CPA REVIEW SCHOOL OF THE PHILIPPINES

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FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

CASH, ACCOUNTS RECEIVABLE AND INVENTORY

1. Which of the following should be considered cash?
a. Certificates of deposit
b. Money orders
c. Money market instruments
d. Treasury bills
2. What is compensating balance?
a. Saving account balance
b. Loan account with bank
c. Temporary investment serving as collateral for loan
d. Minimum deposit required to be maintained in connection with borrowing arrangement.
3. All of the following can be classified as cash and cash equivalents, except
a. Redeemable preference shares acquired and due in 60 days
b. Commercial papers held and due for repayment in 90 days
c. Equity investments
d. A bank overdraft
4. Which statement is true about bank overdraft?
a. Overdraft typically can be offset against positive balance in other bank account.
b. Generally, cash overdraft is allowed.
c. Overdraft can be offset against other bank account when payable on demand and often fluctuates
from positive to overdrawn as an integral part of cash management.
d. All of these statements are true about bank overdraft.
5. What is the major purpose of an imprest petty cash fund?
a. To effectively plan cash inflows and outflows
b. To ease the payment of cash to vendors
c. To determine the honesty of the employees
d. To effectively control cash disbursements
6. The petty cash account under the imprest fund system is debited.
a. Only when the fund is created.
b. When the fund is created and everytime it is replenished.
c. When the fund is created and when the size of the fund is increased.
d. When the fund is replenished.
7. Which is accepted in determining bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the allowance
8. The estimate of uncollectible accounts based on percentage of sales
a. Emphasizes measurement of accounts receivable
b. Emphasizes measurement of bad debt expense
c. Emphasizes measurement of total assets
d. Is acceptable only for tax purposes
9. Which method is not permitted in accounting for bad debts?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts using a percentage of accounts receivable under the allowance method.
c. Charging bad debts using aging accounts receivable under the allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
10. A method of estimating bad debts that focuses on asset valuation is
a. Aging of accounts receivable
b. Direct writeoff
c. Percentage of credit sales
d. Percentage of credit sales less returns and allowances
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11. A method of estimating bad debts that focuses on the income statement is the method based on
a. Direct writeoff
b. Aging accounts receivable
c. Credit sales
d. Accounts receivable
12. When aging of accounts receivable is used
a. Bad debt expense is measured indirectly and the allowance is measured directly.
b. Bad debt expense and the allowance are measured directly
c. Bad debt expense and the allowance are measured indirectly.
d. Bad debt expense is measured directly and the allowance is measured indirectly.
13. An entity uses the allowance method for recognizing doubtful accounts. The entry to record the
writeoff of a specific uncollectible account
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts receivable
c. Decreases both net income and working capital
d. Decreases both net income and accounts receivable
14. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of an account previously written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income
15. An entity disclosed in the notes to financial statements a significant number of unsecured accounts
receivable with entities that operate in the same industry. This disclosure is required to inform users
of financial statements the existence of
a. Risk of measurement uncertainty
b. Off-statement of financial position risk of accounting loss
c. Concentration of credit risk
d. Concentration of market risk
16. Why would an entity sell accounts receivable to another entity?
a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amounts collected
d. To comply with customer agreement
17. Accounts receivable hypothecated against borrowings should be
a. Disclosed in the notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized.
18. Which statement is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale.
b. The accounts are used as collateral for a promissory note issued to the factor.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
accounts receivable.
d. The financing cost should be recognized ratably over the collection period.
19. Accounting for the imputed interest on a noninterest bearing note receivable is an example of what
aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance
20. What is imputed interest?
a. Interest based on stated interest rate
b. Interest based on implicit interest rate
c. Interest based on average interest rate
d. Interest rate based on bank prime rate 6897
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21. Notes receivable discounted with recourse should be

a. Included in total receivables with disclosure of contingent liability
b. Included in total receivables without disclosure of contingent liability
c. Excluded from total receivables with disclosure of contingent liability
d. Excluded from total receivables without disclosure of contingent liability
22. Entities must allocate the cost of all goods available for sale between
a. The cost of goods on hand at the beginning and the cost of goods acquired during the period
b. The cost of goods on hand at the end and the cost of goods acquired during the period.
c. The income statement and the statement of financial position
d. All of the choices are correct.
23. Why are inventories included in the computation of net income?
a. To determine cost of goods sold
b. To determine sales revenue
c. To determine merchandise returns
d. Inventories are not included in the computation of net income
24. Theoretically, cash discounts permitted on purchased raw materials should be
a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken
25. The use of purchase discount account implies that the recorded cost of a purchase is
a. Invoice price
b. Invoice price plus purchase discount lost
c. Invoice price less purchase discount taken
d. Invoice price less purchase discount allowable whether taken or not
26. The use of a discount lost account implies that the recorded cost of an inventory is
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not
27. When a portion of inventory has been pledged as security on a loan
a. The value of the portion pledged should be subtracted from the debt.
b. An equal amount of retained earnings should be appropriated.
c. The fact should be disclosed but the amount of current assets should not be affected.
d. The cost of the pledged inventory should be transferred from current to noncurrent asset.
28. If a material amount of inventory has been ordered through a formal purchase contract at the
statement of financial position date for future delivery at firm prices
a. This fact must be disclosed.
b. Disclosure is required only if prices have declined since the date of the order.
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.
29. The credit balance that arises when a loss on purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement
30. Which is the reason why the specific identification method may be considered ideal?
a. The potential for manipulation of income is reduced.
b. There is no arbitrary allocation of cost.
c. The cost flow matches the physical flow.
d. It is applicable to all types of inventory.

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31. In a period of declining prices, which inventory cost flow method would result in the highest cost of
goods sold?
a. Moving average method
b. Specific identification method
c. FIFO
d. Weighted average method

32. Why are inventories measured at lower of cost and net realizable value?
a. To report a loss when there is a decrease in the future utility.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future profit to be recognized.

33. Which statement is true about the LCNRV method of measuring inventory?
a. The LCNRV is always either the net realizable value or cost
b. The LCNRV gives the lowest valuation if applied to individual items of inventory.
c. When the cost of goods sold method is used to record inventory at net realizable value, the NRV
is substituted for cost and the loss is buried in the cost of goods sold.
d. All of these statements are true about LCNRV method.

34. Which statement is true regarding inventory writedown and recovery of writedown?
a. Recovery of inventory writedown is prohibited under IFRS.
b. IFRS requires separate reporting of reversal of inventory writedown.
c. IFRS requires entities to record writedown in a separate loss account.
d. All of the choices are true.

35. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a purchases account.
b. Inventory records are not kept for every item
c. Cost of goods sold is recorded each time a sale is made.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

36. When the FIFO inventory cost flow method is used, a perpetual inventory system would
a. Not be permitted
b. Result in a higher ending inventory than a periodic inventory system
c. Result in the same ending inventory as a periodic inventory system
d. Result in a lower ending inventory than a periodic inventory system

37. An advantage of the retail inventory method is that it

a. Permits entities to avoid in annual physical inventory.
b. Gives a more accurate measurement of inventory
c. Hides costs from customers
d. Provides a method for inventory control and facilitates determination of the periodic inventory.

38. The conservative retail method produces an ending inventory that approximates
a. Lower of average cost and net realizable value
b. Lower of FIFO cost and net realizable value
c. Fair value less cost of disposal
d. Current replacement cost

39. The use of the gross profit method assumes

a. The amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed from previous years.
c. Inventory value has not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar in prior years.

40. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value under LIFO.

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PAS 41 – AGRICULTURE
41. Biological assets
a. Are found only in Biotech entities.
b. Are living animals or living plants and must be disclosed as a separate line item in the statement
of financial position
c. Must be valued at cost
d. Do not generally have future economic benefits
42. Agricultural activity includes all of the following, except
a. Raising livestock
b. Annual perennial cropping
c. Floriculture and aquaculture, including fishing
d. Ocean fishing
43. All of the following must be satisfied before a biological asset can be recognized, except
a. The entity controls the asset as a result of past event.
b. It is probable that future economic benefits relating to the asset will flow to the entity.
c. An active market for the asset exists.
d. The fair value or cost of the asset can be measured reliably.
44. Biological assets shall be measured using
a. Historical cost
b. Historical cost less depreciation and impairment
c. A fair value approach
d. Net realizable value
45. A bearer plant is a living plant that
a. Is used in the production or supply of agricultural produce.
b. Is used to bear produce for more than one period
c. Has a remote likelihood of being sold as agricultural produce, except for scrap sales.
d. Must possess all of these characteristics.
46. The harvested agricultural produce is
a. Accounted for as inventory
b. Initially recognized at fair value less cost of disposal at the point of harvest
c. Recorded as gain from change in fair value.
d. All of these are correct for harvested agricultural produce
47. Under IFRS, bearer plants are accounted for as
a. Biological assets with disclosure
b. Biological assets without disclosure
c. Property, plant and equipment
d. Noncurrent investment
48. Under IFRS, bearer animals are accounted for as
a. Biological assets
b. Property, plant and equipment
c. Investment property
d. Agricultural produce
49. Animals related to recreational activities are accounted for as
a. Biological asset
b. Property, plant and equipment
c. Investment property
d. Either biological asset or property, plant and equipment
50. Land that is related to agricultural activity is measured
a. At fair value
b. In accordance with PAS 16 as property, plant and equipment or PAS 40 as investment property
c. At fair value in combination with the biological asset
d. At resale value separate from the biological asset
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