be disclosed.
c. Not be accrued but should be disclosed.
d. Be accrued and need not be disclosed.
Anne Kristine P. Jusay
l. Which entities are required to apply deferred tax accounting?

a. Public entities
b. Nonpublic entities
c. Both public and nonpublic entities
d. Neither public entities nor nonpublic entities
2. It is the income for a period determined in accordance with the rules established by tax
authorities upon which income taxes are payable.
a. Accounting income
b. Taxable income
c. Net income
d. Accounting income subject to tax
3. It is the income for a period before deducting tax expense.

a. Accounting income
b. Taxable income
c. Gross income
d. Net income
4. These are differences that will result in future taxable amount in determining taxable income
of future periods.
a. Temporary differences
b. Taxable temporary differences
c. Deductible temporary differences
d. Permanent differences
5. These are differences that result in future deductible amount in determining taxable income in
future periods.
a. Taxable temporary differences
b. Deductible temporary differences
c. Taxable temporary and permanent differences
d. Deductible temporary and permanent difference
6. It is the deferred tax consequence attributable to a deductible taxable temporary difference.

a. Deferred tax liability
b. Deferred tax asset
c. Current tax liability
d. Current tax asset
7. It is the deferred tax consequence attributable to a deductible temporary difference and

operating loss carryforward.
a. Deferred tax liability
b. Deferred tax asset
c. Current tax liability
d. Current tax asset
8. It is the amount of income tax payable in respect of taxable income.

a. Current tax expense
b. Total income tax expense
c. Deferred tax expense
d. Deferred tax benefit
9. It is the aggregate amount included in the determination of net income for the period in respect
of current tax and deferred tax.
a. Tax expense
b. Current tax expense
c. Deferred tax expense
d. Deferred tax benefit
10. The deferred tax expense is equal to

a. Increase in deferred tax asset less increase in deferred tax liability.
b. Increase in deferred tax liability less increase in deferred tax asset.
c. Increase in deferred tax asset.
d. Increase in deferred tax liability.
1. A deferred tax asset is recognized for deductible temporary differences and operating loss
carryforward when
a. It is probable that taxable income will be available against which the deferred tax
asset can be used.
b. It is probable that accounting income will be available against which the deferred tax
asset can be used.
c. It is possible that the taxable income will be available against which the deferred tax asset
can be used.
d. It is possible that accounting income will be available against which the deferred tax asset
can be used.
2. An entity shall offset a deferred tax asset and deferred tax liability
a. When the income taxes are levied by different taxing authority.
b. When the entity has no legal enforceable right to offset.
c. When the income taxes are levied by the same taxing authority and the entity has a
legal enforceable right to offset a current tax asset against a current tax liability.
d. Under all circumstances.
3. Which is correct about deferred tax assets and liabilities?

a. Current deferred tax assets are netted against current deferred tax liabilities.
b. All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities.
c. Deferred tax assets are never netted against deferred tax liabilities
d. Deferred tax assets are netted against deferred tax liabilities if they relate to the
same tax authority.
4. Which statement is incorrect concerning tax assets and liabilities?

a. Deferred tax assets and liabilities shall be discounted.
b. Tax assets and liabilities shall presented separately from other assets and liabilities in the
statement of financial position.
c. Deferred tax assets and liabilities shall be distinguished from current tax assets and
liabilities.
d. When an entity makes a distinction between current and noncurrent assets and liabilities,
it shall classify deferred tax assets and liabilities as noncurrent.
5. All of the following must be disclosed separately, except

a. The tax bases of major items on which deferred tax has been calculated.
b. The amount of deductible temporary differences for which no deferred tax asset is
recognized.
c. The amount of taxable temporary differences associated with investments in subsidiaries
and associates for which no deferred tax liability is recognized.
d. The amount of income tax relating to each component of other comprehensive income.

1. Justification for the is method of determining periodic deferred tax expense is based on the
concept of
a. Matching of periodic expense to periodic revenue.
b. Objectivity in the calculation of periodic expense.
c. Recognition of asset and liability.
d. Consistency planning of tax expense measurement with actual tax planning strategies.
2. Which of the following differences would result in future taxable amount?

a. Expenses or losses that are deductible after they are recognized in accounting income.
b. Revenues or gains that are taxable before they are recognized in accounting income.
c. Expenses or losses that are deductible before they are recognized in accounting
income.
d. Revenues or gains that are recognized in accounting income but are never included in
taxable income.
3. A temporary difference which would result in a deferred tax liability is

a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess of tax depreciation over accounting depreciation
d. Subscription received in advance
4. A temporary difference which would result in a deferred tax asset is

a. Tax, penalty or surcharge.
b. Dividend received on share investment.
c. Excess tax depreciation over accounting depreciation.
d. Rent received in advance included in taxable the time of receipt but deferred for
accounting purposes.
5. An entity, cash basis taxpayer, prepared accrual basis financial statements. In the year-end
statement of financial position, the deferred income tax liability increased compared to the prior
year. Which of the following would cause the increase in deferred tax liability?
a. An increase in prepaid insurance
b. An increase in rent receivable
c. An increase in warranty obligation
d. An increase in prepaid insurance and increase in rent receivable
6. An entity reported deferred tax asset and deferred tax liability at the end of the prior year and
at the end of the current year. For the current year, the entity should report deferred tax expense
or benefit equal to the
a. Decrease in the deferred tax asset
b. Increase in the deferred tax liability
c. Amount of the current liability plus the sum of the net changes in deferred tax asset and
deferred tax liability
d. Sum of the net changes in deferred tax asset and deferred tax liability
7. Because an entity uses different methods to depreciate equipment for accounting and income
tax purposes, the entity has temporary differences that will reverse during the next year and add
to taxable income. Deferred taxes that are based on these temporary differences should be
classified in the statement of financial position as
a. Contra account to current assets
b. Contra account to noncurrent assets
c. Current liability
8. A deferred tax liability is computed using

a. Current tax law regardless of expected or enacted future tax law
b. Expected future tax law regardless of whether enacted or not
c. Current tax law unless a future enacted tax law is different
d. Either current or expected future tax law regardless of whether the expected future tax
law is enacted or not
9. Which statement is true regarding reporting deferred income taxes in the financial statements?
a. Deferred tax asset is always netted against deferred tax liability.
b. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting
process.
c. Deferred tax asset and liability may only be classified as noncurrent.
d. Deferred tax asset and liability are classified as current and noncurrent based on
expiration date.
10. At the current year-end, an entity had a deferred tax liability that exceeded a deferred tax
asset which is expected to reverse in the next year.
Which of the following should be reported in the current year-end statement of financial
position?
a. The excess of the deferred tax liability over the deferred tax asset as a noncurrent
liability.
b. The excess of the deferred tax liability over the deferred tax asset as a current liability.
c. The deferred tax liability as a noncurrent liability.
d. The deferred tax liability as a current liability.
1. The purpose of interperiod tax allocation is to

a. Allow entities to utilize carryforward loss.
b. Allow entities whose tax liabilities vary significantly from year to year to smooth tax
payments.
c. Recognize an asset or liability for the tax consequences of temporary differences
that exist at year-end.
d. Amortize the deferred tax liability.
2. Intraperiod tax allocation

a. Involves the allocation of income taxes between current and future periods.
b. Associates tax effect with different items in the income statement.
c. Is not generally acceptable.
d. Arises because different income statement items are taxed at different rates.
3. Which is true about intraperiod tax allocation?

a. Intraperiod tax allocation arises because certain items are recognized for accounting and
tax purposes.
b. Intraperiod tax allocation is required for the effect of accounting policy.
c. The purpose is to allocate income tax expense evenly over a number of accounting
periods.
d. The purpose is to relate the income tax expense to the items which affect the amount
of tax.
4. All would require intraperiod tax allocation, except

a. Discontinued operation
b. Prior period error
c. Change in accounting estimate
d. Income from continuing operations
5. Tax expense should be allocated to all, except

a. Discontinued operation
b. Prior period error
c. Gross income
d. Other comprehensive income
TFA 1
Chapter 16 – Discontinued Operation

Reinalyn L. Mendoza
1. Which of the following criteria is not required for the results of a component of an entry
to be classified as discontinued operation?
a. Management must have entered into a sale agreement.
b. The component is available for immediate sale.
c. The operations and cash flows of the component shall be eliminated from the
operations of the entry as a result of the disposal.
d. The entity shall not have any significant continuing involvement in the operations of
the component after disposal.
2. Which disposal could qualify as discontinued operation?

a. Disposal a component that is similar in nature to other components but has operations
and cash flows distinguishable from the rest of the entity.
b. Disposal of a component due to a major change in business strategy.
c. Disposal of a small component within the current business strategy.
d. Disposal of a component with distinguishable operations and cash flows from the rest
of entity.
3. Which should be considered as discontinued operation?

a. The operations and cash flows of a component have been eliminated from the
ongoing operations of the entity as a result of a disposal transaction.
b. The entity continues to have a significant continuing involvement in the operations of
a component after the disposal transaction.
c. The entity outsources the manufacturing operations of a component and sells the
manufacturing facility of the component but continues to sell the product.
d. All of these should be considered as discontinued operations.
4. When a component of an entity was continued during the current year, the loss on
discontinued operation should
a. Exclude the associated employee relocation cost.
b. Exclude operating loss for the period.
c. Include associated employee termination cost.
d. Exclude associated lease cancelation cost.
5. When an entity decided to sell a business component, the gain on the disposal should be
a. Presented as other income.
b. Presented as an adjustment to retained earnings.
c. Netted against the loss from operations of the component as a part of
discontinued operation.
d. Included in other comprehensive income.
6. When a component of a business has been discontinued during the year, the loss on
discontinued operation should
a. Include operating loss of the current period.
b. Exclude operating loss during the period.
c. Be classified an extraordinary item.
d. Be classified an operating item.
7. When a component of a business has been discontinued during the year, the component’s
operating loss of the current period should be included in
a. Income statement as part of revenue and expenses.
b. Income statement as part of the loss on the discontinued operations.
c. Income from continuing operations.
d. Retained earnings.
8. When an entity discontinued an operation and disposed of the discontinued operation, the
transaction should be reported in the income statement as
a. A prior period error
b. Other income and expense item
c. An amount after income from continuing operations and before net income
d. A bulk sale of assets included in income from continuing operations.
TFA 1
Chapter 20 – Operating Segments

Princess Rachelle Anne M. Tisbe
Question 20-16 Multiple Choice (PFRS 8)

1. What are the disclosures required in relation to operating segments?
a. General information about the operating segment.
b. Information about segment profit or loss, including specified revenue and expenses
included in profit or loss, segment assets and segment liabilities.
c. Reconciliation of total segment revenue, total segment profit or loss, total segment assets
and total segment liabilities to the corresponding amounts in the entity’s financial statements.
d. All of these are required to be disclosed.
2. An entity shall disclose which of the following general information?
a. Factors used to identify the reportable segments
b. Types of products and services
c. Factors used to identify the reportable segments and types of products and services
d. Names of the board of directors
3. Segment reporting requires that an entity should provide reconciliations of

segment information. Which is not a required reconciliation?
a. The total of the reportable segments’ revenue to the entity revenue
b. The total of the reportable segments’ profit or loss to the entity profit or loss before tax
expense and discontinued operations
c. The total number of major customers of all segments to the total number of major
customers of the entity
d. The total of the reportable segments’ assets to the entity assets
4. Which of the following is a required enterprises-wide disclosure regarding

external customers?
a. The identify of any external customer considered to be major by management
b. The identify of any external customer providing 10% or more of a particular operating
segment revenue
c. Information on major customers is not required in segment reporting
d. The fact that transactions with a particular external customer constitute at least
10% of the total entity’ revenue
5. An operating segment is considered reportable when any of the following

conditions is met, except
a. Segment revenue is 10% or more of the combined revenue of all of the entity’s segments
b. Segments assets are 10% or more of the combined assets of all segments
c. Segments liabilities are 10% or more of the combined liabilities of all segments
d. Segment’s profit or loss is 10% or more of the combined profit of all segments that did
not incur a loss
TFA 1
Chapter 8 – Accounting Process
Sherwin M. Legarte
Anne Kristine P. Jusay
Allia Marie A. Landig
QUESTION 8-1 Accounting Cycle

What are the steps in the accounting cycle?
ANSWER:
1. Analyzing the business documents or transactions. This means that the accountant
determines the impact of the transactions on the financial position as represented by the
basic equation "assets equal liabilities plus equity.
2. Journalizing - This is the process of recording the transactions in a journal.
3. Posting - Transactions as classified and recorded in the Journal are transferred to the
appropriate accounts in the general ledger and subsidiary ledger, if appropriate.
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a postclosing trial balance
9. Preparing the reversing entries
Actually, the accounting process can be classified into two parts, namely recording phase and
summarizing phase.
The recording phase includes analyzing the transaction, journalizing and posting.
The summarizing phase includes the unadjusted trial balance, adjusting entries, financial
statements, closing entries, postclosing trial balance and reversing entries,
The postclosing trial balance, reversing entries and worksheet are optional.
QUESTION 8-2 Journal
What is a journal?
ANSWER:
The most fundamental journal is the general journal, often called simply as journal.
A journal is a chronological record of transactions.
A general journal entry consists of the transaction date, the accounts and amounts to be debited,
the accounts and amounts to be credited, and a brief explanation of the transaction.
A simple journal entry consists of one debit and one credit.

A compound journal entry consists of two or more debits or two or more credits.
QUESTION 8-3 Ledger
What is a ledger?
ANSWER:
The general ledger, often called simply as the ledger, is a group of accounts.
An account is the accounting device used in summarizing the effects of transactions on each
asset, liability, equity, revenue and expense.
The accounts used by a particular entity are usually expressed in the form of chart of accounts.
A chart of accounts is a listing of all the entity's general ledger accounts in a systematic form.
QUESTION 8-4 Trial Balance
What is a trial balance?
ANSWER:
A trial balance is a list of general ledger accounts with their respective debit or credit balance.
The trial balance prepared at this time is often called the unadjusted trial balance because
account balances do not yet reflect adjustments.
A trial balance is prepared at the end of every accounting period after all transactions for the
period have been recorded and posted to the general ledger.
The trial balance is a control device that helps eliminate accounting errors.
When total debits do not equal total credits, the trial balance is out of balance. This condition
alerts the accountant that errors have been made.
On the other hand, if the total debits equal total credits, the trial balance is said to be in balance.
However, this condition does not necessarily signify the absence of errors.
For example, the trial balance does not indicate the failure to record a transaction or the
recording of a transaction in the wrong accounts.
QUESTION 8-5 Purpose of Trial Balance
What are the purposes of a trial balance?
ANSWER:
1. The trial balance provides evidence that the total debits in the general ledger equal
credits.
2. The trial balance provides information that helps the accountant to formulate adjustments.
QUESTION 8-6 Transposition, Transplacement and Error of Omission
Describe transposition, transplacement and error of omission.
ANSWER:
1. Transposition - The figures are interchanged. For example, P 1, 234 is written as P4,
123.
2. Transplacement - Error in placing the decimal point. For example, P12, 000 is written as
P1, 200.
3. Error of omission - A transaction is not recorded. For example, a sale of P10, 000 is not
journalized.
QUESTION 8-7 Recording Expenses
What are the two methods of recording expenses?
ANSWER:
1. Expense method - The original payment is debited to an, expense account.
For example, the payment for a one-year insurance premium is debited to insurance
expense account.
2. Asset method - The original payment is debited to an asset account.
For example, the payment for a one-year insurance premium is debited to prepaid
insurance account.
QUESTION 8-8 Recording Income
What are the two methods of recording income?
ANSWER:
1. Income method -An income account is credited for the receipt of the income.
For example, the receipt of a one-year rental is credited to rental income account.
2. Liability method -A liability account is credited for the receipt of the income.
For example, the receipt of a one-year rental is credited to unearned rental income
account.
QUESTION 8-9 Adjusting Entries
What are adjusting entries?
ANSWER:
Adjusting entries are made at the end of every accounting period in order to split mixed
accounts or to bring the account up to date.
Adjusting entries allocate revenue and expenses between current and future periods.
Moreover, every adjusting entry affects both a real account and a nominal account. Under
the cash basis of accounting, revenue is recorded only when cash is received, and expenses are
recorded when paid in cash.
In contrast, the accrual basis of accounting requires recognition of revenue when earned and
recognition of expenses when incurred.
Generally accepted accounting principles require the use of accrual accounting.

Accordingly, adjusting entries are necessary for a fair and accurate measurement of performance
and financial position on the accrual basis.
QUESTION 8-10 Proforma Adjustments
What are the items that normally require adjusting entries?
Indicate the proforma adjustment.
ANSWER:
1. Ending inventory
Inventory – end xxx

Income summary or cost of sales xxx
2. Doubtful accounts
Doubtful accounts xxx

Allowance for doubtful accounts xxx
3. Depreciation
Depreciation xxx
Accumulated depreciation xxx
4. Prepaid expenses are and therefore already paid but not yet incurred an asset. If the asset
method is used or if the account appearing on the trial balance is an asset account, the
adjusting entry is:
Expense xxx
Prepaid expense xxx
If the expense method is used or if the account appearing on the trial balance is an expense
account, the adjusting entry 18
Prepaid expense xxx

Expense xxx
5. Accrued expenses are expenses already incurred but not yet paid and therefore a
liability.
Expenses xxx
Accrued expenses xxx
6. Deferred income is income already received but not yet earned and therefore a liability.
If the liability method is used or if the account appearing on the trial balance is a liability
account, the adjusting entry is:
Deferred income xxx

Income xxx
If the income method is used or if the account appearing on the trial balance is an income
account, the adjusting entry is:
Income xxx
Deferred income xxx
7. Accrued income is income already earned but not yet received. and therefore an asset.
Accrued income xxx

Income xxx
QUESTION 8-11 Worksheet
What is a worksheet?
ANSWER:
A worksheet is multicolumn sheet of paper that an accountant necessary uses in compiling and
summarizing the information for the preparation of the financial statements.
A worksheet is not a formal statement.
A worksheet is only a tool of an accountant in the preparation of financial statements.
The accountant prepares a worksheet at that stage of the accounting cycle when it is time to
make adjustments and prepare financial statements.
A worksheet facilitates the preparation of financial statements by
a. Providing a place where adjusting entries can be made informally before they are journalized
and posted.
b. Providing an orderly means whereby each account can be classified according to the financial
statement in which it will appear.
c. Providing a balancing mechanism that helps to uncover accounting errors.
Actually, the balancing figure in the worksheet is the net income or net loss.
If the total of the debits exceeds the total of the credits in the income statement columns, there is
a net loss.
Accordingly, in the statement of financial position columns, if the total of the credits exceeds the
total of the debits, there is also a net loss.
If the total of the credits exceeds the total of the debits in the income statement columns, there is
a net income.
Accordingly, in the statement of financial position columns, "the total of the debits exceeds the
total of the credits, there also a net income.
QUESTION 8-12 Closing Entries
What are closing entries?
ANSWER:
Closing entries are made at the end of an accounting period after adjusting entries and financial
statements have been prepared for the purpose of closing all nominal or temporary accounts.
To close an account means to reduce its balance to zero.
Closing nominal accounts is logical because they measure activities that have occurred during
a given period of time.
At the end of an accounting period, nominal accounts have served their purpose.
Thus, their balances must be reduced to zero so that the new nominal accounts can be used to
measure activities in the next accounting period.
Actually, nominal accounts are temporary equity accounts.

Accordingly, their balances may be transferred directly to an equity account during closing.
However, most accountants transfer nominal accounts to a clearing account known as income
summary.
The income summary account summarizes the net income or net loss for the period and its
balance is ultimately closed to capital in the case of a proprietorship or retained earnings in the
case of a corporation.
QUESTION 8-13 Postclosing Trial Balance
What is a postclosing trial balance?
ANSWER:
A postclosing trial balance is simply a listing of general ledger accounts and their balances after
the closing entries have been made.
Accordingly, the postclosing trial balance consists entirely of real or permanent accounts.
QUESTION 8-14 Reversing Entries
What are reversing entries?
ANSWER:
Reversing entries are made at the beginning of the new accounting period in order to transfer all
accrued and prepaid items established by adjusting entries to the nominal accounts that are to
be used in recording transactions during the new period.
These are called reversing entries because they are the exact opposite of certain adjusting entries
made at the end of the preceding period.
Reversing entries do not mean that the adjusting entries reversed are unnecessary or inaccurate.
The sole purpose of reversing entries is to simplify the recording of certain kinds of recurring
transactions.
The adjustments normally requiring reversal at the beginning of the new period are:
a. Accrued expenses
b. Prepaid expenses, if the expense method is used in recording expense
c. Accrued income
d. Deferred income, if the income method is used in recording income.
QUESTION 8-15 Principles of Debit and Credit
Explain the principle of debit and credit.
ANSWER:
The term “debit” refers to the left side of an account and “credit” refers to the right side of an
account.
When both sides of an account are each totaled, and the smaller sum is deducted from the larger
sum, the difference is called the balance of the account.
Every account has a normal balance, which is simply the balance ordinarily found in an account.
The normal balance may be either a debit or credit, depending on the type of account.
If an account has a normal debit balance, it is increased when debited and decreased when
credited.
If an account has a normal credit balance, it is increased when credited and decreased when
debited.
Thus, a debit does not necessarily mean an increase and a credit does not necessarily mean a
decrease.
Proper analysis of transactions requires understanding of the types of accounts with their normal
balances.
These accounts are summarized below.
Account Normal balance Balance increased by Balance decreased by

Asset Debit Debit Credit
Liability Credit Credit Debit
Equity Credit Credit Debit
Revenue Credit Credit Debit
Expense Debit Debit Credit
1. The first step in the accounting cycle is to

a. Record the transaction in a journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger accounts
d. Adjust the general ledger accounts
2. What is the last step in the accounting cycle considering the following?
a. Prepare a postclosing trial balance
b. Journalize and post closing entries
c. Prepare financial statements
e. Journalize and post adjusting entries
3. Which is done first in the accounting process?
a. Financial statements are prepared
b. Adjusting entries are recorded
c. Nominal accounts are closed
d. A postclosing trial balance is prepared
4. Which is not among the first five steps in the accounting cycle?
a. Record transactions in journals
b. Record closing entries
c. Adjust the general ledger accounts
d. Post entries to general ledger accounts
5. Which is an optional step in the accounting cycle?

a. Adjusting entries
b. Closing entries
c. Financial statements
d. Reversing entries
6. Which is logical order in the accounting cycle?

a. Posting
b. Adjusting entries, trial balance, Closing entries, postclosing, reversing entries
c. Financial statements, recording, adjusting entries
d. Reversing entries, adjusting entries, closing entries
7. Factors that shape an accounting information system include

a. Nature of business
b. Size of the entity and nature of business
c. Volume of data and size of entity
d. Nature of business, size of entity and volume of data
8. Basic steps in the recording process include all of the following, except
a. Transfer the journal information to the appropriate account in the statement
of financial position
b. Analyze each transaction for the effect on the accounts.
c. Enter the transaction information in a journal.
d. All of the choices are correct regarding the basic steps in the recording process.
9. The accounting record where a transaction is initially recorded is

a. Ledger
b. Account
c. Trial balance
d. Journal
10. The use of computers in processing accounting data

a. Eliminates the need for accountants.
b. Eliminates the double entry system.
c. Eliminates the need for financial reporting standards.
d. May result in the elimination of document trails used to verify accounting
records.
1. In recording transaction
a. The word “debit” means increase and the word “credit” means decrease
b. Assets, expenses, and drawing accounts are debited for increases
c. Liabilities, revenue, and drawing accounts are debited for increases
d. Assets, expenses, and capital accounts are debited for increases
2. Which is false concerning the rules of debit and credit?

a. The left side of an account is always the debit side and the right side is always the
credit side
b. Increases in assets and expenses are debit entries, and increases in liabilities,
equity and revenue are credit entries
c. The normal balance of any account appears on the side
d. The word "debit" means to increase and the word "credit" means to
decrease.
3. Debits
a. Increase assets and decrease expenses, liabilities, revenue and equity.
b. Increase assets and expenses and decrease liabilities, revenue and equity.
c. Increase assets and equity and decrease liabilities, expenses and revenue.
d. Decrease assets and expenses and increase liabilities, revenue and equity.
4. Which statement is true regarding debits and credits?

a. In the income statement, debits are used to increase account balances, whereas in
the statement of financial position, credits are used to increase account balances.
b. Before adjustments, debits will not equal credits in the trial balance.
c. The rules for debit and credit and the normal balance o equity are the same as
for liability.
d. In the income statement, revenue is increased by a debit whereas in the statement
of financial position, retained earnings account is increased by a debit.
5. The debit and credit analysis of a transaction normally takes place

a. Before an entry is recorded in a journal.
b. When the entry is posted to the ledger.
c. When the trial balance is prepared.
d. At some other point in the accounting cycle.
6. Which of the following is not a possible combination of a journal entry?

a. Increase in asset and increase in liability.
b. Decrease in equity and increase in liability.
c. Decrease in liability and decrease in asset.
d. Increase in asset and decrease in equity.
7. The normal balance of an account is on the

a. Debit side of the account
b. b. Credit side of the account
c. Side represented by increases in the account balance
d. Side represented by decreases in the account balance
8. The double entry accounting system means

a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry and then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. All of these describe the double entry system.
1. The accounting equation must remain in balance

a. Throughout each step in the accounting cycle.
b. Only when journal entries are recorded.
c. Only at the time the trial balance is prepared.
d. Only when formal financial statements are prepared
2. The book of original entry is known as

a. Subsidiary ledger
b. Trial balance
c. General ledger
d. Journal
3. A general journal
a. Chronologically lists transactions and other events expressed in terms of
debit and credit.
b. Contains one record for each asset, liability, equity, revenue and expense.
c. Lists all the increases and decreases in each account in one place.
d. Contains only adjusting entries.
4. A simple journal entry

a. Consists of one debit and one credit
b. Consists of two debits and one credit
c. Consists of one debit and two credit
d. Is a memorandum entry
5. A journal entry that contains more than two accounts is called

a. A posted journal entry
b. An adjusting journal entry
c. An erroneous journal entry
d. A compound journal entry
6. Which accounts measure economic time flows over a period of time?
a. Real accounts
b. Nominal accounts
c. Mixed accounts
d. Contra accounts
7. Which of the following is a nominal account?

a. Unearned revenue
b. Salary expense
c. Inventory
d. Retained earnings
8. Nominal accounts are also called

a. Temporary accounts
b. Permanent accounts
c. Real accounts
d. Mixed accounts
9. Real accounts include all of the following, except

a. Dividends
b. Assets
c. Liabilities
d. Equity
10. Equity is not affected by all

a. Cash receipts
b. Dividends
c. Revenue
d. Expenses
1. Posting is to the process of transferring information from

a. Journal to the general ledger
b. General ledger to the journal
c. Source document to the journal
d. Journal to the source document
2. A general ledger is defined as
a. A group of transactions
b. A group of all statement of financial position accounts
c. A group of all income statement accounts
d. The entire group of accounts
3. What function do ledgers serve in the accounting process?
a. Reporting
b. Summarizing
c. Classifying
d. Recording
4. A subsidiary ledger is
a. A listing of the components of account balances
b. A backup system to protect against record destruction
c. A listing of accounts before closing entries
d. A listing of accounts of a subsidiary
e.
5. A chart of accounts is
a. A flowchart of all transactions
b. An accounting procedure manual
c. A journal
d. A list of all account titles in the general ledger
1. The trial balance

a. Proves that debits are greater than credits when entity has net income. the
b. Uncovers any errors in journalizing and posting prior to preparation of the
statement of financial position.
c. Is useful in preparing the statement of financial position.
d. All of the choices are correct.
2. Which of the following is not a principal purpose of an unadjusted trial balance?

a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger
accounts.
3. Which statement is true regarding the trial balance?

a. Preparation of the trial balance ensures that all amounts have been posted to the
correct accounts.
b. Preparation of the trial balance is a step in the recording process.
c. Preparation of the trial balance determines that total debits equal total
credits.
d. Preparation of the trial balance determines that total debits equal total credits and
that all amounts have been posted to the correct accounts.
4. Which statement regarding a trial balance is incorrect?

a. A trial balance is a test of the equality of the debit and credit balances in the
ledger.
b. A trial balance is a list of all of the open accounts in the ledger with their
balances.
c. A trial balance proves that no errors of any kind have been made in the
accounts during the accounting period.
d. A trial balance helps to localize errors within an identifiable time period.
5. An unadjusted trial balance

a. Provides information that is helpful when making adjusting entries
b. Proves that no errors have been made
c. Usually contains the account balances that should appear in the financial
statements
d. Is a summary taken directly from the general journal
6. The trial balance

a. Is a listing of all the account balances in the order the accounts appear in the
statement of financial position,
b. Has as the primary purpose of proving that all journal entries were made for the
period.
c. Can be used to uncover errors in journalizing and posting.
d. Is used to prepare the statement of financial position.
7. Numerous errors may exist even though the trial balance columns agree. Which is not
one of these errors?
a. A transaction is not journalized
b. Transposition error
c. A journal entry is posted twice
d. A transaction is recorded and amount posted at an incorrect
8. A trial balance may prove that debits and credits are equal, except
a. An amount could be entered in the wrong account.
b. A transaction could have been entered twice.
c. A transaction could have been omitted.
d. All of these may prove that debits and credits are equal.
1. Adjusting entries involve

a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. One real and one nominal account
2. If an expense has been incurred adjusting entry would involve but not yet recorded, the
a. A liability and an asset
b. A liability and a revenue
c. An expense and an asset
d. An asset and a revenue
3. The adjusting entry for depreciation has the same effect as the adjusting entry for
a. An unearned income
b. A prepaid expense
c. An accrued expense
d. An accrued income
4. An adjusting entry to accrue wages incurred but not yet paid is an example of
a. Aligning recorded costs with appropriate accounting periods
b. Aligning recorded revenue with appropriate accounting periods
c. Reflecting unrecorded expenses incurred during an accounting period
d. Reflecting unrecorded revenue earned during an accounting period
5. Which of the following least resembles a typical adjusting entry?

a. Debit an asset and credit revenue
b. Debit an expense and credit liability
c. Debit revenue and credit liability
d. Debit an asset and credit liability
6. An adjusting entry should never include

a. Debit expense and credit liability
b. Debit expense and credit revenue
c. Debit liability and credit revenue
d. Debit revenue and credit liability
7. Adjusting entries
a. Are often prepared after the end of reporting period but dated as of the end of
reporting period.
b. Are necessary to conform with standards.
c. Include both accruals and deferrals.
d. All choices are correct about adjusting entries.
8. Which statement is incorrect regarding adjusting entries?

a. Cash is neither debited nor credited.
b. Each adjusting entry affects one statement of financial position account and one
income statement account.
c. Each adjusting entry affects one revenue account and one expense account
d. Adjusting entries involve accruals or deferrals.
9. An entity must make adjusting entries

a. To ensure that the revenue recognition and expense recognition principles are
followed.
b. Each time it prepares financial statements.
c. To account for accruals or deferrals
d. All of the choices are correct regarding adjusting entries
10. Which statement best defines an accrual?
a. Adjusting entries where cash flow precedes revenue expense recognition.

b. Adjusting entries where revenue or expense recognition precedes cash flow.
c. Adjusting entries where cash flow and revenue expense recognition are
simultaneous.
d. Adjusting entries where revenue or expenses recognized in the absence of cash
flow evidence.
Question 8-22 Multiple Choice (IAA)
1. A prepaid expense can best be described as an amount
a. Paid and currently matched with earnings.
b. Paid and not currently matched with earnings.
c. Not paid and currently matched with earnings.
d. Not paid and not currently matched with earnings.
2. An accrued expense can best be described as an amount

a. Paid and currently matched with earnings.
b. Paid and not currently matched with earning.
c. Not paid and not currently matched with earnings.
d. Not paid and currently matched with earnings.
3. An accrued revenue can best be described as an amount

a. Collected and currently matched with expenses.
b. Collected and not currently matched with expenses.
c. Not collected and currently matched with expenses.
d. Not collected and not currently matched with expenses.
4. An unearned revenue can best be described as an amount

a. Collected and currently matched with expenses.
b. Collected and not currently matched with expenses.
c. Not collected and currently matched with expenses.
d. Not collected and not currently matched with expenses.
5. Which of the following properly describes a deferral?

a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid at the same time period that an expense is incurred.
1. Closing entries
a. Are optional step in the accounting cycle.
b. Affect only real accounts.
c. Permit an entity to analyze routine and repetitive transactions the same way all the
time.
d. Remove the balances from the temporary accounts.
2. Which of the following closing procedures is unique to a corporation?

a. Close each revenue account to the income summary account.
b. Close each expense account to the income summary account.
c. Close the income summary account to the retained earnings account.
d. Close the owner's drawing account to the owner's capital account.
3. After the accounts have been closed

a. All the accounts have zero balances.
b. The asset, liability and shareholders' equity accounts have zero balances.
c. The revenue, expense, income summary and retained earnings accounts have zero
balances.
d. The revenue, expense and income summary accounts have zero balances.
4. Which statement best describes the purpose of closing entries?

a. To facilitate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of temporary accounts to zero so that these are used
to accumulate the revenue, expenses and dividends of the next period.
d. To complete the record of various transactions that were started in a prior period.
5. The closing entries

a. Must debit or credit one income statement account and one statement of financial
position account.
b. Include closing the dividends account to income summary.
c. Are posted to the appropriate general ledger accounts.
d. All of the choices are correct regarding closing entries
6. If income is greater than expenses, the income summary account will be closed by
a. Crediting income summary and debiting retained earnings.
b. Debiting income summary and crediting retained earnings.
c. Debiting cash and crediting income summary.
d. Debiting income summary and crediting cash.
7. The post-closing trial balance

a. Provides a convenient listing of account balances that can be used to prepare the
b. Does not include nominal accounts.
c. Is identical to the statement of financial position.
d. Proves that accounts have been closed properly.
8. The post-closing trial balance
a. Consists of statement of financial position & accounts only.

b. Will balance if a transaction is not journalized and posted or if a transaction is
journalized and posted twice.
c. Shows that the accounting equation is in balance at the end of the accounting
period.
d. All of the choices are correct regarding the post-closing trial balance.
1. Reversing entries
a. Are normally prepared for accruals and prepayments.
b. Are necessary to achieve a proper matching of revenue and expense.
c. Are desirable to exercise consistency and establish standardized procedures.
d. Must be made at year-end. and expense.
2. Reversing entries
a. Impact the income statement only.
b. Impact the statement of financial position and the income statement.
c. Are not allowed under Philippine Financial Reporting Standards.
d. Change amounts reported in the financial statements of the preceding period.
3. Which statement regarding reversing entries is incorrect?

a. Deferrals entered in statement of financial position accounts make reversing
entries unnecessary.
b. All accruals should be reversed.
c. Adjusting entries for depreciation and doubtful accounts are never reversed.
d. Reversing entries change amounts statement of financial reported in the
statement of financial position for the previous per the period.
4. Reversing entries apply to

a. All adjusting entries
b. All deferrals
c. All accruals
d. All closing entries
5. Reversing entries apply to all of the following, except

a. Unearned revenue
b. Accrued wages
c. Prepaid insurance
d. Depreciation
6. Adjusting entries that should be reversed include

a. All accrued revenue
b. All accrued expenses
c. Those that debit an asset or credit a liability
d. All of these adjusting entries require reversal
7. A reversing entry should never be made for an adjusting entry that

a. Accrues unrecorded revenue.
b. Adjusts expired costs from an asset account to an expense account.
c. Accrues unrecorded expenses.
d. Adjusts unexpired costs from an expense account to an asset account.
8. Adjusting entries that should be reversed include those for prepaid or unearned items that
a. Create an asset or a liability account.
b. Were originally entered in a revenue or expense account.
c. Were originally entered in an asset or liability account.
d. Create an asset or a liability account and were originally entered in a
revenue or expense account.
9. An entity initially records prepayments in real accounts and makes reversing entries
when appropriate.
Which of the following year-end adjusting entries should be reversed?
a. The adjusting entry to record depreciation for the period.

b. The adjusting entry to record the portion of service fees received in advance that
is earned by year-end.
c. The adjusting entry to record supplies used during the period.
d. The adjusting entry to record service fees earned by year-end but not billed.
10. An entity initially records prepayments in nominal accounts.

Which of the following year-end adjusting entries should be reversed?
a. The adjusting entry to record inventory at year-end.

b. The adjusting entry to record the portion of rental received in advance that
is unearned at year-ènd.
c. The adjusting entry to record doubtful accounts.
d. The adjusting entry to record amortization of patent.
TFA 1
Chapter 9 – Financial Statements

Frances Sandee C. Javier
Celine P. America
QUESTION 9-1

What are the financial statements?
ANSWER 9-1
Financial statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users.
In other words, the financial statements are the end product or main output of the financial
accounting process.
Financial statements are a structure financial representation of the financial representation of
the financial position and financial performance of an entity.
QUESTION 9-2

What are general purpose financial statements?
ANSWER 9-2
General purpose financial statements are statements that have been prepared for use by those
who are not in a position to require an entity to prepare reports tailored to their particular
information needs.
Reports prepared at the request of an entity’s management or bankers are not general
purpose financial statements because they are prepared specifically to meet the needs of
management or bankers.
General purpose financial statements are directed to all common users and not to specific
users.
QUESTION 9-3

Enumerate the complete set of financial statements.
ANSWER 9-3
A complete set of financial statements comprises:

1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other explanatory
information
QUESTION 9-4

Explain the objective of financial statements.
ANSWER 9-4
The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.
Financial statements also show the results of the management stewardship of the resources
entrusted to it.
To meet the objective, financial statements provide information about the following:
a. Assets
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contributions by and distributions to owners in their capacity as owners
f. Cash flows
QUESTION 9-5

Explain the responsibility for financial statements.
ANSWER 9-5
The management of an entity has the primary responsibility for the preparation and
presentation of the financial statements of an entity
The Board of Directors in discharging its responsibilities reviews and approves the financial
statements before these are submitted to the shareholders of the entity.
QUESTION 9-6

Explain the accountability of management.
ANSWER 9-6
Management is accountable for the safekeeping of the entity’s resources and for their proper,
efficient and profitable use.
Shareholders are interested in information that helps them to assess how effectively
management has fulfilled this role as this is relevant to the decisions concerning their
investment and the reappointment or replacement of management.
QUESTION 9-7

What are the general features in the preparation and presentation of financial statements?
ANSWER 9-7
1. Fair presentation and compliance with PFRS

2. Going concern
3. Accrual basis
4. Materiality and aggregation
5. Offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency of presentation
QUESTION 9-8

Explain fair presentation and compliance with Philippine Financial Reporting Standards.
ANSWER 9-8
The financial statements shall present fairly the financial position, financial performance and
cash flows of an entity.
Virtually, in all circumstances, fair presentation is achieved if the financial statement are
prepared in accordance with Philippine Financial Reporting Standards which represent the
GAAP in the Philippines.
An entity whose financial statements comply with PFRS shall make an explicit and
unreserved statement of such compliance in the notes
Fair presentation is defined as faithful representation of the effects of transaction and other
events in accordance with the definition and recognition criteria for assets, liabilities, income
and expenses laid down in the Conceptual Framework.
Fair presentation requires an entity:
a. To select and apply accounting policies in accordance with PFRS.
b. To prevent information that provides relevant, reliable, comparable and understandable
information.
c. To provide additional disclosures necessary for the users to understand the entity’s
An entity cannot rectify inappropriate accounting policies either by disclosure of the

accounting policies used or by the notes or explanatory material.
QUESTION 9-9

Explain the preparation of financial statements on a going concern basis.
ANSWER 9-9
Going concern means that the accounting entity is viewed as continuing in operation
indefinitely in the absence of evidence to the contrary.
Financial statements shall be prepared on a going concern basis, such fact shall be disclosed
together with the measurement basis and the reason therefor.
QUESTION 9-10

Explain accrual basis of accounting.
ANSWER 9-10
An entity shall prepare financial statements, except for cash flow information, using the
accrual basis of accounting.
Under accrual basis, the effects of transactions and other events are recognized when they
occur and not as cash or cash equivalent is received or paid, and these are recorded and
reported in the financial statements of the periods to which they relate.
Simply stated, accrual accounting means that income is recognized when earned regardless
of when received and expense is recognized when incurred regardless of when paid.
The essence of accrual accounting is the recognition of accounts receivable, accounts
payable, prepaid expenses, accrued expenses, deferred income and accrued income.
QUESTION 9-11

Explain materiality aggregation.
ANSWER 9-11
An entity shall present separately each material class of similar items.

An entity shall present separately items of dissimilar nature or function unless they are
immaterial.
Materiality provides that the specific requirements of Philippine Financial Reporting
Standards need not be met if the resulting information is not material.
QUESTION 9-12

Explain offsetting.
ANSWER 9-12
Assets and liabilities, and income and expenses, when material, shall not be offset against
each other.
Offsetting may be done when it is permitted by another PFRS.
For example, gains and losses on disposal of assets are reported by deducting from the
proceeds the carrying amount and the related selling expenses.
Expenditures related to a provision and reimbursed under a contractual arrangement with a
third party may be netted against the related reimbursement.
In addition, gains and losses arising from a group of similar transactions are reported on a
net basis.
For example, foreign exchange gains and losses or unrealized gains and losses arising from
measurement of financial assets at fair value are netted against each other.
The reporting of assets net of valuation allowances is permitted because technically this is
not offsetting.
Thus, accounts receivable may be shown net of allowance for doubtful accounts.
QUESTION 9-13

Explain frequency of reporting.
ANSWER 9-13
An entity shall present a complete set of financial statements at least annually.

When an entity changes the end of it reporting period and presents financial statements for a
period longer or shorter that one year, an entity shall disclose:
a. The period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely comparable.
QUESTION 9-14

Explain the presentation of comparative information.
ANSWER 9-14
Except when a standard or an interpretation permits or requires otherwise, an entity shall

disclose comparative information in respect of the previous period for all amounts reported
in the current period’s financial statements.
In other words, the financial statements of the current period shall be presented with
comparative figures of the financial statements of the preceding year.
Comparative information shall also be included for narrative and descriptive information
when it is relevant to an understanding of the current period’s financial statements.
For example, details of a legal dispute, the outcome of which was uncertain at last reporting
date and is yet to be resolved, are disclosed in the current period.
QUESTION 9-15

What is a “third” statement of financial position required?
ANSWER 9-15
A third statement of financial position is required when an entity:

1. Applies an accounting policy retrospectively.
2. Makes retrospective restatement of items in the financial statements.
3. Reclassifies item in the financial statements.
Under these circumstances, the entity shall present three statement of financial positionas at:
a. The end of the current period
b. The end of the previous period
c. The beginning of the pervious comparative period
QUESTION 9-16

Explain consistency of presentation
ANSWER 9-16
The presentation and classification of financial statement items shall be uniform from one
accounting period to the next
Any change is allowed when it is required by another standard or when a significant change
in the nature of operations of the entity will demonstrate a more appropriate revised
presentation.
QUESTION 9-17
Explain the identification of financial statements
ANSWER 9-17
Financial statements shall be clearly identified and distinguished from other information in the
same published document.
An entity shall clearly identify each financial statement and the notes.
In addition, the following information shall be prominently displayed and repeated when
necessary for the information presented to be understandable:
a. The name of the reporting entity
b. Whether the financial statements cover the individual entity or a group of entities.
c. The date of the end of the reporting period or the period covered by the financial
statements, whichever is appropriate to the related component of the financial statements.
d. The presentation currency
e. The level of precision used in the amounts in the financial statements.
1. A complete set of financial statements includes all, except

a. Statement of financial position
b. Statement of changes in equity
c. Notes to financial statements
d. Environmental reports
2. What is the objective of financial statements?

a. To provide information about the financial position, financial performance and
changes in financial position useful to a wide range of users
b. To prepare a statement of financial position and statement of comprehensive income
c. To present relevant, reliable, comparable and understandable information
d. To prepare financial statements in accordance with all applicable standards
3. The primary responsibility for the preparation of the financial statements is reposed in
a. Management of the entity
b. Internal auditor
c. External auditor
d. Controller
4. The major financial statements include all, except

b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
5. The major financial statements include all, except

b. Statement of changes in financial position
c. Statement of comprehensive income
d. Statement of changes in equity
1.
QUESTION 9-19 Multiple Choice (IFRS)
1. When an entity changed the reporting period longer or shorter than one year, an entity shall
disclose all, except
a. Period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely comparable.
d. The fact that similar entities in the geographical area in which the entity operates
have done so.
2. Which is not a component of financial statements?

b. Statement of changes in equity
c. Report of board of directors
d. Notes to financial statements
3. Which is included in a complete set of financial statements?

a. A statement of compliance with local legislation
b. A statement of changes in equity
c. Statements of financial position for the last five years
d. Value added statement
4. Which is included within the financial statements?

a. A statement of retained earnings
b. Accounting policies
c. An auditor's report
d. Board of directors' report
5. An entity shall clearly identify each financial statement and display all of the following,
except
a. Name of the reporting entity.
b. Names of major shareholders of the entity.
c. The presentation currency.
d. Whether the financial statements cover the individual entity or a group of entities.
1. Which statement is incorrect concerning fair presentation of financial statements?

a. Fair presentation requires the faithful representation of the effects of transactions and
other events.
b. Financial statements shall present fairly the financial position, financial performance and
cash flows of an entity.
c. In virtually all circumstances, a fair presentation is achieved by compliance with
applicable PFRS.
d. An entity whose financial statements comply with PFRS shall not make an explicit
and unreserved statement of such compliance in notes.
2. Which of the following cannot be considered fair presentation of financial statements?

a. To present information in a manner that provides relevant and faithfully represented
financial information.
b. To provide additional disclosures when compliance with specific PFRS is insufficient to
understand the financial position and financial performance.
c. To select and apply accounting policies in accordance with applicable PFRS.
d. To rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory information.
3. Which statement indicates a going concern?

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 operations of the entity.
d. None of these would indicate going concern
4. An entity is permitted to depart from a particular standard if all conditions are satisfied, except
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 achieve fair presentation.
d. When the Conceptual Framework for Financial Reporting prohibits such a
departure.
5. The effects of transactions and other events on economic resources and claims are depicted in
the periods in which those effects occur even if the resulting cash receipts and payments occur in
a different period.
a. Accrual accounting
b. Cash accounting
c. Modified accrual accounting
d. Modified cash accounting
6. Financial statements must be prepared at least

a. Annually
b. Quarterly
c. Semiannually
d. Every two years
7. Technically, offsetting in financial statements is accomplished when
a. The allowance for doubtful accounts is deducted from accounts receivable.
b. The accumulated depreciation is deducted from property, plant and equipment.
c. The total liabilities are deducted from total assets.
d. Gain or loss from disposal of noncurrent asset is reported by deducting from the
proceeds the carrying amount of the asset and the related disposal cost.
8. The presentation and classification of items in the financial statements shall be retained from
one accounting period to the next.
a. Consistency of presentation
b. Materiality
c. Aggregation
d. Comparability
9. A third statement of financial position as at beginning of the earliest comparative period

presented is required
a. When an entity applies an accounting policy retrospectively.
b. When an entity makes a retrospective restatement of items in the financial statements.
c. When an entity reclassifies items in the financial statements.
d. Under all of these circumstances
10. Which statement in relation to financial statements is incorrect?

a. General purpose financial statements do not and cannot provide all of the information
that primary users need.
b. General purpose financial statements are designed to show the value of the
reporting entity.
c. General purpose financial statements are intended to provide common information to
users.
d. Financial statements are largely based on estimate and judgment rather than exact
depiction.
QUESTION 9-21 Multiple Choice (IFRS)
1. Items of dissimilar nature or function

a. Must always be presented separately.
b. Must not be presented separately.
c. Must be presented separately if material.
d. Must be presented separately even if immaterial.
2. Materiality depends on
a. The nature of the omission or misstatement.
b. The absolute size of the omission or misstatement.
c. The relative size and nature of the omission.
d. The judgment of management.
3. An entity must disclose comparative information for

a. The previous comparable period for all amounts.
b. The previous comparable period for all amounts and for all narrative and descriptive
information.
c. The previous comparable period for all amounts and for all narrative and
descriptive information relevant to an understanding of the financial statements.
d. The previous two comparable periods for all amounts.
4. When the classification of items in the financial statements is changed, the entity
a. Must not reclassify the comparative amounts.
b. Can choose whether or not to reclassify.
c. Must reclassify the comparative amounts unless it is impracticable to do so.
d. Must reclassify the current year amounts only.
5. An entity shall present

a. The statement of cash flows more prominently.
b. The statement of financial position more prominently.
c. The income statement more prominently.
d. Each financial statement with equal prominence.
1. Which would likely prepare the most accurate financial forecast for an entity based on
empirical evidence?
a. Investors using statistical models
b. Corporate management
c. Financial analysts
d. Independent certified public accountants
2. What is the most useful information in predicting future cash flows?

a. Information about current cash flows
b. Current earnings based on accrual accounting
c. Information regarding the accounting policies used
d. Information regarding financial position
3. The accrual basis of accounting is most useful for

a. Determining the amount of income tax liability.
b. Predicting short-term financial performance.
c. Predicting long-term financial performance.
d. Determining the amount of dividends to shareholders.
4. Accrual accounting is used because

a. Cash flows are considered less important.
b. It provides a better indication of ability to generate cash flows than cash basis.
c. It recognizes revenue when cash is received.
d. It is one of the implicit assumptions.
5. The financial statements prepared under GAAP

a. Do not articulate with one another.
b. Reflect a single measurement which is historical cost.
c. Are not highly precise because estimate and judgment must be made.
d. Contain a limited number of future projections.
TFA 1
Chapter 10 – Statement of Financial Position

Kristine Joy Landicho
Loremie Landicho
Joanna Rose Lopez
QUESTION 10-1
Define a statement of financial position.
ANSWER 10-1
A statement of financial position is a formal statement showing the three elements comprising
financial position, namely assets, liabilities and equity.
Investors, creditors and other statement users analyze the statement of financial position to
evaluate such factors as liquidity, solvency and the need of the entity for additional financing.
Liquidity is the ability of the entity to meet currently maturing obligations.
Solvency is the availability of cash over the longer term to meet maturing obligations.
Information about liquidity and solvency is useful in predicting the ability of the entity to comply
with future financial commitments and to pay dividends to shareholders.
QUESTION 10-2
Define current assets.
ANSWER 10-2
PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:
a. The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The entity expects to realize the asset or intends to sell or consume it within the entity's normal
operating cycle.
QUESTION 10-3
What is the presentation of current assets in the statement of financial position?
ANSWER 10-3
Current assets are usually listed in the statement of financial position in the order of liquidity.
The line items under current assets are:
a. Cash and cash equivalents
b. Financial assets at fair value profit as loss such as trading securities and other investments
in quoted equity instruments.
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
QUESTION 10-4
Define noncurrent assets.
ANSWER 10-4
The caption noncurrent assets is a residual definition.

PAS 1, paragraph 66, simply states all other that an entity shall classify assets not classified as
current as noncurrent.
QUESTION 10-5
Define current liabilities.
ANSWER 10-5
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity's normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
QUESTION 10-6
Explain the presentation of current liabilities.
ANSWER 10-6
PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial position
shall include the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
The term trade and other payables is a line item for accounts payable, notes payable, accrued
interest on note payable, dividends payable and accrued expenses.
No objection can be raised if the trade accounts and notes payable are separately presented.
QUESTION 10-7
What are noncurrent liabilities?
ANSWER 10-7
The term noncurrent liabilities is a residual definition.

PAS 1, paragraph 69, provides that all liabilities not classified as current liabilities are classified
as noncurrent liabilities.
Examples of noncurrent liabilities are:
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue
QUESTION 10-8
Explain the treatment of a currently maturing long-term debt.
ANSWER 10-8
A liability which is due to be settled within twelve months after the reporting period is classified
as current, even if.
a. The original term was for a period longer than twelve months.
b. An agreement to refinance or to reschedule payment on a long-term basis is completed after
the reporting period and before the financial statements are authorized for issue.
However, if the refinancing on a long-term basis is completed on or before the end of the
reporting period, the refinancing is an adjusting event and therefore the obligation is classified
as noncurrent.
QUESTION 10-9
Explain the treatment of a currently maturing obligation if there is a discretion to refinance.
ANSWER 10-9
If the entity has the discretion to refinance or roll over an obligation for at least twelve months
after the reporting period under an existing loan facility, the obligation is classified as
noncurrent even if it would otherwise be due within a shorter period.
The reason for this treatment is that such obligation is considered to form part of the entity's
long-term refinancing because the entity has the unconditional right under the existing loan
agreement to defer payment for at least twelve months after the end of the reporting period.
Note that the refinancing or rolling over must be at the discretion of the entity.
Otherwise, if the refinancing or rolling over is not at the discretion of the entity, the obiigation is
classified as a current liability.
QUESTION 10-10
What are covenants?
ANSWER 10-10
Covenants are often attached to borrowing agreements which represent undertakings by the
borrower.
These covenants are actually restrictions on the borrower as to undertaking further borrowings,
paying dividends, maintaining specified level of working capital and so forth.
Under these covenants, if certain conditions relating to the borrower's financial situation are
breached, the liability becomes payable on demand.
QUESTION 10-11
Explain the effect of breach of covenants on the classification of the liability.
ANSWER 10-11
PAS 1, paragraph 74, provides that "the liability is classified as current even if the lender has
agreed, after the reporting period and before the statements are authorized for issue, not to
demand payment as a consequence of the breach”.
This liability is classified as current because at reporting date the borrower does not have an
unconditional right to defer payment for at least twelve months after the reporting period.
However, Paragraph 75 provides that the liability is classified as noncurrent if the lender has
agreed on or before the end of reporting period to provide a grace period ending at least twelve
months after the end of reporting period.
QUESTION 10-12
What is the meaning of equity?
ANSWER 10-12
Equity is the residual interest in the assets of the entity after deducting all of the liabilities.
Simply stated, equity means "net assets" or total assets minus liabilities.
The terms used in reporting the equity of an entity depending on the form of the business
organization are:
a. Owner's equity in a proprietorship
b. Partners' equity in a partnership
c. Shareholders equity in a corporation
However, the term equity may simply be used for all business organizations.
QUESTION, 10-13
As a minimum, what are the line items on the face of the statement of financial position?
ANSWER 10-13
PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial
position shall include the following:
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sale and assets included in disposal group classified as
held for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 1l and 14)
16. Liabilities included in disposal group classified as held for sale

17. Noncontrolling interest
18. Share capital and reserves
The listing of the line items is not exclusive.
PAS 1 simply provides a list of items that are so different in nature and function to warrant
separate presentation on the face of the statement of financial position.
Paragraph 55 provides that additional line items, headings and subtotals shall be presented on
the face of the statement of financial position when such presentation is relevant to the
understanding of the financial position of an entity.
QUESTION 10-14
Explain the presentation of assets and liabilities in the statement of financial position.
ANSWER 10-14
PAS 1, paragraph 60, provides that an entity shall present current and noncurrent assets, and
current and noncurrent liabilities on the face of the statement of financial position.
Current and noncurrent presentation of assets and liabilities provides useful information when
the entity supplies goods or services within a clearly identifiable operating cycle.
In the Philippines, the common practice is to present in the statement of financial position
current assets before noncurrent assets, current liabilities before noncurrent liabilities, and equity
after liabilities.
Other formats may be equally appropriate provided the distinction is clear. This is in accordance
with paragraph 7 of the Preface to IAS 1.
However, all assets and liabilities are presented broadly in the order of liquidity when such
presentation is reliable and more relevant.
Note that the format of the statement of financial position as illustrated in the appendix to IAS 1
presents assets, liabilities and equity as follows:
Noncurrent assets
Current assets
Equity
Noncurrent liabilities
Current liabilities
This is the practice in other jurisdiction, like the United Kingdom.
1. When there is much variability, the operating cycle is measured at

a. The mean value
b. The median value
c. Twelve months
d. Three years
2. The operating cycle of an entity

a. Is the time between the acquisition of materials entering into a process and their
realization in cash.
b. Is the period of time normally elapsed in converting trade receivables back into cash.
c. Is a period of one year.
d. Refers to the seasonal variation experienced by entities.
3. An entity shall classify an asset as current under all of the following conditions, except
a. The entity expects to realize the asset or intends to sell or consume it within the entity's
normal operating cycle.
b. The entity holds the asset for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The asset is cash or a cash equivalent that is restricted to settle a liability for more
than twelve months after the reporting period.
4. An entity shall classify a liability as current when under all of the following conditions,
except
a. The entity expects to settle the liability within the entity's normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity has an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
5. Which obligations are classified as current even if these are due to be settled after more
than twelve months from the end of the reporting period?
a. Trade payables and accruals for employee and other operating cost
b. Current portion of interest-bearing liabilities
c. Bank overdrafts
d. Dividends payable
6. Current and noncurrent presentation of assets and liabilities provides useful information
when the entity
a. Supplies goods or services within a clearly identifiable operating cycle
b. Is a financial institution
c. Is a public utility
d. ls a nonprofit organization
7. A presentation of assets and liabilities in increasing or decreasing order of liquidity

provides information that is reliable and more relevant than a current and noncurrent
presentation for
a. Financial institution
b. Public utility
C. Manufacturing entity
d. Service provider
8. In the Philippines, the common practice is to present in the statement of financial position
a. Current assets before noncurrent assets, current liabilities before noncurrent
liabilities and equity after liabilities.
b. Noncurrent assets before current assets, noncurrent liabilities before current liabilities
and equity after liabilities.
c. Current assets before noncurrent assets, noncurrent liabilities before current liabilities
d. Noncurrent assets before current assets, current liabilities before noncurrent liabilities
9. A financial liability due within twelve months after the reporting period shall be
classified as noncurrent
a. When it is refinanced on a long-term basis before the issue of financial statements.
b. When the entity has no discretion to refinance for at least twelve months.
c. When it is refinanced on a long-term basis after the end of reporting period.
d. When it is refinanced on a long-term basis on or before the end of reporting
period.
10. When an entity breaches under a long-term loan agreement on or before the end of the
reporting period with the effect that the liability becomes payable on demand, the liability
is classified as
a. Current under all circumstances
b. Noncurrent under all circumstances
c. Current if the lender has agreed after the reporting period and before the
issuance of the statements not to demand payment as a consequence of the breach.
d. Noncurrent if the lender agreed after the reporting period to provide a grace period for
at least twelve months after the reporting period.

1. In presenting a statement of financial position, an entity
a. Must make the current and noncurrent presentation.
b. Must present assets and liabilities in order of liquidity
c. Must choose either the current and noncurrent or the liquidity presentation, meaning
free choice of presentation.
d. Must make the current and noncurrent presentation, except when a presentation
based on liquidity provides information that is reliable and more relevant.
2. Assets to be sold, consumed or realized as part of the normal operating cycle are
a. Current assets
b. Noncurrent assets
c. Classified as current or noncurrent in accordance with other criteria
d. Noncurrent investments
3. Liabilities that an entity expects to settle within the normal operating cycle are classified
as
a. Noncurrent liabilities
b. Current or noncurrent liabilities in accordance with other criteria
c. Current liabilities
d. Equity
4. In which section of the statement of financial position should cash that is restricted for
the settlement of a liability due 18 months after the reporting period be presented?
a. Current assets
b. Equity
d. Noncurrent assets
5. In which section of the statement of financial position should employment taxes that are
due for settlement in 15 months' time be presented?
b. Current assets
6. An entity has a loan due for repayment in six months' time, but the entity has the option
to refinance for repayment two years later. The entity plans to refinance this loan. In
which section of the statement of financial position should this loan be presented?
b. Current assets
7. Which of the following must be included on the face of the statement of financial
position?
a. Investment property
b. Number of shares authorized
c. Contingent asset
d. Shares in an entity owned by that entity
8. Which of the following is not required to be presented as minimum information on the

face of the statement of financial position?
a. Investment property
b. Investment accounted under the equity method
c. Biological asset
d. Contingent liability
9. Which of the following must be included as a line item in the statement of financial
position?
a. Contingent asset
b. Property, plant, and equipment analyzed by class
c. Share capital and reserves analyzed by class
d. Deferred tax asset
10. Which statement about the statement of financial position is not true?
a. Biological assets should be reported in the statement of financial position.
b. The number of shares authorized for issue should be reported in the statement of
financial position or the statement of changes in equity or in the notes.
c. Provisions should be recognized in the statement of financial position.
d. A revaluation surplus on a noncurrent asset in the current year should be
recognized in the income statement.
QUESTION 10-17 Multiple choice (AICPA Adapted
1. In analyzing financial statements, which financial statement would a potential investor

primarily use to assess liquidity and financial flexibility?
b. Income statement
c. Statement of retained earnings
d. Statement of cash flows
2. Which is an essential characteristic of an asset?

a. The claims to the benefits are legally enforceable
b. An asset is tangible
c. An asset is obtained at a cost
d. An asset is a present economic resource
3. Conceptually, asset valuation accounts are

a. Assets
b. Neither assets nor liabilities
c. Part of shareholders’ equity
d. Liabilities
4. Working capital is
a. Assets which enable the entity to operate profitably.
b. Capital which has been reinvested in the business.
c. Unappropriated retained earnings.
d. Current assets less current liabilities.
5. The basis for classifying assets as current or noncurrent is the period of time normally
elapsed from the time the entity expends cash to the time it converts
a. Inventory back into cash or 12 months, whichever is shorter.
b. Receivables back into cash or 12 months, whichever is longer.
c. Tangible fixed assets back into cash or 12 months, whichever is longer.
d. Inventory back into cash or 12 months, whichever is longer.
6. The operating cycle concept

a. Causes the distinction between current and noncurrent to depend on cash realization
within one year.
b. Permits some assets to be classified as current even though more than one year
removed from becoming cash.
c. Has become obsolete.
d. Affects the income statement only.
7. When classifying assets as current and noncurrent

a. Current assets must reflect realizable cash value.
b. Prepayments are included in other assets.
c. Current assets are determined by the seasonal nature.
d. Assets are classified as current if reasonably expected to be realized in cash or
consumed during the normal operating cycle.
8. The term net assets represents

a. Retained earnings
b. Current assets less current liabilities
c. Total contributed capital
d. Total assets less total liabilities
9. Treasury shares should be reported as

a. Current asset
b. Investment
c. Other asset
d. Reduction of shareholders' equity
10. The term deficit refers to

a. An excess of current assets over current liabilities
b. An excess of current liabilities over current assets
c. A debit balance in retained earnings
d. A prior period error
QUESTION 10-18 Multiple choice (AICPA Adapted
1. Which should be classified as current asset?

a. Trade accounts receivable normally collectible in 18 months
b. Cash for the redemption of preference shares
c. Cash surrender value
d. A deposit on machinery ordered within six months
2. Which should not be considered as a current asset?

a. Installment accounts receivable due over 18 months in accordance with normal trade
practice
b. Prepaid taxes
c. Financial asset held for trading
d. Cash surrender value
3. Current assets should never include

a. A receivable not collectible within one year
b. Current tax asset
c. Goodwill arising in & business combination
d. Premium paid on a bond investment
4. Equity investments held to finance construction of additional plant should be classified as

a. Current assets
b. Property, plant, and equipment
c. Intangible assets
d. Noncurrent investments
5. Which of the following is not a noncurrent investment?

a. Cash surrender value
b. Franchise
c. Land held for speculation
d. A sinking fund
1. The statement of financial position is useful for analyzing all of the following, except
a. Liquidity
b. Solvency
c. Profitability
d. Financial flexibility
2. The statement of financial position is useful for all of the following, except
a. To compute rate of return
b. To analyze cash inflows and outflows for the period
c. To evaluate capital structure
d. To assess future cash flows
3. What is one criticism not normally aimed at a statement of financial position?

a. Failure to reflect current value information
b. The extensive use of separate classifications
c. An extensive use of estimate
d. Failure to include items of financial value that cannot be recorded objectively
4. The statement of financial position

a. Omits many items that are of financial value
b. Makes very limited use of judgment and estimate
c. Uses fair value for most assets and liabilities
d. All of the choices are correct
5. Which is a limitation of a statement of financial position?

a. Many items that are of financial value are omitted
b. Judgment and estimate are used
c. Current fair value is not reported
d. All of these are a limitation of the statement or financial position
6. The amount of time that is expected to elapse until an asset is realize into cash is referred
to as
a. Solvency
b. Financial flexibility
c. Liquidity
d. Exchangeability
7. Which is not an acceptable major asset classification?

a. Current assets
b. Investments
c. Property, plant, and equipment
d. Deferred charges
8. Which is not an element of working capital?
a. Accrued interest on notes receivable
b. Goodwill
c. Goods in process
d. Temporary investments
9. Accrued revenue would normally appear under

a. Noncurrent assets
b. Current liabilities
d. Current assets
10. Which is classified as a noncurrent asset?

a. Plant expansion fund
b. Prepaid rent
c. Supplies
d. Goods in process
TFA 1
Chapter 11 – Notes to Financial Statements

Jobilleen H. Lopez

5. The summary of significant accounting policies should disclose
a. Proforma effect of retroactive application of an accounting change
b. Basis of profit recognition on long term construction contracts
c. Adequacy of pension plan assets in relation to vested benefits
d. Future lease payments
6. The summary of significant accounting policies should disclose

a. The composition of property, plant and equipment and the depreciation method used
b. The composition of property, plant, and equipment only
c. The depreciation method only
d. Neither the composition of property, plant, and equipment nor the depreciation
method used
1. Which of the following should be included in the summary of significant accounting

policies?
a. Property, plant, and equipment recorded at cost with the depreciation computed
principally by straight line method
b. A business component was sold during the current year
c. Breakdown of sales attributable to business components
d. Future ordinary share dividends are expected to approximate sixty percent of
earnings
2. Which of the following is not a required disclosure of accounting policies?
a. The measurement basis used
b. Key management personnel involved in drafting the summary of significant
accounting policies
c. Disclosures required by Standards
d. The nature of operations and the policies that the users of the financial statements
would expect to be disclosed
1. Notes to financial statements

a. Must be quantifiable.
b. Must, qualify as an element.
c. Amplify items presented in the financial statements.
d. All of these are characteristics of notes to financial statements.
2. Which is incorrect regarding notes to financial statements?

a. IFRS requires specific note disclosures including disaggregation of inventories.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes should be clear, simple to understand and
nontechnical in nature.
d. All of the choices are correct regarding notes to financial statements.
3. The disclosure of accounting policies is important to financial statement users in

determining
a. Net income for the year.
b. Whether accounting policies are consistently applied from year to year.
c. The measurement of obsolete inventory.
d. Whether the working capital position is adequate.
4. The standard of adequate disclosure is best described by which of the following?

a. All information related to operating objectives must be disclosed in the financial
statements.
b. Information about each account balance appearing in the financial statements is
included in the notes.
c. Enough information should be disclosed in order that a prospective investor can make
a wise decision.
d. Disclosure of any financial facts significant enough to influence the judgment of
a primary user.
5. Application of full disclosure principle

a. Is theoretically desirable but not practical because the cost of complete disclosure
exceeds the benefit.
b. Is violated when important financial information is buried in the notes to financial
statements.
c. Is demonstrated by the use of supplementary information presenting the effects
of changing prices.
d. Requires that the financial statements should be consistent and comparable.
6. An inventory accounting policy that should be disclosed is a summary of significant
accounting policies is
a. Composition of inventory into raw materials, work in process and finished goods
b. Major backlog of inventory orders
c. Method used for pricing inventory
d. All of these should be disclosed in the summary of significant accounting policies
7. Significant accounting policies may not be

a. Selected on the basis of judgment
b. Selected from existing acceptable alternatives
c. Unusual or innovative in application
d. Omitted from financial statement disclosure
8. Which of the following is a method of disclosing relevant financial information?

a. Supporting schedule
b. Parenthetical explanation
c. Cross reference
d. All of these are methods of disclosure
TFA 1
Chapter 12 – Related Party Disclosure

Ma. Ruby A. Bagsit

1. Related parties include nil of the following.
a. Parent, authority, and fellow subsidiaries
b. Associates
c. Key management personnel and close family members of such key management
personnel
d. Two venturers simply because they share joint control over a joint venture
2. A related party transaction in u transfer

a. Between related parties when a price is charged.
b. Between related parties, regardless of whether a price is charged.
c. Between unrelated parties when a price is charged.
d. Between unrelated parties, regardless of whether a price is charged.
3. Unrelated parties include which of the following?

a. Providers of finance in the normal course of business
b. Government agencies
c. Single customer with significant volume of business
d. All of these are unrelated parties
4. Close family members of an individual include all , except

a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or individual's spouse
d. Brothers and sisters of the individual
5. The 'minimum disclosures. about related party transactions include all of the following,
except
a. The amount of the transaction
b. Amount of outstanding balance
c. Allowance for doubtful accounts related to the outstanding balance
d. Nature of the relationship
1. Which is not included in key management personnel compensation?

a. Short-term benefit
b. Share-based payment
c. Termination benefit
d. Reimbursement of out-of-pocket expenses
2. Which of the following is not a mandated disclosure about related party transactions?
a. Relationship between parent and subsidiaries
b. Names of all the associates that an entity hag dealt with during the year.
c. Name of tie entity's parent and, if different, the ultimate controlling party.
d. If neither the entity's parent nor the ultimate controlling entity produces financial
statement available for public use, then the name of the next most senior parent that
does go.
3. The Philippine Financial Reporting Standards collectively include

a. The amount of related party transaction
b. The amount, of the outstanding balance
c. The amount of similar transaction with unrelated parties to establish that
comparable related party transaction has been entered at arm's length
d. Doubtful debt related to the out8tanding balance
4. Related party transactions include all, except

a. A venturer sold goods to the joint venture.
b. Sold a car to the uncle of the entity’s finance director
c. Sold goods to another entity owned by the daughter of the managing director.
e. All of these are related party transactions.
5. All of following are related party transactions, except

a. Transferred goods from inventory to a subsidiary
b. Sold an entity car to the wife of the managing
c. Sold an asset to an associate
d. Took out a huge bank loan
6. An entity that entered into a related party transaction would be required to disclose all,
except
a. Nature od the relationship between parties
b. Nature of any future transactions planned between the parties and the terms
involved
c. Peso amount of the transaction.
d. Amount due from or to related parties.
7. Which is not a required related party disclosure?

a. The son of the chief executive officer of the entity
b. The parent of the entity
c. An entity that has a common director with the entity
d. Joint venture in which the entity is a venturer
8. All Of the following are related parties, except

a. Joint venture in which the entity is a venturer
b. A postemployment benefit plan for the employees
c. An executive director of the entity
d. The partner of a key manager is a major supplier
9. Which of the following is not a related party?

a. A shareholder owning twenty percent
b. An entity providing banking facilities
c. An associate
d. Key management personnel
10. Which of the following should be included in key management personnel compensation?
a. Social security contributions
b. Postemployment benefits
c. Social security contributions and postemployment benefits
d. Social security contributions, postemployment benefits and dividends to shareholders
1. Financial statements shall include disclosure of material transactions between related
parties, except
a. Nonmonetary exchange by affiliates
b. Sales of inventory by a subsidiary to the parent when consolidated financial
statements are prepared.
c. Expense allowance for executive which exceed normal business practice
d. An entity’s agreement to act as surety for a loan to the chief executive officer
2. Which should be disclosed as related party transaction in the entity's separate financial
statements?
a. Key management personnel compensation
b. Sales to affiliated entities
c. Key management personnel compensation and sales to affiliated entities
d. Neither key management personnel compensation nor sales to affiliated entities
3. An entity has cosigned the mortgage note on the home of its president guaranteeing the
indebtedness in the event that the resident should default. The entity considers the
likelihood default to be remote. How should the guarantee be treated in the financial
statements?
a. Disclosed only
b. Accrued only
c. Accrued and disclosed
d. Neither accrued nor disclosed
4. Which of the following transactions most likely would be a related party transaction
requiring disclosure?
a. The entity borrowed P 1,000,000 from Southwest Bank issuing a noninterest-bearing
note.
b. The entity borrowed P 2,000,000 Northwest Bank at rate significantly above the
prevailing market rate.
c. The entity ed P500,000 from Eastwest Bank with no scheduled terms for how or
when funds will be repaid.
d. All of these would be disclosed as related party
TFA 1
Chapter 13 – Events After the Reporting Period

Ma. Ruby A. Bagsit

1. Events after the end of reporting period are favorable or unfavorable events that occur
between
a. The end of the reporting period and the date of the next annual financial statement8.
b. The end of the reporting period and the date of the next interim or annual financial
statements.
c. The end of the reporting period and the date when the financial statements are
authorized for issue.
d. The end of reporting period and the date of the next interim financial statements.
2. Adjusting events are events that

a. Provide evidence of conditions that existed at the end of the reporting period.
b. Are favorable and indicative of conditions that arose after the end of the reporting
period.
c. Are unfavorable and indicative of conditions that arose after the end of the reporting
period.
d. Provide of conditions that existed after the date the financial statements were
authorized for issue.
3. When after the end of reporting period an event occurs that is indicative of conditions
that arose after the end of reporting period
a. The entity shall disclose the nature and effect of the event in the financial
statements.
b. The entity shall adjust the related amount in the financial statements.
c. The entity shall disclose the nature and effect of the event and adjust the related
amount.
d. The entity shall disclose nothing.
4. The financial statements are authorized for issue

a. When the board of directors reviews the financial statements and authorizes
them for issue.
b. When the financial statements are made available to shareholders.
c. When the shareholders approve •the financial statements at their annual meeting.
d. When the approved financial statements are filed with a regulatory body.
1. Which event after the reporting period would require adjustment?

a. Loss of plant as a result of fire
b. Change in the market price of investment
c. Loss on inventory resulting from flood 1088
d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end
2. Events that occur after the current year-end but before the financial statements are issued
and affect the realizability of accounts receivable should be
a. Discussed in the management annual report.
b. Disclosed in the notes to financial statements.
c. Used to record an adjustment to bad debt expense.
d. An adjustment directly to retained earnings.
3. Nonadjusting events include all, except

a. A major business combination after reporting period
b. Announcing a plan to discontinue an operation
c. Expropriation of major asset after reporting period
d. Destruction of a major production plant a fire before the end of the reporting-
period
4. Nonadjusting events include all, except

a. The entity announced a discontinued operation.
b. An agreement to purchase the leased building.
c. Destruction of a major production plant by fire.
d. A mistake in the calculation of allowance for doubtful accounts.
5. Which event after the end of reporting period would generally require disclosure?
a. Retirement of key management personnel
b. Settlement of litigation when the event that gave rise to the litigation occurred in a
prior period
c. Strike of employees
d. Issue of a large amount of ordinary Share
1. At the end of the current reporting Period, an entity carried a receivable from a major
customer who declared bankruptcy after the end of reporting period and before the
issuance of financial statements. What should be reported at the current year-end?
a. Disclose the fact that the customer has declared bankruptcy.
b. Make a provision for the event after reporting period in the financial statements.
c. Ignore the event and wait for the outcome of the bankruptcy.
d. Reverse the sale pertaining to the receivable in the comparative statement for the
prior period.
2. An entity decided to build and operate an amusement park next year. The entity applied
for a letter of guarantee which was issued before the issuance of the financial statements
of the current year. What is the adjustment required at the current year-end?
a. Book a long-term payable for the amount of guarantee
b. Disclose the guarantee as a contingent liability
c. Increase the contingency reserve
d. Do nothing
3. An entity built a new factory building during the current year. Subsequent to the current
year-end and before issuance of financial statements, the building was destroyed by fire
and the claim against the insurance entity proved futile because the cause of the fire was
negligence on the. part of the caretaker of the building. What should be reported at the
current year-end?
a. Write off the carrying amount of the building
b. Make a provision for one-half of the carrying amount of the building
c. Make a provision for three-fourths of the carrying amount of the building
d. Disclose the nonadjusting event in the notes to financial statements
4. An entity lease extensively with foreign currency transactions. Subsequent to the end of
reporting period and before the date 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?
a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations
b. Adjust the foreign exchange year-end balance to reflect all abnormal fluctuations and
not just adverse movements
c. Disclose the post-reporting period event
d. Ignore the post-reporting period event
5. Which statement is true in relation to events after reporting period?

a. Notes to the financial statements should give details of material adjusting events
included in those financial statements.
b. Notes to the financial statements should give details of material nonadjusting
events which could influence the economic decisions of primary users.
c. A decline in the fair value of trading investments would normally be classified as an
adjusting event.
d. The settlement of a long-running court case would normally be classified as a
nonadjusting event.
TFA 1
Chapter 14 – Statement of Comprehensive Income

Lordin Kaye G. Magbujos

1. The income statement reveals
a. Resources and equity at a point in time.
b. Resources and equity for a period of time.
c. Net earnings at a point in time.
d. Net earnings for a period of time.
2. Conceptually, net income is a measure of

a. Wealth
b. Change of wealth
c. Capital maintenance
d. Cash flow
3. Which term cannot be used to describe a line item in the statement of comprehensive
income?
a. Revenue
b. Gross income
c. Income before tax
d. Extraordinary
4. Comprehensive income includes all, except

a. Revenue and gain
b. Expense and loss
c. Preference share dividend
d. Unrealized gain and loss on derivative contract
5. Comprehensive income includes all, except

a. Dividend revenue
b. Loss on disposal of asset
c. Investment by owners
d. Unrealized gain on trading investment
1. Income determination is arrived at by

a. Measuring the change in owner’s equity
b. Identifying the change in the purchasing power
c. Using a transaction approach
d. Applying the value-added concept
2. Net income equals

a. Assets minus liabilities
b. Revenue minus cost of goods sold
c. Revenue minus expenses
d. Cash receipts minus cash payments
3. Comprehensive income always

a. Is the same as net income
b. Is greater than net income
c. Is less than net income
d. Could be greater than or less than net income
4. Gains are
a. Inflows from selling a product to a customer
b. Increases in equity resulting from transfers of assets to the entity from the owners
c. Increases in equity from peripheral transactions
e. All of these can be considered gains
5. Change in equity from nonowner sources is

a. Comprehensive income
b. Revenue
c. Expense
d. Gain or loss
TFA 1
Chapter 20 – Operating Segments

Lhana Iane D. Tuazon
Problem 20-17 Multiple Choice (PFRS 8)

1. Entity-wide disclosures include all, except
a. Information about products
b. Information about geographical areas
c. Information about major customers
d. Information about intersegment revenue disclosure
2. Which statement is true about major customer?

a. A major customer is defined as one providing revenue which amounts to 10% or
more of combined external revenue of all operating segments.
b. The identities of major customers need not be disclosed.
c. The entity shall disclose the total amount of revenue from major customers,
d. All of these statements are true about major customer disclosures
3. Which entity is required to report on business segments?

a. Publicly traded
b. Not for profit
c. Joint venture
d. Nonpublic
4. An entity must disclose all of the following about each reportable segment if the amounts
are used by the chief operating decision maker, except
a. Depreciation expense
b. Allocated expense
c. Interest expense
d. d Income tax expense
5. An entity shall disclose for each reportable segment all of the following specified
amounts included in the measure of profit or loss, except
a. Revenue from external customers
b. Revenue from internal customers
c. Interest revenue
d. Gain on disposal of investment
6. An entity shall disclose for each reportable segment all of the following specified
amounts included in the
a. Depreciation and amortization
b. The entity's interest in the profit or loss of associate
c. Income tax expense
d. General corporate expenses
7. An entity must disclose all of the following about each reportable segment if the amounts
are used by the chief operating decision maker, except
a. Unusual items
b. Income tax expense
c. Intersegment revenue
d. Cost of goods sold
8. For segment reporting purposes, which test must be applied to determine if a component
is a reportable operating segment?
a. Revenue test and asset test
b. Revenue test, asset test and profit or loss test
c. Revenue test, asset test and expense test
d. Revenue test, asset test and cash flow test
9. What is the practical limit to the number of reportable operating segments?

a. Five segments
b. Ten segments
c. Six segments
d. Four segments
10. The approach used in segment reporting is known as

a. Segment approach
b. Revenue approach
c. Management approach
d. d Enterprise approach
TFA 1
Chapter 15 - Non-Current Assets Held For Sale

Kim Frances G. Manalo
QUESTION 15-9 Multiple choice (PFRS 5)
1. It is group of assets to be disposed of by sale or otherwise, together as a group in a single

transaction, and liabilities directly associated with those assets that will be transferred in
the transaction.
a. Disposal group
b. Discontinued operation
c. Noncurrent asset
d. Cash generating unit
2. An entity shall classify a noncurrent asset or disposal group as held for sale when
a. The carrying amount of the asset or disposal group is recovered through a sale
transaction
b. The carrying amount of the asset or disposal group is recovered through continuing
use.
c. The noncurrent asset or disposal group is abandoned.
d. The noncurrent asset or disposal group is idle or retired from active use.
3. For the sale of a noncurrent asset to be highly probable, which of the following
statements is incorrect?
a. Management must be committed to a plan to sell the asset.
b. An active program to locate a buyer and complete the plan must have been initiated.
c. The asset must be actively marketed for sale at a reasonable price in relation to the
current fair value.
d. The sale is expected to qualify for recognition as a completed sale within two
years from the date of classification of the asset as held for sale.
4. An entity shall measure a noncurrent asset or disposal group classified as held for sale at
a. Carrying amount
b. Fair value less cost of disposal
c. Lower of carrying amount and fair value less cost of disposal.
d. Higher of carrying amount and fair value less cost of disposal.
5. Noncurrent asset classified as held for sale shall be presented as

a. Current asset
b. Other noncurrent asset
c. Noncurrent investment
d. Property, plant and equipment
6. If the fair value less cost of disposal is lower than the carrying amount of a noncurrent
asset classified as held for sale, the difference is
a. Not accounted for.
b. Accounted for as an impairment loss.
c. Charged to depreciation.
d. Debited to retained earnings.
7. What is the treatment of any gain on a subsequent increase in the fair value less cost of
disposal of a noncurrent asset classified as held for sale?
a. The gain shall be recognized in full.
b. The gain shall not be recognized.
c. The gain shall be recognized but not in excess of the cumulative impairment loss
previously recognized.
d. The gain shall be recognized but only in retained earnings.
8. A noncurrent asset that is to be abandoned shall not be classified as held for sale because
a. The carrying amount is recovered principally through continuing use.
b. It is difficult to value.
c. It is unlikely that the noncurrent asset is sold within twelve months.
d. It is unlikely that there is an active market for t noncurrent asset.

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CHAPTER 36

QUESTION 36-16 Multiple choice (PAS 16)

40-11 Multiple choice (PAS 16)

3. Which statement is incorrect with respect to depreciation?

4. Which statement is true with respect to residual value?

5. The useful life of property, plant and equipment is

7. The production method of depreciation results in

8. Which statement is true in relation to depreciation?

10. Technical or commercial obsolescence arises from

2. The straight line depreciation is not appropriate for

3. The principal objection to the straight line method of depreciation is that it

4. In which of the following situations is the production method of depreciation most

2. Which depreciation method is not based on the passage of time?

4. The double declining balance method

6. What factor must be present to use the production method of depreciation?

7. The sun of years' digits method

10. Which statement regarding depreciation is true?

3. Information needed to compute a depletion charge per unit includes the

5. Which of the following is not part of depletable amount?

2. When is an entity required to recognize exploration and evaluation expenditure as an asset?

1. Which statement best describes impaiment loss?

a. The removal of an asset from the statement of financial position.

2. What is the recoverable amount of an asset?

a. Fair value less cost of disposal

c. Fair value less cost of disposal or value in use, whichever is higher

d. Fair value less cost of disposal or value in use, whichever is lower

3. What is fair value of an asset?

4. Which statement bests describes value in use?

d. Undiscounted future net cash flows

5.What is the best evidence of fair value?

a. Quoted price in an active market for identical asset.

b. Quoted price in an active market for similar asset.

c. Quoted price in an inactive market for identical asset.

d. Quoted price in an inactive market for similar asset.

6. Which statement is incorrect concerning the estimate of future cash flows?

c. Future cash flows do not include income tax.

a. Cash inflows from the continuing use of the asset

d. Income tax payments

8. What is a cash generating unit?

a. The smallest business segment

b. Any group of assets that generate cash flows

c. Any group of assets reported separately to management

QUESTION 43-8 Multiple choice (IFRS)

1. If the fair value less cost of disposal cannot be determined

a. The asset is not impaired.

b. The recoverable amount is the value in use.

d. The carrying amount of the asset remains the same.

2. If the assets are to be disposed of

a. The recoverable amount is the fair value less cost of disposal.

b. The recoverable amount is the value in use.

c. The asset is not impaired.

d. The recoverable amount is the carrying value.

a. The time value of money.

a. Across the assets of the units based on carrying amount.

b. Across the assets of the unit based on the fair value.

b. Revaluation surplus that relates to the revalued asset

c. Opening retained earnings

d. Any reserve in equity

6. Which of the following is not relevant in determining value in use?

a. The expected future cash flows from the asset

b. The carrying amount of the asset

d. The time value of money

d. If recoverable amount is higher than carrying amount, no impairment loss is recognized.