CHAPTER 1 THE ACCO UNTANCY PROFESSION
Accountants employed in entities in various capacity
QUESTION 1-1 MULTIPLE CHOICE (ACP)
1. What is the law regulating the practice of
accountancy in the Philippines?
a. RA. No. 9298
b. RA. No. 9198
c. RA. No. 9928
d. RA. No. 9892
Ans: A
2. It is the body authorized by law to promulgate rules
and regulation affecting the practice of the accountancy
profession in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
Ans: A
3. The qualifications of the members of the Board of
Accountancy include all of the following, except
a. Must be a natural-born citizen and a resident of the
Philippines.
b. Must be duly registered CPA with at least ten years of
work experience in any scope of practice of
accountancy.
c. Must be of good moral character and must not have
been convicted of crime involving moral turpitude.
d. Must have any pecuniary interest, directly or
indirectly in any school conferring an academic degree
necessary for admission to the practice of accountancy.
Ans: D
4. What are the three main areas in the practice of the
accountancy profession?
a. Public accounting, private accounting and managerial
accounting.
b. Auditing, taxation and managerial amounting
c. Financial accounting, managerial accounting and
corporate accounting.
d. Public accounting, private accounting and
government accounting.
ANS: D
5. What is the primary service of CPAs in public practice?
a. Auditing
b. Taxation
c. Managerial accounting
d. Controllership
ANS:A
6.
as accounting staff, chief accountant or controller are
said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
ANS:B
7. It is the area of the accountancy profession that
encompasses the process of analyzing, classifying,
summarizing and communicating all transactions
involving the receipt and disposition of government
funds and property and interpreting the results thereof.
a. Internal auditing
b. External auditing
c. Private accounting
d. Government accounting
ANS:D
8. The Continuing Professional Development is required
for
a. Renewal of CPA license
b. Accreditation to practice the accountancy profession.
c. Both renewals of CPA license and accreditation to
practice the accountancy profession.
d. Neither renewal of CPA license nor accounting
profession accreditation to practice the accountancy
profession.
ANS: C
9. Which of the following statements is true regarding
exemptions from CPD requirements?
a. A CPA shall be permanently exempted from CPD
requirement for renewal of CPA license at the age of 65
years but not for the accreditation to practice the
accountancy profession.
b. A CPA who is working or practicing the profession
abroad shall be temporarily exempted from CPD
requirement during the period of stay abroad provided
the CPA has been out of the country for at least two
years prior to the date of renewal.
c. A CPA who is furthering studies abroad shall be
temporarily exempted from CPD requirement during
the period of stay abroad provided the CPA has been
out of the country for at least two years prior to date of
renewal.
d. All of the statements are true.
ANS:D
10. Which of the following statements is incorrect in
relation to the practice of public accounting?
a. Single practitioners for the practice of public
accounting shall be registered CPAs in the Philippines.
b. Partners of partnership formed for the practice of
public accounting shall be registered CPAs in the
Philippines.
c. The Securities and Exchange Commission can register
any corporation organized for the practice of public
accounting.
d. The Professional Regulation Commission upon
favorable recommendation of the Board of Accountancy
shall issue certificate of accreditation to CPAs in public
practice provided the registrant has acquired a
minimum of three years of meaningful experience in
public practice.
ANS:C
QUESTION 1-2 MULTIPLE CHOICE (ACP)
1. Which is the accounting standard setting body in the
Philippines at the present time?
a. Accounting Standards Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards Council
ANS: D
2. Which statement is true regarding the FRSC?
a. The FRSC is created by Professional Regulation
Commission upon recommendation of the Board of
Accountancy in carrying out its powers and functions
under RA 9298
b. The FRSC shall be composed of 15 with a Chairman
and 14 representatives.
c. The Chairman and members of FRSC are appointed by
Professional Regulation Commission upon
recommendation of the Board of Accountancy and shall
have a term of three years renewable for another
d. All of the statements are true.
ANS:D
3. All of the following are represented in FRSC, except
a. Board of Accountancy
b. Securities and Exchange Commission
c. Commission on Audit
d. Department of Budget and Management
ANS: D
4. The Philippine Financial Reporting Standards
collectively include
a. PFRS corresponding to IFRS.
b. PAS corresponding to IAS
c. Philippine Interpretations corresponding to IFRIC and
SIC Interpretations and Interpretations developed by
PIC.
d. All of these are included in Philippine Financial
Reporting Standards.
ANS: D
QUESTION 1-3 MULTIPLE CHOICE (IFRS)
1. The International Accounting Standards Board was
formed
a. To enforce IFRS in foreign countries
b. To develop a single set of high quality IFRS
c. To establish accounting standards for multinational
entities
d. To develop accounting standards for countries that
do not have their own standard-setting bodies
ANS:B
2. The IASB declared that the merits of proposed
standards are assessed
a. From a position of neutrality
b. From a position of materiality
c. Based on possible impact on behavior
d. Based on arguments of lobbyist
ANS: A
3. What is the chronological order in the evaluation of a
typical standard?
a. Exposure draft, Standard and Discussion paper
b. Exposure draft, Discussion paper and Standard
c. Standard, Discussion paper and Exposure draft
d. Discussion paper, Exposure draft and Standard
ANS: D
4. The IASB publishes standards called
a. International Accounting Standards
b. Financial Reporting Standards
c. International Financial Reporting Standards
d. Statement of Financial Accounting Standards
ANS: C
5. The IASB employs a "due process" system which
a. Is an efficient system for collecting dues from
members
b. Enables interested parties to express their views on
issues under consideration.
c. Identifies the most important accounting issues.
d. Requires that all CPAs must receive a copy of IFRS.
ANS: B
6. What is "due process" in the context of standard-
setting by IASB?
a. IASB operates in full view of the public.
b. Public hearings are held on proposed standards. c.
Interested parties can make their views known.
d. All of these are part of due process in standard-
setting.
ANS: D
7. What is a possible danger if politics play too big a role
in developing IFRS?
a. Financial reporting standards are not truly generally
accepted.
b. Individuals may influence the standards.
c. User groups become active.
d. The IASB delegates its authority to elected officials.
ANS: A
8. Financial accounting standard-setting
a. Can be described as a social process which reflects
political actions of various interested user groups as
well as a product of research and logic.
b. Is based solely on research and empirical findings.
c. Is a legalistic process based on rules promulgated by
governmental agencies
d. Is democratic in the sense that a majority of
accountants must agree with a standard before it
becomes enforceable.
ANS:A
9. IFRIC Interpretations issued by IASB
a. Are considered authoritative and must be followed.
b. Cover newly identified financial reporting issues not
specifically addressed.
c. Cover issues where unsatisfactory or conflicting
interpretations have developed.
d. All of these are true about IFRIC Interpretations.
ANS: D
QUESTION 1-4 MULTIPLE CHOICE (IAA)
1. Financial accounting can be broadly defined as the
area of accounting that prepares
a. General purpose financial statements to be used by
parties internal to the entity.
b. Financial statements to be used by investors.
c. General purpose financial statements to be used by
parties both internal and external to the entity.
d. Financial statements to be used primarily by
management.
ANS: C
2. Financial accounting emphasizes reporting to
a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors
ANS: D
3. Managerial accounting emphasizes
a. Reporting financial information to external users
b. Reporting to the Securities and Exchange Commission
c. Combining accounting with data processing
d. Developing accounting information for use within an
entity
ANS: D
4. Which of the following statements is true regarding
the comparison of managerial and financial accounting?
a. Managerial accounting is generally more-precise.
b. Managerial accounting need not follow generally
accepted accounting principles while financial
accounting must follow GAAP.
c. Managerial accounting has a future focus.
d. The emphasis on managerial accounting is relevance
and the emphasis on financial accounting is timeliness.
ANS: B
QUESTION 1-5 MULTIPLE CHOICE (IAA)
1. Generally accepted accounting principles
a. Are accounting principles based on law.
b. Derive their credibility and authority from law.
c. Derive their authority from regulatory authority.
d. Derive their credibility and authority from recognition
and acceptance by the accountancy profession.
ANS: D
2. Which of the following statements best describes
generally accepted accounting principles?
a. The accounting principles have been formulated in
the public sector.
b. The accounting principles have been developed on
the basis of such factors as usage and practical necessity.
c. The accounting principles are the same as laws
d. The accounting principles do not apply to SMEs.
ANS: B
3. Proper application of accounting principles is most
dependent upon
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
ANS: D
4. Once an accounting standard has been established
a. The standard is continually reviewed to see if
modification is necessary.
b. The standard is not reviewed.
c. The task of reviewing the standard is given to a
national organization of CPAs.
d. No revisions should be made to the standard.
ANS: A
CHAPTER 2
CONCEPTUAL FRAMEWORK
Assumptions and financial reporting
QUESTION 2-1 MULTIPLE CHOICE (IAA)
1. Which of the following statements best describes the
term “going concern?
a. When current liabilities of an entity exceed current
assets
b. The ability of the entity to continue in operation for
the foreseeable future
c. The potential to contribute to the flow of cash and
cash equivalents to the entity
d. The expenses exceed income
ANS: B
2. Which of the following is not an implication of the
going concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable
and appropriate.
c. The current and noncurrent classification of assets
and liabilities is justifiable and significant.
d. Amortizing research and development costs over
several periods is justifiable and appropriate.
ANS: D
3. Which basic assumption may not be followed when
an entity in bankruptcy prepares financial statements?
a. Economic entity assumption
b. Going concern assumption
c. Time period assumption
d. Monetary unit assumption
ANS: D
4. The financial statements that are prepared for the
business are separate and distinct from the financial
statements of the owners.
a. Going concern assumption
b. Matching principle
c. Economic entity assumption
d. Accounting period assumption
ANS:C
5. The economic entity assumption
a. Is inapplicable to unincorporated businesses.
b.Recognizes the legal aspects of business organizations
c. Requires periodic income measurement
d. Is applicable to all forms of business organizations
ANS: D
6. Which assumption serves as the basis for preparing
financial statements at regular artificial points in time?
a. Accounting entity
b. Going concern
c. Accounting period.
d. Stable monetary unit
ANS: C
7. Which basic accounting assumption is threatened by
the existence of severe inflation in an economy?
a. Monetary unit assumption
b. Periodicity assumption
c. Going concern assumption
d. Economic entity assumption
ANS: A
8. Which is not an important characteristic of the
financial statements that accountants currently prepare?
a. The information in financial statements is expressed
in units of money adjusted for changing purchasing
power.
b. Financial statements articulate with one another.
c. The information in financial statements is
summarized and classified to help meet users’ needs.
d. Financial statements can be justified only if the
benefits exceed the costs.
ANS: A
QUESTION 2-2 MULTIPLE CHOICE (AICPA ADAPTED)
1. The concept of accounting entity is applicable
a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business
organizations
c. Only to business organizations
d. Whenever accounting is involved
ANS: D
2. When a parent and subsidiary relationship exists,
consolidated financial statements are prepared in
recognition of
a. Legal entity
b. Economic entity
c. Stable monetary unit
d. Time period
ANS: B
3. The valuation of a promise to receive cash in the
future at present value is valid because of the
accounting concept of
a. Entity
b. Time period
c. Going concern
d. Monetary unit
ANS: C
4. What is the accounting concept that justifies the
usage of accruals and deferrals?
a. Going concern
b. Materiality
c. Consistency
d. Stable monetary unit
ANS: A
QUESTION 23 MULTIPLE CHOICE (IFRS)
1. What is the authoritative status of the Conceptual
Framework?
a. The Conceptual Framework has the highest level of
authority.
b. In the absence of a standard or an interpretation that
specifically applies to a transaction, the Conceptual
Framework shall be followed.
c. In the absence of a standard or an interpretation that
specifically applies to a transaction, management shall
consider the applicability of the Conceptual Framework
in developing and applying an accounting policy that
result in information that is relevant and reliable.
d. The Conceptual Framework applies only when the
International Accounting Standard Board develops new
or revised standards.
ANS: C
2. Which of the following statements is true concerning
the Conceptual Framework for Financial Reporting?
a. The Conceptual Framework is not a reporting
standard and does not define standard for any
particular measurement or disclosure issue.
b. The Conceptual Framework is concerned with general
purpose financial statements including consolidated
financial statements.
c. Nothing in the Conceptual Framework overrides any
specific Philippine Financial Reporting Standard.
d. All of these statements are true about the Conceptual
Framework.
ANS: D
3. The Conceptual Framework deals with all of the
following, except
a. The objective of financial reporting
b. The qualitative characteristics of useful financial
information
c. The definition, recognition and measurement of the
elements of financial statements
d. Supplementary information
ANS: D
4. The Conceptual Framework it intended to establish
a. Generally accepted accounting principles.
b. The meaning of “present fairly in accordance with
GAAP”
c. The objectives and concepts for use in developing
standards of financial accounting and reporting.
d. The hierarchy of sources of GAAP.
ANS: C
5. The Conceptual Framework should
a. Lead to uniformity of financial statements among
entities within the same industry.
b. Eliminate alternative accounting principles.
c. Guide multinational entities in developing generally
accepted auditing standards.
d. Define the basic objectives, terms and concepts of
accounting.
ANS: D
6. Which is not a purpose of the Conceptual Framework?
a. To provide definitions of key terms and concepts.
b. To provide specific guidelines for resolving situations
not covered by existing accounting standards.
c. To assist accountants in selecting among alternative
accounting and reporting methods.
d. To assist IASB in the standard-setting process.
ANS: B
QUESTION 2-4 MULTIPLE CHOICE (IM)
1. In the Conceptual Framework for Financial Reporting,
what provides the “why” of accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Element of financial statement
d. Objective of financial reporting
ANS: D
2. The underlying theme of the Conceptual Framework
is
a. Decision usefulness
b. Understandability
c. Timeliness
d. Comparability
ANS: A
3. Which is an important characteristic of the
Conceptual Framework?
a. To enable the accountancy profession to solve more
quickly emerging practical problems
b. To provide a foundation from which to build more
useful financial accounting standards
c. To enhance comparability of financial statements
across entities
d. All of these are important characteristics of the
Conceptual Framework
ANS: D
4. Which of the following statements is not true
concerning the Conceptual Framework?
a. The Conceptual Framework should be a basis for
standard setting.
b. The Conceptual Framework should allow practical
problems to be solved more quickly.
c. The Conceptual Framework should be based on
fundamental truth derived from the law of nature.
d. The Conceptual Framework should increase users’
understanding and confidence in financial reporting.
ANS: C
QUESTION 2-5 MULTIPLE CHOICE (IAA)
1. The primary focus of financial reporting has been on
meeting the needs of which of the following groups?
a. Management
b. Existing and potential investors, lenders and other
creditors
c. National and local taxing authorities
d. Independent CPAs
ANS: B
2. The overall objective of financial reporting is to
provide information
a. That is useful for decision making
b. About assets, liabilities and owners' equity
c. About financial performance during a period
d. That allows owners to assess management
performance
ANS: A
3. Which is an objective of financial reporting?
a. To provide information that is useful to those making
investing and credit decisions.
b. To provide information that is useful to management.
c. To provide information about prospective investors.
d. To provide information about ways to solve internal
and external conflicts about the entity.
ANS: A
4. Which is an objective of financial reporting?
a. To provide information that is useful to management
in making decisions.
b. To provide information that clearly portrays non-
financial transactions.
c. To provide information that is useful to assess the
amount, timing, and uncertainty of prospective cash
receipts.
d. To provide information that excludes claims against
the resources.
ANS: C
5. An objective of financial reporting is to provide
a. Information about the investors in the entity.
b. Information about the liquidation value of the
resources held by the entity.
c. Information that is useful in assessing cash flow
prospects.
d. Information that will attract new investors.
ANS: C
6. An objective of financial reporting is “assessing cash
flow prospects” which is interpreted to mean
a. Cash basis accounting is preferred over accrual basis
accounting.
b. Information about the financial effects of cash
receipts and cash payments is generally considered the
best indicator of present and continuing ability to
generate favorable cash flows.
c. Over the long run, trends in revenue and expenses
are generally more meaningful than trends in cash
receipts and disbursements.
d. All of the choices are correct regarding “assessing
cash flow prospects”.
ANS: C
QUESTION 2-6 MULTIPLE CHOICE (AICPA ADAPTED)
1. The objectives of financial reporting are based on
a. The need for conservatism
b. Reporting on management stewardship
c. Generally accepted accounting principles
d. The needs of the users of the information
ANS: D
2. Financial reporting pertains to
a. Individual business entities rather than to industries
or an economy as a whole or to members of society as
consumers
b. Individual business entities and an economy as a
whole or to members of society as consumers
c. Individual business entities and an economy as a
whole, rather than to industries or to members of
society as consumers
d. Individual business entities, industries and an
economy as a whole, rather than to members of society
as consumers
ANS: A
3. During a period when an entity is under the direction
of a particular management, financial reporting will
directly provide information about
a. Both entity performance and management
performance
b. Management performance but not entity
performance
c. Entity performance but not management
performance
d. Neither entity performance nor management
performance.
ANS: C
4. Which of the following is not listed as an objective of
financial reporting?
a. Financial reporting shall provide information about
entity resources, claims to those resources and changes
in them.
b. Financial reporting shall provide information useful in
evaluating management stewardship.
c. Financial reporting shall provide information useful in
investment, credit and similar decisions.
d. Financial reporting shall provide information useful in
assessing cash flow prospects.
ANS: B
5. Which is not an objective of financial reporting?
a. To provide information about assets and claims
against those assets
b. To provide information that is useful in assessing
sources and uses of cash
c. To provide information that is useful in lending and
investing decisions
d. To provide information about liquidation value of an
entity
ANS: D
CHAPTER 3
CONCEPTUAL FRAMEWORK
Qualitative characteristics
QUESTION 8-1 MULTIPLE CHOICE (IAA)
1. What are qualitative characteristics of financial
statements?
a. Qualitative characteristics are the attributes that
make the information provided in financial statements
useful to users.
b. Qualitative characteristics are broad classes of
financial effects of transactions and other events.
c. Qualitative characteristics are non-qualitative aspects
of an entity’s position and performance and changes in
financial position.
d. Qualitative characteristics measure the extent to
which an entity has complied with all relevant standards
and interpretations.
ANS: A
2. Qualitative characteristics
a. Are considered either fundamental or enhancing.
b. Contribute to the decision-usefulness of financial
reporting information.
c. Distinguish better information from inferior
information for decision-making purposes.
d. All of the choices are correct.
ANS: D
3. The fundamental qualitative characteristics are
a. Relevance and faithful representation
b. Relevance, faithful representation and materiality
c. Relevance and reliability
d. Faithful representation and materiality
ANS: A
4. Accounting information is considered relevant when
it
a. Can be depended upon to represent the economh1
conditions and events that it is intended to represent
b. Is capable of making a difference in a decision.
c. Is understandable by reasonably informed users of
accounting information.
d. Is verifiable and neutral.
ANS: B
5. The ingredients of relevant financial information are
a. Predictive value and confirmatory value
b. Predictive value, confirmatory value and timeliness
c. Predictive value, confirmatory value and materiality
d. Predictive value, confirmatory value, timeliness and
materiality
ANS: A
6. What is the quality of information that gives
assurance that it is reasonably free from error and bias?
a. Relevance
b. Faithful representation
c. Verifiability independent measurers using the same measurement
d. Neutrality method is
ANS: B a. Relevance
b. Understandability
7. Which of the following is the best description of c. Verifiability
faithful representation in relation to information in d. Neutrality
financial statements? ANS: C
a. Influence on the economic decision of users
b. Inclusion of a degree of caution 5. Which concept of accounting holds that, to the
c. Freedom from material error maximum extent possible, financial statements shall be
d. Comprehensibility to users based on arm’s length transactions?
ANS: C a. Revenue realization
b. Verifiability
8. The ingredients of faithful representation are c. Monetary unit
a. Completeness and neutrality d. Matching
b. Completeness and free from error ANS: B
c. Completeness, neutrality and free from error
d. Neutrality, free from error and conservatism 6. An entity issuing the annual financial reports within
ANS: C one month at the end of reporting period is an example
of which enhancing quality of accounting information?
QUESTION 3-2 MULTIPLE CHOICE (IAA) a. Neutrality
1. The enhancing qualitative characteristics of financial b. Timeliness
information are c. Predictive value
a. Comparability and understandability d. Representational faithfulness
b. Verifiability and timeliness ANS: B
c. Comparability, understandability and verifiability
d. Comparability, understandability, verifiability and 7. Allowing entities to estimate rather than physically
timeliness count inventory at an interim period is an example of a
ANS: D tradeoff between
a. Verifiability and comparability
2. Financial information exhibits consistency when b. Timeliness and comparability
a. Accounting procedures are adopted which smooth c. Timeliness and verifiability
net income and make results consistent between years d. Neutrality and consistency
b. Gains and losses are shown separately in the income ANS: C
statement.
c. Accounting entities give similar events the same 8. Which of the following statements is true in relation
accounting treatment each period. to the enhancing qualitative characteristic of
d. Expenditures are reported as expenses and netted understandability of financial information?
against revenue in the period when paid. a. Users have a reasonable knowledge of business and
ANS: C economic activities and review the information with
reasonable diligence.
3. When information about two different entities b. Users are expected to have significant business
engaged in the same industry has been prepared and knowledge.
presented in similar manner, the information exhibits c. Financial statements shall exclude complex matters.
the enhancing qualitative characteristic of d. Financial statements shall be free from material error.
a. Relevance ANS: A
b. Faithful representation
c. Consistency QUESTION 3-3 MULTIPLE CHOICE (IAA)
d. Comparability
ANS: D 1. The overriding qualitative characteristic of accounting
information is
4. The characteristic that is demonstrated when a high a. Relevance
degree of consensus can be secured among b. Understandability
c. Faithful representation c. Information is measured and reported in a similar
d. Decision usefulness fashion across entities.
ANS: D d. Information is timely.
ANS: C
2. Which of the following terms best describes
information that influences the economic decisions of 8. What is meant by consistency when discussing
users? financial accounting information?
a. Reliable a. Information is measured and reported in a similar
b. Prospective fashion across points in time.
c. Relevant b. Information is timely.
d. Understandable c. Information is measured similarly across the industry.
ANS: C d. Information is verifiable.
ANS: A
3. What is the quality of information that enables users
to better forecast future operations? 9. Which of the following is not an enhancing qualitative
a. Faithful representation characteristic?
b. Materiality a. Understandability
c. Comparability b. Profit-oriented
d. Relevance c. Timeliness
ANS: D d. Comparability
ANS: B
4. Which of the following terms best describes
information in financial statements that is neutral? QUESTION 3-4 MULTIPLE CHOICE (IAA)
a. Understandable 1. An item would be considered material when
b. Comparable a. The expected benefits of disclosure exceed the
c. Relevant additional costs.
d. Unbiased b. The impact on earnings is greater than 10%.
ANS: D c The standard definition of materiality is met.
d. The omission or misstatement of the amount would
5. For information to be useful, the linkage between the make a difference to the users.
users and the decisions made is ANS: D
a. Relevance
b. Faithful representation 2. Which statement about materiality is true?
c. Understandability a. An item must make a difference or it need not be
d. Verifiability disclosed
ANS: C b. Materiality is a matter of relative size.
c. An item is material if the inclusion or omission would
6. An enhancing quality of financial accounting influence or change the judgment of a reasonable
information is that person. d. All of these statements are true about
a. Information must be decision-useful to all potential materiality.
users of financial reporting. ANS: D
b. General-purpose financial reporting is the primary
source of information for users. 3. The Conceptual Framework includes which of the
c. Users need reasonable knowledge of business and following constraints?
financial accounting matters to understand the a. Prudence
information contained in financial statements. b. Substance over form
d. All of the choices are correct. c. Cost
ANS: C d. All of the choices are constraints
ANS: C
7. What is meant by comparability when discussing
financial accounting information? 4. Which of the following statements best describes the
a. Information has predictive and confirmatory value. cost and benefit constraint?
b. Information is reasonably free from error.
a. The benefit of the information must be greater than
the cost of providing it.
b. Financial information should be free from cost to
users of the information.
c. Cost of providing financial information is not always
evident or measurable but must be considered.
d. All of the choices are correct.
ANS: A
5. The Conceptual Framework
a. Includes prudence or conservatism which means
when in doubt, choose the solution that will be least
likely to overstate assets and income.
b. Includes prudence or conservatism which means
when in doubt, choose the solution that will be least
likely to understate liabilities and expenses.
c. Includes prudence or conservatism as a desirable but
not required quality of accounting information.
d. Excludes prudence or conservatism because it is
inconsistent with neutrality.
ANS: D
QUESTION 3-5 Multiple choice (AICPA Adapted)
1. The ability through consensus among measurers to
ensure that information represents what it purports to
represent is an example of the concept of
a. Relevance
b. Verifiability
c. Comparability
d. Feedback value
ANS: B
2. Which of the following accounting concepts states
that an accounting transaction shall be supported by
sufficient evidence to allow two or more qualified
individuals to arrive at essentially similar conclusion?
a. Conservatism
b. Objectivity
c. Periodicity
d. Stable monetary unit
ANS: B
3. Objectivity is assumed to be achieved when an
accounting transaction
a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c Involves an arm’s length transaction between two
independent parties
d. Allocates revenue or expenses in a rational and
systematic manner
ANS: C
4. Proponents of historical costs maintain statements
prepared using historical costs are more
a. Objective
b. Relevant
c. Indicative of purchasing power
d. conservative
ANS: A
5. Which of the following statements is an argument
against historical cost?
a. Fair value is more relevant.
b. Historical cost is based on exchange transaction.
c. Historical cost is verifiable and reliable.
d. Fair value is subjective.
ANS: A
6. Which of the following situations violates the concept
of faithful representation?
a. Financial statements were issued nine months late.
b. Data on segments having the same expected risks
and growth rates are reported to analysts estimating
future profits.
c. Financial statements included an item of property,
plant and equipment with carrying amount increased to
management estimate of market value.
d. Management reports refer to new projects
undertaken but the financial statements never report
project results.
ANS: C
7. What is the underlying concept governing the
generally accepted accounting principles pertaining to
recording gain contingencies?
a. Conservatism
b. Relevance
c. Consistency
d. Reliability
ANS: A
8. The usefulness of providing information in financial
statements is subject to the constraint of
a. Consistency
b. Cost-benefit
c. Reliability
d. Representational faithfulness
ANS: A
CHAPTER 4
CONCEPTUAL FRAMEWORK
ELEMENTS OF FINANCIAL STATEMENTS
QUESTION 4-1 MULTIPLE CHOICE (ACP)
1. Which of the following statements is true about the
elements of financial statements?
a. The elements directly related to the measurement of
financial position are asset, liability and equity.
b. The elements directly related to the measurement of
financial performance are income and expense.
c. The elements of financial position describe amounts
of resources and claims against resources at a moment
in time.
d. All of these statements are true about elements of
financial statements.
ANS: D
2. It is a resource controlled by the entity as a result of
past event and from which future economic benefits are
expected to flow to the entity.
a. Asset b. Liability c Equity d. Income
ANS: A
3. It is a present obligation of an entity arising from past
event the settlement of which is expected to result in
an outflow from the entity of resources embodying
economic benefits.
a. Asset b. Liability c. Equity d. Expense
ANS: B
4. It is the residual interest in the assets of the entity
after deducting all of the liabilities.
a. Income
b. Expense
c. Net income
d. Equity
ANS: D
5. An income is recognized when
a. It is probable that future economic benefit will flow
to the entity and the economic benefit can be measured
reliably.
b. It is possible that future economic benefit will flow to
the entity and the economic benefit can be measured
reliably.
c. The entity obtains control of the future economic
benefit.
d. The future economic benefit can be measured
reliably
ANS: A
6. An expense is recognized when
a. It is probable that a decrease in future economic
benefit has occurred.
b. The decrease in future economic benefit can be
measured reliably. .
c. It is probable that a decrease in future economic
benefit has occurred and the decrease in the future
economic benefit can be measured reliably.
d. It is probable that an increase in future economic
benefit has occurred and the increase in future
economic benefit can be measured reliably.
ANS: C
7. It is the process that involves the simultaneous or
combined recognition of revenue and expenses that
result directly from the same transactions and other
events.
a. Matching of cost with revenue
b. Matching of revenue with cost
c. Systematic and rational allocation
d. Immediate recognition
ANS: A
8. When economic benefits are expected to arise over
several accounting periods and the association with
income can only be broadly or indirectly determined,
expenses are recognized on the basis of
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
d. Realization
ANS: D
9. An expense is recognized immediately
a. When expenditure produces no future economic
benefit.
b. When cost incurred ceases to qualify as an asset.
c. When expenditure produces future economic benefit.
d. When expenditure produces no future economic
benefit and when cost incurred ceases to quality as an
asset.
ANS: D
10. It is the process of determining the monetary
amounts at which the elements of the financial
statements are recognized and carried in the financial
statements.
a. Measurement b Recognition c. Presentation d.
Recording
ANS: A
QUESTION 4-2 MULTIPLE CHOICE (IAA)
1. Which of the following measurement attributes is the
most relevant?
a. Present value
b. Exit value
c. Current cost
d. Historical cost
Ans: A c. At the point of cash collection.
d. At appropriate points throughout the operating cycle.
2. It is the amount of cash or cash equivalent that would ANS: A
have to be paid if the same or an equivalent asset was
have to be paid if the same or an acquired currently. 4. Normally, revenue from sale of goods is recognized
a. Historical cost a. When the customer order is received.
b. Current cost b. When the customer order is accompanied by a check.
c. Realizable value c. Only if the transaction will create an account
d. Present value receivable.
ANS: B d. When the title to the goods changes.
ANS: D
3. Which of the following terms best describes assets
recorded at the amount that represents the immediate 5. Revenue may be recognized
purchase cost of an equivalent asset? a. At the point of sale
a. Inflation-adjusted cost b. During production
b. Realizable value c. At the end of production
c. Present value d. All of the choices may be acceptable for revenue
d. Current cost recognition
ANS: D ANS: D

4. It is the amount of cash that could currently be 6. Which of the following mat not be acceptable
obtained by selling the asset in an orderly disposal. deviation from recognizing revenue at the point of sale?
a. Realizable value a. Upon receipt of cash
b. Fair value b. During production
c. Market value c. Upon receipt of order
d. Present value d. End of production
ANS: A ANS: C

QUESTION 4-3 MULTIPLE CHOICE (IAA) 7. Which of the following is not an accepted basis for
1. Which of the following statements describes the recognition of revenue?
revenue recognition principle? a. Passage of time
a. Cash is received. b. Performance of service
b. It is probable that future economic benefit will flow c. Completion of percentage of a project
to the entity and the amount can be measured reliably. d. Upon signing of contract
c. Production is complete and there is an active market ANS: D
for the product.
d. Production is complete. 8. Which of the following represents the least desirable
ANS: B choice for the recognition of revenue?
a. During production
2. The revenue principle states that revenue shall be b. When a sale occurs
recognized at a point when c. When cash is collected
a. An exchange transaction has occurred and the d. When production is completed
earning process is essentially complete. ANS: C
b. An order for shipment of merchandise has been
received. 9. Revenue from an artistic performance is recognized
c. A contract between buyer and seller has been signed. when
d. The seller has shipped merchandise under terms that a. The audience registers for the event online.
the customer need not pay until sold. b. The tickets for the concert are sold.
ANS: A c. Cash has been received from the ticket sales.
d. The event takes place.
3. Generally, revenue is recognized ANS: D
a. At the point of sale.
b. When cause and effect are associated. QUESTION 4-4 MULTIPLE CHOICE (AICPA ADAPTED)
1. The term “revenue recognition" conventionally
means
a. The process of identifying transactions to be recorded
as revenue in an accounting period.
b. The process of measuring and relating revenue and
expenses of an entity for an accounting period.
c. The earning process which gives rise to revenue
realization.
d. The process of identifying those transactions that
result in an inflow of assets from customers.
ANS: A
2. Under what condition is it proper to recognize
revenue prior to the sale of the merchandise?
a. When the concept of consistency is complied with.
b. When the revenue is to be reported as an installment
sale.
c. When the ultimate sale of the goods is at an assured
sales price.
d. When management has a long-established policy.
ANS: C
3. Which of the following means the process of
converting noncash resources and rights into cash or
claims to cash?
a. Allocation b. Collection c. Recognition d. Realization
ANS: D
4. Gains on assets unsold are identified in a precise
sense by the term
a. Unrecorded
b. Unrealized
c. Unrecognized
d. Unallocated
ANS: B
5. The term “recognized” is synonymous with the term
a. Recorded
b. Realized
c. Matched
d. Allocated
ANS: A
6. Which of the following statements conforms to the
realization concept?
a. Depreciation was assigned to product unit cost
b. Equipment was sold in exchange for a note receivable
c. Cash was collected on accounts receivable
d. Product unit costs were assigned to cost of goods
sold
ANS: B
7. Revenue may result from
a. A decrease in an asset from primary operations.
b. An increase in an asset from incidental transactions.
c. An increase in a liability from incidental transactions.
d. A decrease in a liability from primary operations
ANS: D
QUESTION 4-5 MULTIPLE CHOICE (AICPA ADAPTED)
1. Costs that can be reasonably associated with specific
revenue but not with specific products should be
a. Charged to expense in the period incurred.
b. Allocated to specific products based on the best
estimate of the product processing time.
c. Expensed in the period in which the related revenue
is recognized.
d. Capitalized and amortized over a reasonable period
ANS: C
2. Why are certain costs of doing business capitalized
when incurred and then depreciated or amortized over
subsequent accounting periods?
a. To reduce the income tax liability
b. To aid management in the decision-making process
c. To match the costs of production with revenue as
earned
d. To adhere to the accounting concept of conservatism
ANS: C
3. Which of the following is an example of the expense
recognition principle of associating cause and effect?
a. Allocation of insurance cost
b. Sales commission
c. Depreciation of property, plant and equipment
d. Officers’ compensation
ANS: B
4. Which of the following principles best describes, the
conceptual rationale for the method of matching
depreciation with revenue?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
ANS: B
5. Which of the following is an application of the
principle of systematic and rational allocation?
a. Amortization of intangible asset
b. Sales commissions
c. Research and development cost
d. Officers’’ salaries
ANS: A
6. Which of the following should be expensed under the a. Post the journal entries to the ledger accounts,
principle of systematic and rational allocation? prepare a worksheet, and then take a trial balance.
a. Salesman’s monthly salaries b. Journalize the closing entries, post the closing entries,
c. Freight out and then take a post-closing trial balance.
d. Electricity to light office building c. Prepare the income statement, prepare the
ANS: B statement of financial position and then prepare a
worksheet.
7. Which of the following would be match with current d. Post the closing entries, take a post-closing trial
revenue on a basis other than association of cause and balance, and then journalize the closing entries.
effect? ANS: B
a. Goodwill
b. Sales commission 4. An optional step in the accounting cycle is the
c. Cost of goods sold preparation of
d. Purchases on account a. Adjusting entries
ANS: A b. Posting to the ledger and unadjusted trial balance
c. Closing entries
8. The matching principle is best demonstrated by d. Post-closing trial balance and reversing entries
a. Not recognizing any expense unless some revenue is ANS: D
realized
b. Associating effort with accomplishment QUESTION 5-2 MULTIPLE CHOICE (IAA)
c. Recognizing prepaid rent received as revenue 1. In recording transactions
d. Establishing an appropriation for contingency a. The word 'debit” means increase and the word credit
ANS: B means decrease
b. Assets, expenses, and drawing accounts are debited
9. Which of the following is not a theoretical basis for for increases
the allocation of expense? c. Liabilities, revenue and drawing accounts are debited
a. Summarization for increase
b. Classification d. Assets, expenses, and capital accounts are debited
c. Profit maximization for increases.
d. Immediate recognition ANS: B
ANS: C
2 Which is false concerning the rules of debit and credit?
CHAPTER 5 a. The left side of an account is always the debit side
ACCOUNTING PROCESS and the right side is always the credit side
QUESTION 5-1 MULTIPLE CHOICE (1AA) b. Increases in assets and expenses are debit entries,
and decreases in liabilities, equity and revenue are
1. What is the last step in the accounting cycle credit entries
considering the following? c. The normal balance of any account appears on the
a. Prepare a post-closing trial balance side for recording increases
b. Journalize and post-closing entries d. The word “debit” means to increase and the word
c. Prepare financial statements “credit” means to decrease.
d. Journalize and post adjusting entries ANS: D
ANS: A
3. Debits
2. Which is done first in the accounting process? a. Increase assets and decrease expenses, liabilities,
a. Financial statements are prepared revenue and equity.
b. Adjusting entries are recorded b. Increase assets and expenses and decrease liabilities,
c. Nominal accounts are closed revenue and equity.
d. A post-closing trial balance is prepared c. Increase assets and equity and decrease liabilities,
ANS: B expenses and revenue.
d. Decrease assets and expenses and increase liabilities,
3. What is the logical order of the following steps in the revenue and equity.
accounting cycle? ANS: B

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
of an 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 credit.
ANS: C
5. The debit and credit analysis of a transaction
normally take 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.
ANS: A
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.
ANS: D
7. The normal balance of an account is on the
a. Debit side of the account
b. Credit side of the account
c. Side represented by increases in the account balance
d. Side represented by decreases in the account balance
ANS: C
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.
ANS: C
QUESTION 5-3 MULTIPLE CHOICE (1AA)
1. The trial balance
a. Proves that debits are greater than credits when the
entity has net income
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.
ANS: C
2. Which of the following is a not 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.
ANS: D
3. Which of the following statements 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.
ANS: C
4. Which of the following statements regarding a trial
balance is incorrect?
a. A trial balance 1s a test of the equality of the debit
and credit balances 1n 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.
ANS: C
5. An unadjusted trial balance
a. Provides information that is helpful when making
adjusting entries
b. Proves that no errors have been made in the
accounting records
c. Usually contains the account balances that should
appear in the financial statements
d. Is a summary taken directly from the general journal
ANS: A
6. The trial balance
a. Is a listing of all the accounts and their 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
while the general ledger is used to prepare the income
statement.
ANS: C
c. Reflecting unrecorded expenses incurred during an
accounting period
d. Reflecting unrecorded revenue earned during an
accounting period
ANS: C
5. An adjusting entry should never include
a. A debit to revenue and a credit to liability
b. A debit to expense anda credit to liability
c. A debit to liability and a credit to revenue
d. A debit to expense and a credit to revenue
ANS: D

7. 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
ANS: D
6. 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 enable the financial statements to
conform with standards.
c. Include both accruals and deferrals.
d. All choices are correct about adjusting entries
ANS: D

QUESTION 5-4 MULTIPLE CHOICE (1AA) 7. Which statement is incorrect regarding adjusting
entries?
1. Adjusting entries involve a. Cash is neither debited nor credited.
a. Only real accounts b. Each adjusting entry affects one statement of
b. Only nominal accounts financial position account and one income statement
c. Only capital accounts account.
d. One real and one nominal account c. Each adjusting entry affects one revenue account and
ANS: D one expense account
d. Adjusting entries involve accruals or deferrals.
2. If an expense has been incurred but not yet recorded, ANS: C
the adjusting entry would involve
a. A liability and an asset 8. An entity must make adjusting entries
b. A liability and revenue a. To ensure that the revenue recognition and expense
c. An expense and an asset recognition principles are followed.
d. An asset and revenue b. Each time it prepares an income statement and a
ANS: C statement of financial position.
c. To account for accruals or deferrals.
3. The adjusting entry for depreciation has the same d. All of the choices are correct regarding adjusting
effect as the adjusting entry for entries.
a. An unearned income ANS: D
b. A prepaid expense
c. An accrued expense 9. Which statement best defines an accrual?
d. An accrued income a. Adjusting entries where cash flow precedes revenue
ANS: B or expense recognition
b. Adjusting entries where revenue or expense
4. An adjusting entry to accrue wages incurred but not recognition precedes cash flow
yet paid is an example of c. Adjusting entries where cash flow and revenue or
a. Aligning recorded costs with appropriate accounting expense recognition are simultaneous
periods d. Adjusting entries where revenue or expenses are
b. Aligning recorded revenue with appropriate recognized in the absence of cash flow evidence
accounting periods ANS: B

QUESTION 5-5 MULTIPLE CHOICE (IAA)
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
ANS: D
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
ANS: C
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.
ANS: D
4. Which of the following statements 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 those
were started in a prior period.
ANS: C
5. The closing process
a. Is done each time a transaction takes place and is
journalized.
b. Transfers all income statement items to their related
statement of financial position account.
c. Posts all closing entries to the appropriate general
ledger account.
d. All of the choices are correct regarding the closing
process.
ANS: C
6. The post-closing trial balance
a. Provides a convenient listing of account balances that
can be used to prepare the financial statements.
b. Does not include nominal accounts.
c. Is identical to the statement of financial position.
d. Proves that accounts have been closed properly.
ANS: B
7. 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.
ANS: D
QUESTION 5-6 MULTIPLE CHOICE (IAA)
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.
ANS: C
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.
ANS: B
3. Which of the following statements 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 reported in the a. The adjusting entry to record inventory at year-end
statement of financial position for the previous period. b. The adjusting entry to record the portion of rental
ANS: D received in advance that is unearned at year-end
c. The adjusting entry to record doubtful accounts
4. Reversing entries apply to d. The adjusting entry to record amortization of patent
a. All adjusting entries ANS: B
b. All deferrals
c. All accruals CHAPTER 6
d. All closing entries
ANS: C FINANCIAL STATEMENTS
QUESTION 6-1 MULTIPLE CHOICE (PAS 1)
5. Reversing entries apply to all of the following, except
a. Unearned revenue 1. A complete set of financial statements includes the
b. Accrued wages following components, except
c. Prepaid insurance a. Statement of financial position, statement of
d. Depreciation comprehensive income and statement of cash flows.
ANS: D b. Statement of changes in equity
c. Notes, comprising a summary of significant
6. Adjusting entries that should be reversed include accounting policies and other explanatory information
a. All accrued revenue d. Reports and statements such as environmental
b. All accrued expenses reports and value added statements.
c. Those that debit an asset or credit a liability ANS: D
d. All of these adjusting entries require reversal
ANS: D 2. What is the objective of financial statements?
a. To provide information about the financial position,
7. A reversing entry should never be made for an financial performance and changes in financial position
adjusting entry that of an entity that is useful to a wide range of users in
a. Accrues unrecorded revenue. making economic decisions.
b. Adjusts expired costs from an asset account to an b. To prepare and present a statement of financial
expense account. position, statement of comprehensive income,
c. Accrues unrecorded expenses. statement of cash flows and statement of changes in
d. Adjusts unexpired costs from an expense account to equity.
an asset account. c. To prepare and present relevant, reliable, comparable
ANS: B and understandable information to investors and
creditors.
8. If an entity initially records prepayments in real d. To prepare and present financial statements in
accounts and makes reversing entries when appropriate, accordance with all applicable PFRS and Interpretations.
which of the following adjusting entries should be ANS: A
reversed?
3. To meet the objective of providing information about
a. The adjusting entry to record depreciation for the financial position, financial performance and cash flows
period of an entity, financial statements should provide
b. The adjusting entry to record the portion of service information about all of the following, except
fees received in advance that IS earned by year-end a. Assets, liabilities and equity
c. The adjusting entry to record supplies used during the b. Income and expenses, including gains and losses
period c. Contributions by and distribution to owners in their
d. The adjusting entry to record service fees earned by capacity as owners.
year-end but not billed d. Nature of business activities
ANS: D ANS: D

9. If an entity initially records prepayments in nominal 4. Which of the following statements is true concerning
accounts, which of the following adjusting entries financial statements?
should be reversed?
a. Financial statements do not provide all the
information that users may need to make economic
decisions since these largely portray the financial effects
of past events and do not necessarily provide
nonfinancial information.
b. Financial statements show the results of the
stewardship of management or the accountability of
management for the resources entrusted to it.
c. The primary responsibility for the preparation and
presentation of the financial statements of an entity is
reposed in the management of the entity.
d. All of these statements are true concerning financial
statements.
ANS: D
QUESTION 6-2 MULTIPLE CHOICE (PAS 1)
1. Which of the following statements 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 the notes.
ANS: D
2. Which of the following cannot be considered fair
presentation?
a. To select and apply accounting policies in accordance
with applicable PFRS.
b. To present information in a manner that provides
relevant, reliable, comparable and understandable
information.
c. To provide additional disclosures when compliance
with specific PFRS is insufficient to understand the
entity’s financial position and financial performance.
d. To rectify inappropriate accounting policies either by
disclosure of the accounting policies used or by notes or
explanatory information.
ANS: D
3. Financial statements must be prepared at least
a. Annually
b. Quarterly
c. Semiannually
d. Every two years
ANS: A
4. It is the presentation and classification of financial
statement items on a uniform basis from one
accounting period to the next.
a. Comparable information
b. Consistency of presentation
c. Aggregation
d. Accrual basis
ANS: B
5. 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 to
arrive at net assets.
d. Gains or losses from disposal of noncurrent assets are
reported by deducting from the proceeds the carrying
amount of the assets and the related disposal cost.
ANS: D
6. A third statement of financial position as at the
beginning of the earliest comparative period 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. In all of the above cases.
ANS: D
7. An entity shall prepare how many statements of
financial position as a result of retrospective application,
retrospective restatement and reclassification of items
in the financial statements?
a. Two
b. Three
c. Four
d. One
ANS: B
QUESTION 6-3 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 in financial statements
if these items are material.
d. Must be presented separately in financial statements
even if these items are immaterial.
ANS: C

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 or
misstatement judged in the surrounding circumstances.
d. The judgment of management.
ANS: C
3. An entity must disclose comparative information for
a. The previous comparable period for all amounts
reported.
b. The previous comparable period for all amounts
reported and for all narrative and descriptive
information.
c. The previous comparable period for all amounts
reported, and for all narrative and descriptive
information when it is relevant to an understanding of
the financial statements of the current period.
d. The previous two comparable periods for all amounts
reported.
ANS: C
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 to reclassify the comparative
amounts.
c. Must reclassify the comparative amounts, unless it is
impracticable to do so.
d. Must reclassify the current year amounts only.
ANS: C
5. An entity shall present
a. The statement of cash flows more prominently than
the other statements.
b. The statement of financial position more prominently
than the other statements.
c. The statement of comprehensive income more
prominently than the other statements.
d. Each financial statement with equal prominence.
ANS: D
QUESTION 6-4 MULTIPLE CHOICE (IFRS)
1. Which is not a component of the financial statements?
a. Statement of financial position
b. Statement of changes in equity
c. Board of directors' report
d. Notes to the financial statements
ANS: C
2. Which of the following is included in a complete set
of financial statements?
a. A statement by the board of directors 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
ANS: B
3. Which of the following is included as a component of
financial statements?
a. A statement of retained earnings
b. Accounting policies
c. An auditor’s report
d. A directors’ report
ANS: B
4. When an entity changed the end of the reporting
period longer or shorter than one year, an‘ entity shall
disclose all of the following, 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 in the current
year.
ANS: D
5. Which of the following information is not specifically
a required disclosure in relation to financial statements?
a. Name of the reporting entity or other means of
identification and any change in that information from
the previous year
b. Names of major shareholders of the entity
c. Level of rounding used in presenting the financial
statements
d. Whether the financial statements cover the individual
entity or a group of entities
ANS: B
CHAPTER 7
STATEMEN T OF FINANCIAL POSITION
QUESTION 7-1 MULTIPLE CHOICE (IAA)
1. 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
ANS: B
2. Which criticism is 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
ANS: B
3. 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
ANS: A
4. Which is a limitation of the 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 of
financial position
ANS: D
QUESTION 7-2 MULTIPLE CHOICE (PAS 1)
1 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.
ANS: D
2. 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.
ANS: D
3. 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. Is a nonprofit organization
ANS: A
4. 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.
ANS: D
5. 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 and equity after
liabilities.
d. Noncurrent assets before current assets, current
liabilities before noncurrent liabilities and equity after
liabilities.
ANS: A
6. A financial liability due within twelve months after
the reporting period shall be classified as noncurrent
a When it is re-enhanced 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.
ANS: D
7. 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.
ANS: C
QUESTION 7-3 MULTIPLE CHOICE (IFRS)
1. 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
c. Noncurrent liabilities
d. Noncurrent assets
ANS: D
2. In which section of the statement of financial position
should employment taxes that are due for settlement in
15 months' time be presented?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
ANS: A
3. 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?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
ANS: C
4. 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
ANS: A
5. 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
ANS: D
6. 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
ANS: D
7. Which of the following statements 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 noncurrent assets in the
current year should be recognized in the statement of
changes in equity.
ANS: D
QUESTION 7-4 MULTIPLE CHOICE (AICPA ADAPTED)
1. In analyzing financial statements, which financial
would a potential investor primarily use to assess
liquidity and financial flexibility?
a. Statement of financial position
b. Income statement
c. Statement of retained earnings
d. Statement of cash flows
ANS: A
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 provides future benefits
ANS: D
3. Conceptually; asset valuation accounts are
a. Assets
b. Neither assets nor liabilities
c. Part of shareholders’’ equity
d. Liabilities
ANS: B
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.
ANS: D
5. The term “net assets” represents
a. Retained earnings
b. Current assets less current liabilities
c. Total contributed capital
d. Total assets less total liabilities
ANS: D
6 When classifying assets as current and noncurrent
a. The amounts at which current assets are reported
must reflect realizable cash value.
b. Prepayments for items such as insurance or rent are
included in other assets rather than as current assets.
c. The time period by which current assets are
distinguished from noncurrent assets is determined by
the seasonal nature of the business.
d. Assets are classified as current if these are reasonably
expected to be realized in cash or consumed during the
normal operating cycle.
ANS: D
1. Which should be classified as current asset?
a. Trade installment accounts receivable normally
collectible in 18 months
b. Cash designated for the redemption of callable
preference shares
c. Cash surrender value of a life insurance policy
d. A deposit on machinery ordered, delivery of which
will be made within six months
ANS: A
2. Which should not be considered as a current asset?
a. Installment notes receivable due over 18 months in
accordance with normal trade practice
b. Prepaid taxes
c. Trading securities
d. Cash surrender value of life insurance policy
ANS: D
3. Current assets should never include
a. A receivable not collectible within one year
b. Current tax asset
c. Goodwill arising in a business combination ‘
d. Premium paid on a bond investment
ANS: C

7. The operating cycle concept 4. Equity investments held to finance construction of

a. Causes the distinction between current and additional plant should be classified as
noncurrent to depend on cash realization within one a. Current assets
year. b. Property, plant, and equipment
b. Permits some assets to be classified as current even c. Intangible assets
though these are more than one year removed from d. Noncurrent investments
becoming cash. ANS: D
c. Has become obsolete.
d. Affects the income statement but not the statement 5. Which of the following is not a noncurrent
of financial position. investment?
ANS: B a. Cash surrender value of life insurance policy
b. Franchise
8. The basis for classifying assets as current or c. Land held for speculation
noncurrent is the period of time normally elapsed from d. A sinking fund
the time the entity expends cash to the time it converts ANS: B

a. Inventory back into cash or 12 months, whichever is 6. Accrued revenue would normally appear in the
shorter. statement of financial position under
b. Receivables back into cash or 12 months, whichever a. Noncurrent assets
is longer. b. Current liabilities
c. Tangible fixed assets back into cash or 12 months, c. Long-term liabilities
whichever is longer. d. Current assets
d. Inventory back into cash or 12 months, whichever is ANS: D
longer.
ANS: D 7. Which should be classified as a noncurrent asset?
a. Plant expansion fund
QUESTION 7-5 MULTIPLE CHOICE (AICPA ADAPTED) b. Prepaid rent
c. Supplies
d. Goods in process
ANS: A
8. 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
ANS: C
9. The essential characteristics of an asset include all of
the following, except
a. The asset is the result of past event.
b. The asset provides future economic benefit.
c. The cost of the asset can be measured reliably.
d. The asset is tangible.
ANS: D
QUESTION 7-6 MULTIPLE CHOICE (IAA)
1. Which of the following would likely prepare the most
accurate financial forecast for a corporate entity based
on empirical evidence?
a. Investors using statistical models to generate
forecasts
b. Corporate management
c: Financial analysts
d. Independent certified public accounts
ANS: B
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 the results obtained by using a
wide variety of accounting policies
ANS: B
3. The accrual basis of accounting is most useful for
a. Determining the amount of income tax.
b. Predicting the short-term financial performance.
c. Predicting the long-term financial performance.
d. Determining the amount of dividends.
ANS: C
4. The financial statements prepared under GAAP
a. Do not articulate with one another.
b. Reflect a single historical cost measurement basis.
c. Are not highly precise because estimate and
judgment must be made.
d. Contain a limited number of future projections.
ANS: C
CHAPTER 8
NOTES TO FINANCIAL STATEMENTS
QUESTION 8-1 MULTIPLE CHOICE (PAS 1)
1. Which is a purpose of the notes to financial
statements?
a. To present information about the basis of
preparation of the financial statements and the specific
accounting policies used.
b. To disclose the information required by Philippine
Financial Reporting Standards that is not presented
elsewhere in the financial statements.
c. To provide additional information which is not
presented on the face of the financial statements but
that is necessary for a fair presentation.
d. All of these can be considered a purpose of the notes
to financial statements.
ANS: D
2. Which is the first item in presenting the notes to
financial statements?
a. Statement of compliance with PFRS
b. Other disclosures, such as contingent liabilities,
unrecognized contractual commitments and non-
financial disclosures
c. Supporting information for items presented on the
face of the financial statements
d. Summary of significant accounting policies
ANS: A
3. An entity is required to disclose all of the following
nonfinancial information, except
a. A description of the nature of the entity’s operations
and the principal activities
b. The name of the parent entity and the ultimate
parent
c. Domicile and legal form of the entity, the country of
incorporation and address of the registered office.
d. Names and addresses of directors and officers.
ANS: D
QUESTION 8-2 MULTIPLE CHOICE (IFRS)
1. The presentation of the notes to financial statements
in a systematic manner
a. Is voluntary
b. Is mandatory
c. ls mandatory, as far as practicable
d. Depends on the industry
ANS: C

2. The cross-reference between each line item in the
financial statements and any related information
disclosed in the notes to financial statements
a. Is voluntary
b. Is mandatory
c. Depends on the industry
d. Is either voluntary or mandatory
ANS: B
a. The measurement basis used in preparing the
financial statements.
b. All the measurement bases irrespective of whether
used by the entity.
c. The measurement basis used in preparing the
financial statements and the accounting policies used.
d. All of the measurement bases and the accounting
policy choices available to the entity irrespective of
whether used.
ANS: C

3. Disclosure of information about key sources of 4. Which of the following information should be
estimation uncertainty disclosed in the summary of significant accounting
a. Is voluntary policies?
b. Is mandatory a. Refinancing of debt subsequent to the reporting
c. Is either voluntary or mandatory period
d. Depends on the industry b. Guarantee of indebtedness of others
ANS: B c. Criteria for determining which investments are
treated as cash equivalents
4. Disclosure of information about judgments d. Adequacy of pension plan assets relative to vested
a. Is voluntary benefits
b. Is mandatory ANS: C
c. Is either voluntary or mandatory
d. Depends on the industry 5. The summary of significant accounting policies should
ANS: B disclose
a. Proforma effect of retroactive application of an
QUESTION 8-3 MULTIPLE CHOICE (AICPA ADAPTED) accounting change
b. Basis of profit recognition on long term construction
1. What is the purpose of information present in the contracts
notes to financial statements? c. Adequacy of pension plan assets in relation to vested
a. To provide disclosures required by generally accepted benefits
accounting principles d. Future lease payments
b. To correct improper presentation in the financial ANS: B
statements
c. To provide recognition of amounts not included in the 6. The summary of significant accounting policies should
financial statements disclose
d. To present management response to auditor a. The composition of property, plant and equipment
comments and the depreciation method used
ANS: A b. The composition of property, plant and equipment
only
2. The notes to financial statements should not be used c. The depreciation method used only
to d. Neither the composition of property, plant and
a. Describe significant accounting policies. equipment nor the depreciation method used
b. Describe depreciation methods employed. ANS: C
c. Describe the principles and methods peculiar to the
industry in which the entity operates. 7. Which of the following should be included in the
d. Correct an improper presentation in the financial summary of significant accounting policies?
statements. a. Property, plant and equipment recorded at cost with
ANS: D the depreciation computed principally by straight line
method
3. An entity shall disclose in the summary of significant b. A business component was sold during the current
accounting policies year
c. Breakdown of sales attributable to business
components
d. Future ordinary share dividends are expected to
approximate sixty percent of earnings
ANS: A
QUESTION 8-4 MULTIPLE CHOICE (IAA)
1. Notes to financial statements
a. Must be quantifiable.
b. Must qualify as an element.
c. Amplify or explain items presented in the body of
financial statements.
d. All of these are characteristics of notes to financial
statements.
ANS: C
2. Which is incorrect regarding notes to financial
statements?
a. IFRS requires specific note disclosures including
disaggregation of inventories into classifications such as
merchandise, production supplies, goods in process,
and finished goods.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes should be clear, simple to
understand and nontechnical 1n nature.
d. All of the choices are correct regarding notes to
financial statements.
ANS: C
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 value of obsolete ending inventory.
d. Whether the working capital position is adequate for
future operations.
ANS: B
4. 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
ANS: D
5. Which of the following is not a required disclosure of
accounting policies?
a. The measurement basis used in the financial
statements
b. Key management personnel involved in preparing the
summary of significant accounting policies
c. Disclosures required by IFRS
d. The nature of operations and the policies that the
users of the financial statements would expect to be
disclosed
ANS: B
6. 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 to
financial statements
c. Enough information should be disclosed in the
financial statements m order that a prospective investor
can make a wise decision.
d. Disclosure of any financial facts significant enough to
influence the judgment of an informed user.
ANS: D
7. Application of the 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 the financial statements.
c. Is demonstrated by the use of supplementary
information presenting the effects of changing prices.
d. Requires that the financial statements be consistent
and comparable.
ANS: C
CHAPTER 9
RELATED PARTY DISCLOSURES
QUESTION 9-1 MULTIPLE CHOICE (PAS 24)
1. Related parties include all of the following, except
a. Affiliates
b. Associates
c. Individuals owning, directly or indirectly, an interest
in the voting power of the reporting entity that gives
them significant influence over the entity
d. Two entities that have a common director
ANS: D
2. Unrelated parties include all of the following, except
a. Providers of finance in the course of their normal
dealings with an entity by virtue only of those dealings.
b. Two ventures simply because they share joint control
over a joint venture.
c. Single customer with whom an entity transacts a
significant volume of business merely by virtue of the
resulting economic dependence.
d. Key management personnel and close family
members of such individuals.
ANS: D
3. Close family members of an individual include all of
the following, except
a. Brothers and sisters of the individual
b. The individual’s spouse and children
c. Children of the individual’s spouse
d. Dependents of the individual or individual’s spouse
ANS: D
QUESTION 9-2 MULTIPLE CHOICE (IFRS)
1. Which is not a mandated related party disclosure?
a. Relationship between parent and subsidiaries
b. Names of all the associates that an entity has dealt
with during the year
c. Name of the entity’s parent and the ultimate
controlling party
d. If neither the entity’s parent nor the ultimate
controlling entity produces financial statements
available for public use, then the name of the next most
senior parent that does so
ANS: B
2. Which is not a required minimum related party
disclosure?
a. The amount of the related party transaction
b. The amount of the outstanding balance and the
terms and conditions
c. The amount of similar transaction with unrelated
parties to establish that comparable related party
transactions have been entered into at arm’s length
d. Allowance for doubtful accounts related to the
outstanding balance
ANS: C
3. An entity that entered into a related party
transaction would be required to disclose all of the
following information except
a. Nature of the relationship between the parties.
b. Nature of any future transaction planned between
the parties and-the terms involved.
c. Peso amount of the transaction.
d. Amount due from or to related parties at the end of
reporting period.
ANS: B
4. Which of the following would not be considered key
management personnel compensation?
a. Short-term benefits
b. Share-based payments
c. Termination benefits
d. Reimbursement of out of-pocket expenses
ANS: D
QUESTION 9-3 MULTIPLE CHOICE (IFRS)
1. All of the following fall within the definition of an
entity related party, except
a. Joint venture in which the entity is a venturer
b. A postemployment benefit plan for the benefit of the
employees
c. An executive director of the entity
d. The partner of a key manager is a major supplier of
the entity
ANS: D
2. Which of the following is not specified as a separate
related party disclosure?
a. Entity with joint control or significant influence over
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
ANS: C
3. Which of the following is .not a related party of an
entity?
a. The son of the chief executive officer of the entity
b. A bank providing loan to the entity
c. An associate of the entity
d. Director of the entity
ANS: B
4. Which of the following is included in key
management personnel compensation?
a. Social security contribution
b. Post-employment benefit
c. Social security contribution and post-employment
benefit
d. Neither social security contribution nor post-
employment benefit
ANS: C
QUESTION 9-4 MULTIPLE CHOICE (AICPA ADAPTED)
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 executives which exceed
normal business practice
d. An entity’s agreement to act as surety for a loan to
the chief executive officer
ANS: B
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
ANS: C
3. An entity has signed the mortgage note on the home
of its president guaranteeing the indebtedness in the
event that the president should default. The entity
considers the likelihood of 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.
ANS: A
CHAPTER 10
EVENTS AFTER THE REPORTING PERIOD
QUESTION 10-1 MULTIPLE CHOICE (IFRS)
1. Events after the end of reporting period are favorable
or unfavorable events that
a. Occur between the end of the reporting period and
the date of the next annual financial statements.
b. Occur between the end of the reporting period and
the date of the next interim or annual financial
statements.
c. Occur between the end of the reporting period and
the date when the financial statements are authorized
for issue.
d. Occur between the end of reporting period and the
date of the next interim financial statements.
ANS: C
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. Provides conditions that existed after the date the
financial statements were authorized for issue.
ANS: A
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 the nature but not the effect
of the event.
ANS: A
QUESTION 10-2 MULTIPLE CHOICE (1AA)
1. 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.
ANS: A
2. Which of the following events after the reporting
period would require adjustment before issuance of the
financial statements?
a. Loss of plant as a result of tire
b. Change in the quoted market price of financial asset
held as an investment
c. Loss on inventory resulting from a storm surge
d. Loss on a lawsuit the outcome of which was deemed
uncertain at year-end.
ANS: D
3. Non-adjusting events after reporting period that
require disclosure include all of the following, 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 by a fire
before the end of the reporting period
ANS: D
4. Which of the following events after the reporting
period would require disclosure in the financial
statements?
a. Retirement of the president
b. Settlement of litigation when the event that gave rise
to the litigation occurred prior to the end of reporting
period
c. Strike of employees
d. Issue of large amount of ordinary shares
ANS: D
5. Events after reporting period that provides evidence
about conditions that existed at the current year-end
and affect the realizability of accounts receivable should
be
a. Discussed only in the management commentary
b. Disclosed only in the notes.
c. Used to record an adjustment to doubtful account
expense.
d. Used to record an adjustment to retained earnings.
ANS: C
6. All of the following events would be classified as non-
adjusting events after reporting period, except
a. The entity announced the discontinuance of the
assembly operation
b. The entity entered into an agreement to purchase
the currently leased office building
c. Destruction of a major production plant by fire
d. A mistake was discovered in the calculation of the
allowance for uncollectible accounts receivable
ANS: D
7. Which is a true statement regarding events after the
end of reporting period?
a. Recognize a loss for all recognized and unrecognized
subsequent events in the current year.
b. Recognize a gain or loss for any recognized
subsequent event in the current year.
c. Recognize a loss for a recognized subsequent event in
the financial statements in the year when the
subsequent event occurs.
d. Recognize a loss for a recognized subsequent event in
the current year financial statements.
ANS: D
QUESTION 10-3 MULTIPLE CHOICE (IFRS)
1. At the end of the current reporting period, an entity
carried a receivable from a major customer. The
customer declared bankruptcy after the end of
reporting period but 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 this post-reporting period event.
c. Ignore the event
d. Reverse the sale pertaining to this receivable.
ANS: B
2. An entity built a new factory building during the
current year. Subsequent to the current year-end and
before the financial statements are issued, the building
was destroyed by fire and the claim against the
insurance entity proved futile. 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 revision for the entire carrying amount of the
building
d. Disclose this non-adjusting event in the notes
ANS: D
3. An entity deals extensive in foreign currency
transactions. Subsequent to the reporting period and
before the date of authorization for the issue 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 balances to
reflect all the abnormal fluctuations and not just
adverse movements.
c. Disclose the post-reporting period event in the notes
as a non-adjusting event.
d. Ignore the post-reporting period event.
ANS: C
CHAPTER 11
STATEMENT 0F COMPREHENSIVE INCOME
Statement of changes in equity
Statement of retained earnings
QUESTION 11-1 MULTIPLE CHOICE (PAS L)
1. It is the change in equity during a period resulting
from transactions and other events, other than changes
resulting from transactions with owners in their
capacity as owners.
a. Comprehensive income
b. Other comprehensive income
c. Profit or loss
d. Retained earnings 7. The two-statement approach of presenting
ANS: A comprehensive income is preparing
a. A comparative statement of comprehensive income
2. It is the total of income less expenses, excluding the b. A combined statement of comprehensive income and
components of other comprehensive income. retained earnings
a. Comprehensive income c. A combined income statement and a statement of
b. Profit or loss changes in equity
c. Accounting income d. A separate income statement and a separate
d. Economic income statement of comprehensive income
ANS: B ANS: D

3. This term comprises items of income and expense 8. Total comprehensive income for the period is
including reclassification adjustments that are not presented
recognized in profit or loss as required or permitted by a. Showing separately the total amount attributable to
PFRS. owners of the parent and the non-controlling interest.
a. Comprehensive income b. Showing separately an analysis of expenses by
b. Other comprehensive income function.
c. Profit or loss c. Showing separately an analysis of expenses by nature.
d. Retained earnings d. Showing separately profit or loss and the total of
ANS: B other comprehensive income.
ANS: A
4. Earnings
a. Include certain gains and losses excluded from Question11-2 Multiple choice (IFRS)
comprehensive income 1. An entity shall present an analysis of expenses using a
b. Are the same as comprehensive income classification based on
c. Exclude certain game and loss included in a. The nature of expenses
comprehensive income b. The function of expenses.
d. Include certain losses excluded from comprehensive c. Either the nature of expenses or the function of
income expenses, whichever provides information that is
ANS: C reliable and more relevant
d. Either the nature of expenses or the function of
5. All of the following components of OCI should be expenses, whichever the entity would prefer to present
reclassified to profit or loss except ANS: C
a. Gain or loss from translating the financial statements
of a foreign operation 2. Separate line items in an analysis of expenses by
b. Gain or loss from re-measuring debt investment at nature include
FVOCI a. Purchases, transport costs, employee benefits
c. The effective portion of gain or loss on hedging depreciation, extraordinary items
instrument in a cash flow hedge b. Purchases, distribution costs, administrative costs,
d. Gain or loss on re-measuring equity investment at employee benefits, depreciation, taxes
FVOCI c. Depreciation, purchases, transport costs, employee
ANS: D benefits and advertising costs
d. Cost of goods sold, administrative and distribution
6. Which of the following components of OCI should be costs
reclassified to retained earnings? ANS: C
a. Revaluation surplus
b. Re-measurements of defined benefit plan 3. Separate line items in an analysis of expenses by
c. Gain or loss attributable to credit risk of a financial function include
liability designated at FVPL a. Purchases, transport costs, employee benefits,
d. All of these components of OCI should be reclassified depreciation, extraordinary items.
to retained earnings b. Purchases, distribution costs, administrative costs,
ANS: D employee benefits, depreciation, taxes.
c. Depreciation, purchases, transport costs, employee
benefits and advertising costs.
d. Cost of goods sold, administrative and distribution
costs
ANS: D
4 Under IFRS, the extraordinary item presentation
a. Has not changed from current rules.
b Has been eliminated.
c. Has been eliminated from the net of tax presentation.
d Has been eliminated from EPS reporting.
ANS: B
QUESTION 11-3 MULTIPLE CHOICE (AICPA ADAPTED)
1. What is the purpose of reporting comprehensive
income?
a. To report transactions with owners.
b. To report a measure of overall entity performance.
c. To replace net income with a better measure.
d. To combine income from continuing operations with
income from discontinued operations.
ANS: B
2. Which of the following changes during a period is not
a component of other comprehensive income?
a. Re-measurement of defined benefit plan
b. Treasury share, at cost
c. Foreign currency translation adjustment d
d. Unrealized gain on equity instrument measured at
fair value through other comprehensive income
ANS: B
3. Other comprehensive income includes all of the
following, except
a. Unrealized gain on forward contract designated as
cash flow hedge
b. Loss from translating the financial statements of a
foreign operation
c. Actuarial gain on defined benefit obligation
d. Dividend paid to shareholders
ANS: D
4. All of the following are a component of other
comprehensive income, except
a. Foreign currency translation adjustment
b. Unrealized gain and loss on financial asset held for
trading
c. Deferred loss on derivative financial instrument
designated as cash flow hedge
d. Change in revaluation surplus
ANS: B
5. Which of the following is not an acceptable option of
reporting other comprehensive income?
a. In a separate statement of comprehensive income
b. In a single statement of comprehensive income
c. In the notes
d. In a statement of changes in equity
ANS: C
6. When a complete set of financial statements is
presented, comprehensive income and the components
should
a. Appear as a part of discontinued operations.
b. Be reported net of related income tax effect, in total
and individually.
c. Appear in a supplemental schedule in the notes.
d. Be displayed in a statement that has the same
prominence as other financial statements.
ANS: D
7. Why is reclassification adjustment used when
reporting other comprehensive income?
a. To reclassify an item of comprehensive income as
another item of comprehensive income
b. To avoid double counting of items
c. To make net income equal comprehensive income
d. To adjust the income tax effect
ANS: B
8. Which of the following is not generally accepted in
presenting the income statement?
a. Including prior period errors in determining income
b. The condensed income statement
c. The consolidated income statement
d. Including discontinued operations in determining
income
ANS: A
QUESTION 11-4 MULTIPLE CHOICE (IAA)
1. The limitations of the income statement include all of
the following, except
a. Items that cannot be measured reliably are not
reported.
b. Only actual amounts are reported in net income.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting
method.
ANS: B
2. Which of the following would represent the least
likely use of an income statement?
a. Use by customers to determine an entity’s ability to
provide needed goods and services
b. Use by labor unions to examine earnings closely as a
basis for salary discussions
c. Use by government to formulate tax policy
d. Use by investors interested in financial position
ANS: D
3. The income statement would help in which of the
following?
a. Evaluate liquidity
b. Evaluate solvency
c. Estimate amount, timing and uncertainty of future
cash flows
d. Estimate future financial flexibility
ANS: C
4. Investors and creditors use income statement
information for each of the following, except
a. To evaluate the future performance of an entity.
b. To provide a basis for predicting future performance.
c. To help assess the risk and uncertainty of achieving
future cash flows.
d. To evaluate the past performance of an entity.
ANS: A
QUESTION 11-5 MULTIPLE CHOICE (AICPA ADAPTED)
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
ANS: C
2. How should exchange gain or loss resulting from
foreign currency transaction be accounted for?
a. Included as component of income from continuing
operations for the period in which the rate changes.
b. Included as component of other comprehensive
income for the period in which the rate changes.
c. Included in the statement of financial position as a
deferred item
d. Included in net income for gain but deferred for loss.
ANS: A
3. Unusual and infrequent gain and loss are reported
a. As an extraordinary item net of tax below income
from continuing operations.
b. As an extraordinary item net of tax within income
from continuing operations.
c. As a separate line item within income from
continuing operations.
d. As a separate line item below income from
continuing operations.
ANS: C
QUESTION 11-6 MULTIPLE CHOICE (IFRS)
1. In the statement of changes in equity, the effect of
the retrospective application of a change in accounting
policy is presented
a. Separately for each component of equity.
b. In aggregate for total equity.
c. In aggregate for total equity and separately for the
total amount attributable to owners of the parent and
the non-controlling interest.
d. Separately for the total amount attributable to
owners of the parent and the non-controlling interest.
ANS: A
2. In the statement of changes in equity, the effect of
the correction of a prior period error is presented
a. Separately for each component of equity.
b. In aggregate for total equity.
c. In aggregate for total equity and separately for the
total amount attributable to owners of the parent and
the non-controlling interest.
d. Separately for the total amount attributable to
owners of the parent and the non-controlling interest.
ANS: A
3. Which of the following should be presented in the
statement of changes in equity?
a. Investments by owners
b. Distributions to owners
c. Change in ownership interest in subsidiary that does
not result in a loss of control
d. All of these should be presented in the statement of
changes in equity
ANS: D
QUESTION 11-7 MULTIPLE CHOICE (1AA)
1. Which of the following does not appear in a
statement of retained earnings?
a. Net loss
b. Prior period error
c. Preference share dividend
d. Other comprehensive income
ANS: D
2. Which of the following would appear first in a
statement of retained earnings?
a. Net income c. Profit is the equivalent of net income under IFRS
b. Prior period error d. All of these statements are true about the term profit
c. Cash dividend ANS: D
d. Share dividend
ANS: B CHAPTER 12

3. Which of the following would not appear in the NON-CURREN T ASSETS HELD FOR SALE
statement of retained earnings? DISCONTI NUED OPERATIONS
a. Net loss
b. Prior period adjustment QUESTION 12-1 MULTIPLE CHOICE (PFRS 5
c. Discontinued operation
d. Dividend declared 1. It is group of assets to be disposed of by sale or
ANS: C otherwise, together as a group in a single transaction,
and liabilities directly associated with those assets that
4. Corrections of errors in prior period are included in will be transferred in the transaction.
a. Retained earnings a. Disposal group
b. Other comprehensive income b. Discontinued operation
c. Net-income c. Noncurrent asset
d. Share premium d. Cash generating unit
ANS: A ANS: A

QUESTION 11-8 MULTIPLE CHOICE (IFRS)
1. The financial capital concept requires that net assets
shall be measured at
a. Current cost
b. Historical cost
c. Historical cost adjusted for changes in purchasing
power
d. Current cost adjusted for changes in purchasing
power
ANS: B
2. The physical capital concept requires the adoption of
which measurement basis?
a. Historical cost
b. Current cost
c. Realizable value
d. Present value
ANS: B
3. Which capital maintenance concept is applied
respectively to net income and comprehensive income?
a. Financial capital and financial capital
b. Physical capital and physical capital
c. Financial capital and physical capital
d. Physical capital and financial capital
ANS: A
4. Which statement regarding the term “profit” is true?
a. Profit is any amount over and above that required to
maintain the capital at the beginning of the period
b. Profit is the residual amount that remains after
expenses have been deducted from income
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.
ANS:A
3. Non-current asset or disposal group is classified as
held for sale when the asset is available for immediate
sale and the sale is highly probable. For the sale 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 one year from the end of
reporting period.
ANS: D
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.
ANS: C
5. How should the assets and liabilities of a disposal
group classified as held for sale be reported in the
statement of financial position?
a. The assets and liabilities shall be offset and presented
as a single amount.
b. The assets of the disposal group shall be reported
separately as current assets and the liabilities of the
disposal group shall be reported separately as current
liabilities.
c. The assets and liabilities shall be presented as a single
amount and as a deduction from equity.
d. There should be no separate disclosure of assets and
liabilities that form part of a disposal group.
ANS: B
6. At current year-end, an entity was holding long-lived
assets that it intended to sell. The entity appropriately
recognized a loss in the current year related to these
assets. In the income statement for the current year,
the loss should be reported as
a. Extraordinary item
b. Component of income from continuing operations
before tax
c. Component of discontinued operations net of tax
d. Component of selling or administrative expenses
ANS: B
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.
ANS: C
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 the
noncurrent asset.
ANS: A
9. An entity classified a noncurrent asset accounted for
under, the cost model as held for sale at the current
year-end. Because no offers were received at an
acceptable price, the entity decided at the end of next
year not to sell the asset but to continue to use it. The
asset shall be measured at the end of next year at what
amount?
a. The lower of carrying amount and recoverable
amount
b. The higher of carrying amount and recoverable
amount
c. The lower of carrying amount on the basis that the
asset had never been classified as held for sale and
recoverable amount
d. The higher of carrying amount on the basis that the
asset had never been classified as held for sale and
recoverable amount
ANS: C
10. An entity recently moved to a new building. The old
building is being actively marketed for sale, and the
entity expects to complete the sale in four months.
Which of the following statements is incorrect regarding
the old building?
a. It will be reclassified as an asset held for sale.
b. It will be classified as a current asset.
c. It will no longer be depreciated.
d. It will be measured at historical cost.
ANS: D
QUESTION 12-2 MULTIPLE CHOICE (IFRS)
1. Which of the following criteria does not have to be
met in order for an operation to be classified as
discontinued?
a The operation shall represent a separate major line of
business or geographical area.
b. The operation is part of a single plan, to dispose of a
separate major line of business or geographical area
c. The operation is a subsidiary acquired exclusively with
a view to resale.
d. The operation must be sold within three months of
the year-end.
ANS: D
2. An entity manufactures and sells household products.
The entity experienced losses associated with the small
appliance group. Operations and cash flows for this
group can be clearly distinguished from the rest of the
entity’s operations. The entity decided to sell the small
appliance group. What is the earliest point at which the
entity shall report the small appliance group as a
discontinued operation?
a. When the entity classifies it as held for sale.
b. When the entity receives an offer for the segment.
c. When the entity first sells any of the assets of the
segment.
d. When the entity sells the majority of the assets of the
segment.
ANS: A
3. Which of the following is a requirement for a
component of an entity to be classified as a
discontinued operation?
a. The activities must cease permanently prior to the
financial statements being authorized for issue.
b. The component must be a reportable segment.
c. The assets must have been classified as held for sale
in the previous financial statements.
d. The component must have been a cash generating
unit while being held for use.
ANS: D
4. What is the presentation of the results from
discontinued operation in the income statement?
a. The entity shall disclose a single amount on the face
of the income statement below the income from
continuing operations.
b. The amounts from discontinued operations shall be
broken down over-each category of revenue and
expense.
c. Discontinued operations shall be shown as a
movement on retained earnings.
d. Discontinued operations shall be shown as a line item
after gross income with the related tax being shown as
part of income tax expense.
ANS: A
5. Which is incorrect concerning the presentation of the
discontinued operation in the statement of financial
position?
a. Assets of the component held for sale are presented
separately from all other assets of the entity.
b. Assets of the component held for sale are measured
at the higher between fair value less cost of disposal
and carrying amount.
c. Liabilities of the component held for sale are
presented separately from all other liabilities of the
entity.
d. Depreciable assets of the component held for sale
shall not be depreciated.
ANS: B
QUESTION 12-3 MULTIPLE CHOICE (AICPA ADAPTED)
1. Which of the following criteria is not required for the
results of a component of an entity to be classified as
discontinued operations?
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 entity as a
result of the disposal.
d. The entity shall not have any significant continuing
involvement in the operations of the component after
disposal.
ANS: A
2. Which disposal could qualify as discontinued
operation?
a. Disposal of 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 the entity.
ANS: B
3. When a component of an entity was discontinued
during the current year, the loss on disposal 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.
ANS: C
4. 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 operations.
d. Included in other comprehensive income.
ANS: C
5. When a component of a business has been
discontinued during the year, the loss on disposal
should
a. Include operating loss of the current period.
b. Exclude operating loss during the period.
c. Be classified as an extraordinary item.
d. Be classified as an operating item.
ANS: A
6. 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 disposal of
the discontinued component.
c. Income statement as part of the income from
continuing operations.
d. Statement of retained earnings as a direct decrease
in retained earnings.
ANS: B
7. 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 plant assets included in income from
continuing operations.
ANS: C
CHAPTER 13
ACCOUNTING CHANGES
Prior period errors
QUESTION 13-1 MULTIPLE CHOICE (AICPA ADAPTED)
1. How should the effect of a change in accounting
estimate be accounted for?
a. By restating amounts reported in financial statements
prior periods
b. By reporting proforma amounts for prior periods
c. As a prior period adjustment to beginning retained
earnings
d. In the period of change and future periods if the
change affects both
ANS: D
2. Which of the following is characteristic of a change in
an accounting estimate?
a. It usually need not be disclosed
b. It does not affect the financial statements of prior
period
c. It should be reported through the restatement of the
financial statements
d. It makes necessary the reporting of proforma
amounts for prior periods
ANS: B
3. A change in the periods benefited by a deferred cost
because of additional information has been obtained is
a. An accounting change that should be reported in the
period of change and future periods if the change
affects both.
b. An accounting change that should be reported by
restating the financial statements of all prior periods
presented
c. A correction of an error
d. Not an accounting change
ANS: A
4. A change in the residual value of an asset arising
because additional information has been obtained is
a. An accounting change that should be reported in the
period of change and future periods if the change
affects both
b. An accounting change that should be reported by
restating the financial statements of all prior periods
presented
c. A correction of an error
d. Not an accounting change
ANS: A
5. The effect of a change in accounting policy that is
inseparable from the effect of a change in accounting
estimate should be reported
a. By restating the financial statements of all prior
periods presented.
b. As a correction of an error.
c. As a component of income from continuing
operations, in the period of change and future periods if
the change affects both.
d. As a separate disclosure after income from
continuing operations.
ANS: C
6. When an entity changed from the straight line
method of depreciation to the double declining balance
method, which of the following should be reported?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported
currently and prospectively
ANS: D
7. When an entity changed the expected service life of
an asset, which of the following should be reported?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported in the
period of change and future periods
ANS: D
QUESTION 13-2 MULTIPLE CHOICE (IAA)
1. Accounting changes are often made even though this
may be a violation of the accounting concept of
a. Materiality
b. Consistency
c. Prudence
d. Objectivity
ANS: B
2. Which is not classified as an accounting change?
a. Change in accounting policy
b. Change in accounting estimate
c. Error in the financial statements
d. All of these are classified as an accounting change
ANS: C
3. Which of the following is the best explanation why
accounting changes are classified into change in
accounting policy and change in accounting estimate?
a. The materiality of the change.
b. Each change involves different method of recognition
in the financial statements.
c. The fact that some treatments are considered GAAP
and some are not.
d. The need to provide a favorable profit picture.
ANS: B
4. Why is retrospective treatment of a change in
accounting estimate prohibited?
a. Change in accounting estimate is a normal recurring
correction or adjustment which is the natural result of
the accounting process.
b. The retrospective treatment for any type of
presentation is not allowed.
c. Retrospective treatment of a change in accounting
estimate is prohibited under existing standard.
d. The existing standard is silent on the issue.
ANS: A
QUESTION 13-3 MULTIPLE CHOICE (PAS 8)
1. Which is the first step within the hierarchy of
guidance when selecting accounting policies?
a. Apply a standard from IFRS if it specifically relates to
the transaction.
b. Apply the requirements in IFRS dealing with similar
and related issue
c. Consider the applicability of the definitions,
recognition criteria and measurement concepts in the
Conceptual Framework.
d. Consider the most recent pronouncements of other
standard setting bodies.
ANS: A
2. In the absence of an accounting standard that applies
specifically to a transaction, what is the most
authoritative source in developing and applying an
accounting policy?
a. The requirement and guidance in the standard or
interpretation dealing with similar and related issue.
b. The definition, recognition criteria and measurement
of asset, liability, income and expense in the Conceptual
Framework.
c. Most recent pronouncement of other standard-
setting body.
d. Accounting literature and accepted industry practice.
ANS: A
3. A change in accounting policy shall be made when
I. Required by law.
II. Required by an accounting standard or an
interpretation
of the standard.
III. The change will result in more relevant or reliable
information about the financial position, financial
performance and cash flows of the entity.
a. I and III only
b. II and III only
c. I and II only
d. I, II and III
ANS: B
4. A change in accounting policy includes which of the
following?
a. The initial adoption of a policy to carry assets at
revalued amount.
b. A change in measurement
c. The change in inventory valuation from FIFO to
weighted average method.
d. All of these qualify as change in accounting policy.
ANS: D
5. Which of the following should be treated as change in
accounting policy?
a. A change is made in the method of calculating the
provision for uncollectible accounts receivable.
b. Investment properties are now measured at fair
value, having previously been measured at cost.
c. An entity engaging in construction contract for the
time needs on accounting policy to deal with this.
d. All of these qualify as change in accounting policy.
ANS: B
6. A change in accounting policy includes
I. Adoption of an accounting policy for events or
transactions that differ in substance from previously
occurring events or transactions.
II. The adoption of a new accounting policy for events or
transactions which did not occur previously or that
were immaterial.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
ANS: D
7. A change in accounting policy requires what kind of
adjustment to the financial statements?
a. Current period adjustment
b. Prospective adjustment
c. Retrospective adjustment
d. Current and prospective adjustment
ANS: C
QUESTION 13-4 MULTIPLE CHOICE (IFRS)
1. An entity that changed an accounting policy
voluntarily should
a. Inform shareholders prior to taking the decision.
b. Account for the change retrospectively.
c. Treat the effect of the change as a component of
other comprehensive income.
d. Treat the change prospectively and adjust the effect
of the change in the current period and future periods
ANS: B
2. Which of the following statements is true about
applying a new accounting policy?
a. Prospective application is applying a new accounting
policy to transactions occurring after the date at which
the policy is changed.
b. Retrospective application is applying a new
accounting policy to transactions as if that policy had
always been applied.
c. Retrospective restatement means correcting the
recognition, measurement and disclosure of the
amounts in the financial statements as if a prior period
error had never occurred.
d. All of these statements are true about applying a new
accounting policy.
ANS: D
3. All of the following should be treated as a change in
accounting policy, except
a. A new accounting policy of capitalizing development
cost as a project has become eligible for capitalization
for the first time.
b. A new accounting policy resulting from the
requirement of a new IFRS.
c . Items of property, plant and equipment are now
being measured at fair value, whereas they had
previously been measured at cost.
d. All of these qualify as change in accounting policy.
ANS: A
QUESTION 13-5 MULTIPLE CHOICE (1AA)
1. Why is an entity permitted to change an accounting
policy?
a. The change would allow the entity to present a more
favorable profit picture.
b. The change would result' in the financial
statements providing more reliable and relevant
information
c. The change is made by the internal auditor.
d. The change is made by the CPA.
ANS: A
2 Under IFRS, a change in accounting policy may occur
a. Either when a change is required by an IFRS or when
it provides reliable and more relevant information.
b. Neither when a change is required by an IFRS nor
when it provides reliable and more relevant information.
c. Only when a change is required by an IFRS.
d. Only when a change provides reliable and more
relevant information.
ANS: A
3. A change in accounting policy requires that the
cumulative effect of the change for prior periods should
be reported as an adjustment to
a. Beginning retained earnings for the earliest period
presented.
b. Net income for the current period.
c. Other comprehensive income for the earliest period
presented.
d. Shareholders’ equity for the current period.
ANS: A
4. When it is difficult to distinguish between a change in
accounting estimate and a change in accounting policy,
the change is treated as
a. Change in accounting estimate with disclosure
b: Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no disclosure
ANS: A
QUESTION 13-6 MULTIPLE CHOICE (AICPA ADAPTED)
1. If it is impracticable to determine the cumulative
effect of an accounting change to any of the prior
periods, the accounting change should be accounted for
a. As a prior period adjustment.
b. On a prospective basis.
c. As a cumulative effect change on the income
statement.
d. As an adjustment to retained earnings.
ANS: B
2. Where it is impracticable to determine the period-
specific effect of the change on comparative
information for one or more prior periods presented,
the retrospective application or restatement is applied
a. Retrospectively only to the extent that it is
practicable
b. Prospectively only to the extent it is practicable
c. Retrospectively to the extent that estimates can be
made
d. Prospectively to the extent that estimates can be
made
ANS: A
3. Applying a requirement of a Standard or an
Interpretation is impracticable when the entity cannot
apply it after making every effort to do so. Which of the
following is not included in the definition of
“impracticable”?
a. The effect of the retrospective application is not
determinable.
b. The retrospective application requires assumptions
about what management intention would have been at
the time.
c. The retrospective application requires significant
estimate.
d. The entity would find the determination of the effect
to be immaterial
ANS: D
QUESTION 13-7 MULTIPLE CHOICE (AICPA ADAPTED)
1. When financial statements for a single year are being
presented, a prior period error should
a. Be shown as an adjustment of the balance of retained
earnings at the start of the current year
b. Affect net income of the current year
c. Be shown in the statement of changes in equity
d. Be included in other comprehensive income.
ANS: A
2. Items reported as prior period errors
a. Do not include the effect of a mistake in the
application of accounting policy.
b. Do not affect the presentation of prior period
comparative financial statements.
c. Do not require further disclosure in the body of the
financial statements.
d. Are reflected as adjustment of the opening balance of
retained earnings of the earliest period presented.
ANS: D
3. An example of a correction of an error in previously
issued financial statements is a change
a. From FIFO method of inventory valuation to the
average method.
b. In the service life of property, plant and equipment.
c. From cash basis to accrual basis of accounting.
d. In the tax assessment related to a prior period.
ANS: C
4. An entity that changed from cash basis to accrual
basis of accounting during the current year should
report
a. Prior period adjustment resulting from the correction
of an error.
b. Prior period adjustment resulting from the change in
accounting policy.
c. Component of income from continuing operations.
d. Component of income from discontinued operations.
ANS: A
5. An entity that changed from an accounting principle
that is not generally accepted to one that is generally
accepted should report the effect of the change, net of
applicable income tax, in the current
a. Income statement as component of income from
continuing operations
b. Income statement as component of discontinued
operations
c. Statement of retained earnings as an adjustment of
the opening balance
d. Statement of retained earnings after net income but
before dividends
ANS: C
QUESTION 13-8 MULTIPLE CHOICE (IFRS)

1. During the current year, an entity discovered that
ending inventory reported in the financial statements
for the prior year was understated. How should the
entity account for this understatement?
a. Adjust the beginning inventory in the prior year.
b. Restate the financial statements
withcorrected balances for all periods presented.
c. Adjust the ending balance in retained earnings at
current year-end.
d. Make no entry because the error will self-correct
ANS: B
2. On March 25, 2018, the entity discovered that
depreciation expense for 2017 was overstated. The
2017 financial statements were authorized for issue on
April 1, 2018. What must the entity do?
a. Correct the 2017 financial statements before issuing
them.
b. Reduce depreciation for 2018.
c. Restate the depreciation expense, reported for 2017
in the comparative figures of the 2018 financial
statements.
d. Do nothing.
ANS: A
3. On March 25, 2018, the entity discovered that
depreciation expense for 2017 was overstated. The
2017 financial statements were authorized for issue on
March 1, 2018. What must the entity do?
a. Reissue the 2017 financial statements with the
correct depreciation expense.
b. Reduce depreciation for 2018.
c. Restate the depreciation expense reported for 2017
in the comparative figures of the 2018 financial
statements.
d. Do nothing.
ANS: C
QUESTION 13-9 MULTIPLE CHOICE (AICPA ADAPTED)
1. A change in reporting entity is actually a change in
a. Accounting policy
b. Accounting estimate
c. Accounting method
d. Accounting concept
ANS: A
2. Which of the following does not represent a change
in reporting entity?
a. Changing the entities included in combined financial
statements
b. Disposition of a subsidiary or other business unit
c. Presenting consolidated statements in place of the
statements of individual entities
d. Changing specific subsidiaries that constitute the
group of entities for which consolidated financial
statements are presented.
ANS: B
3. Which of the following statements is correct
regarding accounting changes that result in financial
statements that are in effect the statements of a
different reporting entity?
a. Cumulative-effect adjustments should be reported as
separate line item in the financial statements.
b. No restatements or adjustments are required if the
changes involve consolidation method of accounting.
c. No restatements or adjustments are required if the
changes involve the equity method of accounting.
d. The financial statements of all prior periods
presented are adjusted retrospectively.
ANS: D
4. What is the proper accounting treatment for a
change in reporting entity?
a. Restatement of financial statements of all prior
periods presented
b. Restatement of current period financial statements
c. Note disclosure and supplementary schedule
d. Adjustment of retained earnings and note disclosure
ANS: A
5. An entity has included in the consolidated financial
statements this year a subsidiary acquired several years
ago that was appropriately excluded from consolidation
last year. How should this change be reported?
a. An accounting change that should be reported
prospectively
b. An accounting change that should be reported
retrospectively
c. A correction of an error
d. Neither an accounting change nor a correction of an
error
ANS: B
CHAPTER 14
INTERIM FINANCIAL REPORTING
QUESTION 14-1 MULTIPLE CHOICE (PAS 34)
1. Which of the following statements is true regarding
interim reporting?
a. The independent view is required for interim financial
statements.
b. Interim reports are required on a quarterly basis.
c. Interim reports are not required.
d. Interim reports require the preparation of only a
statement of earnings and a statement of financial
position.
ANS: C
2. An interim financial report contains
a. A complete set of financial statements
b. A condensed set of financial statements
c. Either a complete set or condensed set of financial
statements
d. Neither a complete set nor condensed set of financial
statements
ANS: C
3. Which basic financial statements are prepared as a
minimum for interim financial reporting?
a. Statement of financial position and income statement
b. Statement of financial position, income statement
and statement of comprehensive income
c. Statement of financial position, statement of
comprehensive income and statement of cash flows
d. Statement of financial position, statement of
comprehensive income, statement of cash flows and
statement of changes in equity
ANS: D
4. Publicly traded entities are encouraged to provide
interim financial reports
a. At least at the end of the half year and within 60 day
of the end of the interim period.
b. Within a month of the half year-end.
c. On a quarterly basis.
d. Whenever the entity wishes.
ANS: A
5. An entity is preparing interim financial statements
for six months ended June 30, 2017. In the interim
financial statements for six months, a statement of
financial position on June 30, 2017 and a statement of
comprehensive income for six months ended J une 30,
2017 shall be presented. In addition, all of the following
shall
be presented, except
a. Statement of financial position on June 30, 2016
b. Statement of financial position on December 31,
2016
c. Statement of comprehensive income for six months
ended June 30, 2016
d. Statement of cash flows for six months ended June
30, 2016
ANS: A
QUESTION 14-2 MULTIPLE CHOICE (IFRS)
1. Interim financial reports shall be published
a. Once a year at any time during the year.
b. Within a month of the half year-end.
c. On a quarterly basis.
d. Whenever the entity wishes.
ANS:D
2. If an entity does not prepare interim financial reports
a. The year-end financial statements are deemed not to
comply with IFRS.
b. The year-end financial statements' compliance with
IFRS is not affected.
c. The year-end financial statements shall not be
acceptable under local legislation.
d. Interim financial reports shall be included in the year-
end financial statements.
ANS: B
3. Interim financial reports shall include as a minimum
a. A complete set of financial statements.
b. A condensed set of financial statements and selected
notes.
c. A condensed statement of financial position and an
income statement.
d. A condensed statement of financial position, income
statement and statement of cash flows.
ANS: B
4. There is a presumption that anyone reading interim
financial reports shall
a. Understand all International Financial Reporting
Standards.
b. Have access to the records of the entity.
c. Have access to the most recent annual report.
d. Not make decisions based on the report.
ANS: C
5. An entity owns a number of farms that harvest
produce seasonally. Approximately 80% of the sales are
in the period August to October. Because the business is
seasonal, what does the standard suggest?
a. Additional notes be written in the interim reports
about seasonal nature of the business.
b. Disclosure of financial information for the latest and
comparative 12-month period in addition to the interim
report.
c. Additional disclosure in the accounting policy note.
d. No additional disclosure.
ANS: B
6. An interim financial report shall include as a
minimum all of the following components, except
a. Condensed statement of financial position and
statement of comprehensive income
b. Condensed statement of cash flows
c. Condensed statement of changes in equity
d. Accounting policies and explanatory notes
ANS: D
7. Which of the following statements is true regarding
interim financial statements?
a. Interim financial statements are required.
b. If interim financial statements are presented, four
basic financial statements are required.
c. If interim financial statements are presented, only a
statement of financial position and a statement of
comprehensive income are required.
d. Interim financial statements must be presented with
the most recent annual financial statements.
ANS: B
QUESTION 14-3 MULTIPLE CHOICE ICPA ADAPTED)
1. Interim financial statements are usually presented on
a b. Decrease in the first quarter by the amount of the
a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. Nine-month basis
ANS: B
2. For interim reporting, an inventory loss from a
market decline in the second quarter shall be
recognized as a loss
a. In the fourth quarter
b. Proportionately in each of the second, third and
fourth quarters
c. Proportionately in each of the first, second, third and
fourth quarters
d. In the second quarter
ANS: D
3. For external reporting purposes, it is appropriate to
use estimated gross profit rate to determine the cost of
goods sold for
a. Interim reporting
b. Year-end reporting
c. Interim reporting and year-end reporting
d. Neither interim reporting nor year-end reporting
ANS: A
4. For interim financial reporting, an expropriation gain
occurring in the second quarter shall be
a. Recognized ratably over the last three quarters
b. Recognized ratably over all four quarters with the
first quarter being restated
c. Recognized in the second quarter
d. Disclosed in the second quarter
ANS: C
5. Advertising costs incurred shall be deferred to
provide an appropriate expense in each period for
a. Interim reporting
b. Year-end reporting
c. Interim reporting and year-end reporting
d. Neither interim reporting nor year-end reporting
ANS: D
6. An inventory loss from a market price decline
occurred in the first quarter. However, in the third
quarter the inventory had a market price recovery that
exceeded the market decline that occurred in the first
quarter. For interim financial reporting, the amount of
inventory should
a. Decrease in the first quarter by the amount of the
market price decline and increase in the third quarter
by the amount of the market price recovery.
market price decline and increase in the third quarter
by the amount of decrease in the first quarter.
c. Not be affected in the first quarter and increase in the
third quarter by the amount of the market price
recovery that exceeded the amount of the market price
decline.
d. Not be affected in either the first quarter or the third
quarter.
ANS: B
7. Due to a decline in market price in the second quarter,
an entity incurred an inventory loss. The market price is
expected to return to previous level by the end of the
year. At the end of the year, the decline had not
reversed. When should the loss be reported in the
interim income statement?
a. Ratably over the second, third and fourth quarters
b. Ratably over the third and fourth quarters
c. In the second quarter
d. In the fourth quarter
ANS: C
8. How is income tax expense for the third quarter
interim period computed?
a. The annual rate multiplied by the third quarter pretax
earnings.
b. The estimated tax for the first three quarters based
on an annual rate less a similar estimate for the first
two quarters.
c. The rate applicable during the third quarter
multiplied by four times the third quarter pretax
earnings.
d. One-half of the difference between total estimated
annual income tax expense and the income tax for the
first two quarters.
ANS: B
9. Conceptually, interim financial statements can be
described as emphasizing
a. Timeliness over reliability
b. Reliability over relevance
c. Relevance over comparability
d. Comparability over neutrality
ANS: A
10. Interim financial reporting should be viewed
a. As a special type of reporting that need not follow
financial reporting standards.
b. As useful only if activity is evenly spread throughout
the year so that estimates are unnecessary.
c. As reporting for an integral part of an annual period.
d. As reporting for a separate accounting period.
ANS: C
QUESTION 14-4 MULTIPLE CHOICE (IAA)
1. Which statement about interim reporting in true?
a. All entities that issue an annual report should issue
interim financial report.
b. The integral view is the appropriate approach in
preparing interim financial report.
c. A complete set of financial statements must be
presented for an interim period.
d. The same accounting principles used for the annual
report should be employed for interim report.
ANS: D
2. Which of the following statements is incorrect
regarding interim financial reporting?
a. A complete set of financial statements at the interim
reporting date is required.
b. Interim amount like advertising that could benefit
later interim periods is expensed immediately.
c. The integral and independent view is the two
approaches of interim financial reporting.
d. No accruals or deferrals in anticipation of future
events during the year should be reported.
ANS: A
3. Entities should disclose all of the following in interim
financial report, except
a. Basic and diluted earnings per share
b. Change in accounting policy
c. Events after the end of reporting period
d. Seasonal revenue cost or expenses.
ANS: C
4. For interim financial reporting, the income tax
expense for the second quarter should be computed by
using the
a. Statutory tax rate for the year.
b. Effective tax rate expected to be applicable for the
second quarter.
c. Effective tax rate expected to be applicable for the
full year as estimated at the end of the first quarter.
d. Effective tax rate expected to be applicable for the
full year as estimated at the end of the second quarter.
ANS: A
CHAPTER 15
0PERATING SEGMENTS
QUESTION 15-1 MULTIPLE CHOICE (PFRS 8)
1. Segment reporting shall apply to
a. Separate financial statements of an entity only.
b. Consolidated financial statements of a group only.
c. Both the separate financial statements of an entity
and the consolidated financial statements of a group.
d. Neither the separate financial statements of an entity
nor the consolidated financial statements of a group.
ANS: C
2. If a financial report contains both the consolidated
financial statements of a parent and the parent’s
separate financial statements, segment information is
required in
a. The separate financial statements only
b. The consolidated financial statements only
c. Both the separate and consolidated financial
statements
d. Neither the separate nor the consolidated financial
statements
ANS: B
3. An operating segment is a component of an entity
a. That engages in business activities from which it may
earn revenue and incur expenses, including revenue
and expenses relating to transactions with other
components of the same entity.
b. Whose operating results are regularly reviewed by
the entity’s chief operating decision maker to make
decisions about resources to be allocated to the
segment and assess its performance.
c. For which discrete information is available.
d. All of these characterize an operating segment.
ANS: D
4. Which quantitative threshold is not a requirement in
qualifying a reportable segment?
a. The segment revenue both external and internal, 10%
or more of the combined external and internal revenue
of all operating segments.
b. The segment profit or loss is 10% or more of the
greater between the combined profit of profitable
segments and combined loss of unprofitable segments.
c. The segment assets are 10% or more of the combined
assets of all operating segments.
d. The segment assets are 20% or more of the combined
assets of all operating segments.
ANS: D
5. Which is true concerning the 75% overall size test for
reportable segments?
a. The total external and internal revenue of all
reportable segments is 75% or more of the entity’s
external revenue.
b. The total external revenue of all reportable segments
is 75% or more of the entity's external and internal
revenue.
c. The total external revenue of all reportable segments
is 75% or more of the entity’s external revenue.
d. The total internal revenue of all reportable segments
is 75% or more of the entity’s internal revenue.
ANS: C
6. The term chief operating decision maker
a. Refers to a manager with a specific title.
b. Must be disclosed by title in the financial reporting
for segments.
c. Must be described in the disclosures for the financial
reporting for segments.
d. Refers to a function of allocating resources to the
operating segments and assessing their performance.
ANS: D
7. Which statement is not true with respect to a chief
operating decision maker?
a. The term chief operating decision maker identifies a
function and not necessary a manager with a specific
title.
b. In some cases, the chief operating decision maker
could be the chief operating officer.
c. The board of directors acting collectively could qualify
as the chief operating decision maker.
d. The chief internal auditor who reports to the board of
directors usually plays a very important role and would
generally qualify as chief operating decision maker.
ANS: D
QUESTION 15-2 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
lose, segment assets and segment liabilities.
c. Reconciliations 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.
ANS: D
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
ANS: C
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
ANS: C
QUESTION 15-3 MULTIPLE CHOICE (PFRS 8)
l. Entity-wide disclosures include all, except
a. Information about products and services
b. Information about geographical areas
c. Information about major customers
d. Information about intersegment sales or transfers
ANS: D

2. Which of the following statements is true in relation
to major customer disclosure?
a. A major customer is defined as one of 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.
ANS: D
3. Operating segments that do not meet any of the
quantitative thresholds
a. Cannot be considered reportable.
b. May be considered reportable and separately
disclosed if management believes that information
about the segment would be useful to the statement
users.
c. May be considered reportable and separately
disclosed if the information is for internal use only.
d. May be considered reportable and separately
disclosed if this is the practice within the economic
environment.
ANS: D
4. In financial reporting for operating segments, an
entity shall disclose all of the following, except
a. Types of products and services from which each
reportable segment derives its revenue.
b. The title of the chief operating decision maker.
c. Factors used to identify the reportable segments.
d. The basis of measurement of segment profit or loss
ANS: B
QUESTION 15-4 MULTIPLE CHOICE (PFRS 8)
1. An entity shall disclose for each reportable segment a
measure of all of the following, except
a. Profit or loss
b. Total assets if such amount is regularly provided to
the chief operating decision maker
c. Total liabilities if such amount is regularly provided to
the chief operating decision maker
d. Net assets
ANS: D
2. 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 transactions with other operating
segments of the same entity
c. Interest revenue
d. Gain on disposal of investment
ANS: D
3. An entity shall disclose for each reportable segment
all of the following specified amounts included in the
measure of profit or loss, except
a. Depreciation and amortization
b. The entity’s interest in the profit or loss of associate
and joint venture accounted for by the equity method.
c. Income tax expense
d. General corporate expenses
ANS: D
4. What is the practical limit to the number of
reportable operating segments?
a. Five segments
b. Ten segments
c. Six segments
d. Four segments
ANS: B
QUESTION 15-5 MULTIPLE CHOICE (AICPA ADAPTED)
1. An industry 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 segments.
b. Segment assets are 10% or more of the combined
assets of all segments.
c. Segment liabilities are 10% or more of the combined
liabilities of all segments.
d. Absolute amount of a segment profit or loss is 10% or
more of the combined profit of all segments that did
not incur a loss.
ANS: C
2. For segment reporting purposes, which tests 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
ANS: B
3. 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 1. Which of the following should not be considered cash?
ANS: D a. Petty cash fund
b. Money orders
4. The approach used in segment reporting is known as c. Coin and currency
a. Segment approach d. IOUs
b. Revenue approach ANS: D
c. Management approach
d. Enterprise approach 2. Which of the following is usually considered cash?
ANS: C a. Certificate of deposit
b. Checking account
5. Which of the following entities are required to report c. Money market saving certificate
on business segments? d. Postdated check
a. Publicly traded entities ANS: B
b. Not for profit entities
c. Joint ventures 3. A cash equivalent is a short-term, highly liquid
d. Nonpublic entities investment that is readily convertible into known
ANS: A amount of cash and
a. Is acceptable as a means to pay current liabilities.
6. An entity must disclose all of the following about b. Has a current market value that is greater than the
each reportable segment if the amounts are used by the original cost.
chief operating decision maker, except c. Bears an interest rate that is at least equal to the
a. Depreciation expense prime interest rate at the date of liquidation.
b. Allocated expense d. Is so near maturity that it presents insignificant risk of
c. Interest expense change in interest rate.
d. Income tax expense ANS: D
ANS: B
4. All of the following can be classified as cash and cash
7. Entity-wide disclosures are required for publicly held equivalents, except
entities with a. Redeemable preference shares acquired and due in
a. One reportable segment 60 days
b. More than one reportable segment b. Commercial papers held and due for repayment in 90
c. One reportable segment and more than reportable days
segment c. Equity investments
d. At least ten segments d. A bank overdraft
ANS: C ANS: C

8. Which of the following is a required enterprise-wide
disclosure regarding external customers?
a. The identity of any external customer considered to
be “major” by management
b. The identity 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
ANS: D
CHAPTER 16 CASH AND CASH EQUIVALENTS
QUESTION 16-1 MULTIPLE CHOICE (IAA)
5. Deposits in foreign bank which are subject to foreign
exchange restriction should be classified
a. Separately as current asset, with appropriate
disclosure.
b. Separately as noncurrent asset with appropriate
disclosure.
c. Be written off as loss.
d. As part of cash and cash equivalents.
ANS: B
6. Bank overdraft generally should be
a. Reported as a deduction from current assets.
b. Reported as a deduction from cash.
c. Netted against cash and a net cash amount reported.
d. Reported as a current liability.
ANS: D

7. What is a compensating balance?
a. Saving account balance
b. Demand deposit account balance
c. Temporary investment serving as collateral for
outstanding loan
d. Minimum deposit required to be maintained in
connection with a borrowing arrangement
ANS: D
8. A compensating balance
a. Must be included in cash and cash equivalent.
b. Which is legally restricted and related to a long-term
loan is classified as current asset.
c. Which is legally restricted and related to a short-term
loan is classified separately as current asset.
d. Which is not legally restricted as to withdrawal is
classified separately as current asset.
ANS: C
QUESTION 16-2 MULTIPLE CHOICE (IAA)
1. Which of the following should not be considered
“cash”?
a. Change fund
b. Certified check
c. Personal check
d. Postdated check
ANS: D
2. All of the following may be included in “cash”, except
a. Currency
b. Money market instrument
c. Checking account balance
d. Saving account balance
ANS: B
3. Deposits held as compensating balance
a. Usually do not earn interest.
b. If legally restricted and held against short-term credit
may be included as cash.
c. If legally restricted and held against long-term credit
may be included among current assets.
d. None of these
ANS: D
4. Which of the following is not considered as a cash
equivalent?
a. A three-year treasury note maturing on January 31 of
the next year purchased by the entity on December1 of
the current year
b. A three-year treasury note maturing on January 31 of
the next year purchased by the entity on October 1 of
the current year
c. A 90-day T-bill
d. A 60-day money market placement
ANS: B
5. Which of the following should not be included in
“cash” in the current year-end statement of financial
position?
a. US $20,000 cash.
b. Past due promissory note issued in favor of the entity
by the President.
c. Another entity’s P150, 000 check payable to the
entity dated December 15 of the current year.
d. The entity’s undelivered check payable to a supplier
dated December 31 of the current year.
ANS: B
6. At the end of the current year, an entity had cash
accounts at three different banks. One account is
segregated solely for payment into a bond sinking fund.
A second account, used for branch operations, is
overdrawn. The third account, used for regular
corporate operations, has a positive balance. How
should these accounts be reported?
a. The segregated account should be reported as a
noncurrent asset, the regular account should be
reported as a current asset, and the overdraft should be
reported as a current liability
b. The segregated and regular accounts should be
reported as current assets and the overdraft should be
reported as a current liability
c. The segregated account should be reported as a
noncurrent asset and the regular account should be
reported as a current asset net of the overdraft
d. The segregated and regular accounts should be
reported as current assets net of the overdraft
ANS: A
QUESTION 16-8 MULTIPLE CHOICE (1AA)
1. Petty cash fund is
a. Separately classified as current asset
b. Money kept on hand for making minor disbursement
of coin and currency rather than by writing checks
c. Set aside for the payment of payroll
d. Restricted cash
ANS: B
2. The internal control feature specific to petty cash is
a. Separation of duties
b. Assignment of responsibility
c. Proper authorization
d. Imprest system
ANS: D

3. 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 petty cashier
d. To effectively control cash disbursements
ANS: D
4. The petty cash fund account under the imprest fund
system is debited
a. Only when the fund is created.
b. When the fund is created and every time it is
replenished.
c. When the fund is created and when the size of the
fund is increased.
d. When the fund is created and when the fund is
decreased.
ANS: C
5. A Cash Over and Short account
a. Is not generally accepted.
b. Is debited when the petty cash fund proves out over.
c. Is debited when the petty cash fund proves out short.
d. Is a contra account to cash.
ANS: C
6. Which of the following statements in relation to an
imprest petty cash is incorrect?
a. The imprest petty cash system in effect adheres to
the rule of disbursement by check.
b. Entries are made to the petty cash account only to
increase or decrease the size of the fund or to adjust
the balance if not replenished at year-end.
c. The petty cash account is debited when the fund is
replenished.
d. The petty cash fund is reported as part of current
assets.
ANS: C
7 When an imprest petty cash fund is used, which of the
following statements is true?
a. The balance of the petty cash fund should be
reported in the statement of financial position as a long-
term investment.
b. The petty cashier’s summary of petty cash payments
serves as a journal entry that is posted to the
appropriate general ledger account.
c. The reimbursement of the petty cash fund should be
credited to the cash account.
d. Entries that include a credit to the cash account
should be recorded at the time the payments from the
petty cash fund are made.
ANS: C
8. Which of the following statements in relation to petty
cash fund is false?
a. Each disbursement from petty cash should be
supported by a petty cash voucher.
b. The creation of a petty cash fund requires a journal
entry to reflect the transfer of fund out of the general
cash account.
c. At any time, the sum of the cash in the petty cash
fund and the total of petty cash vouchers should equal
the amount for which the imprest petty cash fund was
established.
d. With the establishment of an imprest petty cash fund,
one person is given the authority and responsibility for
issuing checks to cover minor disbursements.
ANS: D
QUESTION 16-4 MULTIPLE CHOICE (1AA)
1. Which of the following items must be added to the
cash balance per ledger in preparing a bank
reconciliation which ends with adjusted cash balance?
a. Note receivable collected by bank in favor of the
depositor and credited to the account of the depositor
b. NSF customer check
c. Service charge
d. Erroneous bank debit
ANS: A
2. In preparing bank reconciliation, interest paid by the
bank on the combined current and saving account is
a. Added to the bank balance
b. Subtracted from the bank balance
c. Added to the book balance
d. Subtracted from the book balance
ANS: C
3. In preparing monthly bank reconciliation, which of
the following would be added to the balance per bank
statement to arrive at the correct cash balance?
a. Outstanding check
b. Bank service charge
c. Deposit in transit
d. A customer’s note collected by the bank on behalf of
the depositor
ANS: C
4. Which of the following must be deducted from the
bank statement balance in preparing a bank
reconciliation which ends with adjusted cash balance?
a. Deposit in transit
b. Outstanding check
c. Reduction of loan charged to the account of the
depositor
d. Certified check
ANS: B
5. If the balance shown in the bank statement is less
than the correct cash balance and neither the entity nor
the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded
by the entity
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the entity
ANS: C
6. If the cash balance shown in the accounting records is
less than the correct cash balance and neither the entity
nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded
by the entity
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the entity
ANS: A
7. Bank reconciliations are normally prepared on a
monthly basis to identify adjustments needed in the
depositor’s records and to identify bank errors.
Adjustments on the part of the depositor should be
recorded for
a. Bank errors, outstanding checks and deposits in
transit. b. All items except bank errors, outstanding
checks and deposits in transit.
c. Book errors, bank errors, deposits in transit and
outstanding checks.
d. Outstanding checks and deposits in transit.
ANS: B
8. Bank statements provide information about all of the
following, except
a. Checks cleared during the period
b. NSF checks
c. Bank charges for the period
d. Errors made by the depositor
ANS: D
CHAPTER 17
ACCOUNTS AND NOTES RECEIVABLE
QUESTION 17-1 MULTIPLE CHOICE (IAA)
1. Trade receivables are classified as current assets if
these are reasonably expected to be collected
a. Within one year.
b. Within the normal operating cycle.
c. Within one year or within the operating cycle,
whichever is shorter.
d. Within one year or within the operating cycle,
whichever is longer.
ANS: D
2. Nontrade receivables are classified as current assets
only if these are reasonably expected to be realized 1n
cash
a. Within one year or within the operating cycle,
whichever is shorter.
b. Within one year or within the operating cycle,
whichever is longer.
c. Within the normal operating cycle.
d. Within one year, the length of the operating cycle
notwithstanding
ANS: D
3. If the ideal measure of short-term receivables in the
statement of financial position is the discounted
amount of the cash to be received in the future, failure
to follow this practice usually does not make the
statement of financial position misleading because
a. Most short-term receivables are noninterest-bearing.
b. The allowance for doubtful accounts includes a
discount element.
c. The amount of the discount is not material.
d. Most receivables can be sold to a bank or factor.
ANS: C
4. Credit balances in accounts receivable are classified
a. Current liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts receivable
ANS: A
5. Where the operating cycle extends beyond one year
because of normal credit terms as in the case of
installment sales of household appliances
a. It is proper to classify the entire receivables as
current assets with disclosure of the amount not
realizable within one year, if material.
b. The entire receivables are shown as noncurrent
assets.
c. The portion due in one year is shown as current and
the balance as noncurrent.
d. The receivables are not recognized.
ANS: A
6. In the case of long-term installments receivable as in
real estate installment sales where a major portion is
collected beyond the normal operating cycle
a. The entire receivables are shown as current without
disclosure of the amount not currently due.
b The entire receivables are shown as noncurrent.
c. Only the portion currently due is shown as current
and the balance as noncurrent.
d. The entire receivables are shown as current with
disclosure of the amount not currently due.
ANS: C
QUESTION 17-2 MULTIPLE CHOICE (AICPA ADAPTED)
1. Which method of recording bad debt loss is
consistent with accrual accounting?
a. Allowance method
b. Direct write-hjgoff method
c. Percent of sales method
d. Percent of accounts receivable method
ANS: A
2. A method of estimating bad debts that focuses on the
income statement rather than the statement of
financial position is the allowance method based on
a. Direct write-off
b. Aging the trade accounts receivable
c. Credit sales
d. The balance in the trade accounts receivable
ANS: C
3. A method of estimating uncollectible accounts that
emphasizes asset valuation rather than income
measurement is the allowance method based on
a. Aging of accounts receivable.
b. Direct write-off
c. Gross sales
d. Credit sales less returns and allowances
ANS: A
4. The advantage of relating the bad debt experience to
accounts receivable is that this approach
a. Gives a reasonably accurate measurement of
receivables in the statement of financial position.
b. Relates bad debt expense to the period of sale.
c. Is the only generally accepted method for measuring
accounts receivable.
d. Makes estimates of uncollectible accounts
unnecessary.
ANS: A
5. When a specific customer account receivable is
written off as uncollectible, what will be the effect on
net income under the allowance and direct write-off
method?
a. No effect under both allowance method and direct
write-off method
b. Decrease under both allowance method and direct
write-off method
c. No effect under allowance method and decrease
under direct write-off method
d. Decrease under allowance method and no effect
under direct write-off method
ANS: C
6. When the allowance method of recognizing
uncollectible accounts is used, the entry to record the
write-off of a specific account would
a. Decrease both accounts receivable and the allowance
for uncollectible accounts.
b. Decrease accounts receivable and increase the
allowance for uncollectible accounts.
c. Increase the allowance for uncollectible accounts and
decrease net income.
d. Decrease both accounts receivable and net income.
ANS: A
7. When an entity uses the allowance method for
recognizing uncollectible accounts, the entry to record
the write-off 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 accounts receivable
d. Decreases both net income and working capital
ANS: A
8. 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
ANS: D
9. An entity uses the allowance method to recognize
doubtful accounts expense. What is the effect of a
collection of an account previously written off?
a. No effect on both allowance for doubtful accounts
and doubtful accounts expense
b. No effect on allowance for doubtful accounts and
decrease in doubtful accounts expense
c. Increase in allowance for doubtful accounts and no
effect on doubtful accounts expense
d. Increase in allowance for doubtful accounts and
decrease in doubtful accounts expense
ANS: C
10. When an accounts receivable aging schedule is
prepared, a series of computations is made to
determine the estimated uncollectible accounts. The
resulting amount from this aging schedule
a. When added to the total accounts written of during
the year is the desired credit balance of the allowance
for doubtful accounts at year-end
b. Is the amount of doubtful accounts expense for the
year
c. Is the amount that should be added to the beginning
allowance for doubtful accounts to get the doubtful
accounts expense for the year
d. Is the amount of desired credit balance of the
allowance for doubtful accounts to be reported at year-
end
ANS: D
QUESTION 17-3 MULTIPLE CHOICE (1AA)
1. Which of the following methods of determining bad
debt expense does not match expense and revenue?
a. Charging bad debts with a percentage of sales under
the allowance method
b. Charging bad debts with a percentage of accounts
receivable under the allowance method
c. Charging bad debts with an amount derived from
aging the accounts receivable under the allowance
method
d. Charging bad debts as accounts are written off as
uncollectible
ANS: D
2. Which of the following methods of determining bad
debt expense most closely matches expense to revenue?
a. Charging bad debts only as accounts are written off
as uncollectible.
b. Charging bad debts with a percentage of sales for
that period.
c. Estimating the allowance for doubtful accounts as a
percentage of accounts receivable.
d. Estimating the allowance for doubtful accounts by
aging the accounts receivable.
ANS: B
3. Which of the following concepts relates to the
allowance method in accounting for uncollectible
accounts receivable?
a. Bad debt expense is an estimate based on historicaI
and prospective information.
b. Bad debt expense is the actual amount determined to
be uncollectible.
c. Bad debt expense is an estimate based only on aging
of accounts receivable.
d. Bad debt expense is management determination of
which accounts are considered doubtful.
ANS: A
4. Why is the allowance method preferred over the
direct write-off method of accounting for bad debts?
a. the allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-
off method is difficult to do.
d. Improved matching of bad debt expense with
revenue is achieved.
ANS: D
5. Which of the following is not acceptable in estimating
uncollectible accounts receivable?
a. The estimate of uncollectible accounts is based on a
percentage of sales for the period.
b. The estimate of uncollectible accounts is based on a
percentage of the accounts receivable at the end of a
period.
c. The estimate of uncollectible accounts is based on an
aging schedule.
d. No estimate of uncollectible accounts is made but
accounts are written off when it is determined that the
accounts cannot be collected.
ANS: D
6. The estimate of uncollectible accounts receivable
based on a percentage of sales
a. Emphasizes measurement of the net realizable value
of accounts receivable.
b. Emphasizes measurement of bad debt expense.
c. Emphasizes measurement of total assets.
d. Is only acceptable for tax purposes.
ANS: B
7. The entity debiting accounts receivable and crediting
allowance for doubtful accounts would be made when
a. A customer pays an account balance.
b. A customer defaults on an account.
c. A previously defaulted customer-pays the
outstanding balance.
d. Estimated uncollectible receivables are too low.
ANS: C
8. A debit balance in the allowance for doubtful account.
a. Should never occur.
b. Is always the result of management not providing a
large enough allowance in order to manage earnings
c. May occur before the end-of-period adjustment for
uncollectible accounts.
d. May exist even after the end-of-period adjustment
for uncollectible accounts.
ANS: C
9. Which of the following is not permitted in accounting
for uncollectible accounts receivable?
a. Aging of accounts receivable
b. Percentage of accounts receivable
c. Percentage of sales
d. Direct write-off method
ANS: C
10. When the direct write-off method of recognizing
bad debt expense is used, the entry to write off a
specific customer account would
a. Increase net income
b. Have no effect on net income
c. Increase accounts receivable and increase net income
d. Decrease accounts receivable and decrease net
income
ANS: D
QUESTION 17-4 MULTIPLE CHOICE (AICPA ADAPTED)
1. On October 1 of the current year, an entity received a
one-year note receivable bearing interest at the market
rate. The face amount of the note receivable and the
entire amount of the interest are due on September 30
of next year. The interest receivable on December 31 of
the current year would consist of an amount
representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the
note receivable over its face amount
ANS: A
2. On July 1 of the current year, an entity obtained a
two-year 8% note receivable for services rendered. At
that time, the market rate of interest was 10%. The face
amount of the note and the entire amount of interest
are due on the date of maturity. Interest receivable on
December 31 of the current year is
a. 5% of the face amount-of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note
ANS: B
3. An entity uses the installment method to recognize
revenue from installment sales. Customers pay the
installment notes in 24 equal monthly amounts which
include 12% interest. What is the installment notes
receivable balance six months after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly
payments discounted at 12%.
d. Less than the present value of the remaining monthly
payments discounted at 12%.
ANS: C
4 What in imputed interest?
a. Internet based on the stated interest rate
b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the bank prime interest rate
ANS: B
5. Accounting for the interest in a non- interest bearing
note receivable is an example of what aspect of
accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance
ANS: C
6. On July 1 of the current year, an entity received a
one-year note receivable bearing interest at the market
rate. The face amount of the note receivable and the
entire amount of the interest are due in one year. The
interest receivable account would show a balance on
a. July 1 but not December 31
b. December 31 but not July 1
c. July 1 and December 31
d. Neither July 1 nor December 31
ANS: B
7. On July 1 of the current year, an entity received a
one-year note receivable bearing interest at the market
rate. The face amount of the note receivable and the
entire amount of the interest are due in one year. When
the note receivable was recorded on July 1, which of the QUESTION 17-5 Multiple Choice (IAA)
following was debited?
a. Interest receivable 1. Why would an entity sell accounts receivable to
b. Unearned discount on note receivable another entity?
c. Interest receivable and unearned discount on note a. To improve the quality of credit granting process
receivable b. To limit its legal liability
d. Neither interest receivable nor unearned discount on c. To accelerate access to amount collected
note receivable d. To comply with customer agreements
ANS: D ANS: C

8. On August 15, an entity sold goods for which it 2. Which of the following is a method to generate cash
received a note bearing the market rate of interest on from accounts receivable?
that date. The four-month note was dated July 15. Note a. Assignment
principal, together with all interest, is due November 15. b. Factoring
When the note was recorded on August 15, which of c. Assignment and factoring
the following accounts increased? d. Assignment, factoring and discounting
a. Unearned discount ANS: C
b. Interest receivable
c. Prepaid interest 3. The practice of realizing cash from trade receivables
d. Interest revenue prior to maturity date is widespread. Which term is not
ANS: B associated with this practice?
a. Hypothecation
9. On July 1 of the current year, an entity received a b. Factoring
one-year note receivable bearing interest at the market c. Defalcation
rate. The face amount of the note receivable and the d. Pledging
entire amount of the interest are due on June 30 of next ANS: C
year. On December 31 of the current year, the entity
should report in the statement of financial position 4. When the accounts receivable are sold outright, the
a. A deferred credit for interest applicable to next year accounts receivable have been
b. No interest receivable a. Pledged
c. Interest receivable for the entire amount of the b. Assigned
interest due on June 30 of next year c. Factored
d. Interest receivable for the interest accruing in the d. Collateralized
current year ANS: C
ANS: D
5. It is a predetermined amount withheld by a factor as
10. An entity received a seven-year zero interest- a protection against customer returns, allowances and
bearing note on February 1, 2017 in exchange for other special adjustments.
property sold. There was no established exchange price a. Equity in assigned accounts
for the property and the note has no ready market. The b. Service charge
prevailing rate 'of interest for a note of this type was 7% c. Factor’s holdback
on February 1, 2017, 6% on December 31, 2017, 8% on d. Loss on factoring
February 1, 2018, and 9% on December 31, 2018. What ANS: C
interest rate should be used to calculate the interest
revenue from the transaction for the years ended 6. If a note receivable is discounted with recourse
December 31, 2017 and 2018, respectively? a. A contingent liability does not exist.
b. Note receivable discounted is credited.
a. O% and 0% c. Note receivable must be credited.
b. 7% and 7% d. Liability for note receivable discounted is credited.
c. 7% and 9% ANS: B
d. 6% and 9%
ANS: B 7. The note receivable discounted account is reported
as
a. Contra asset account for the proceeds from the
discounting transaction
b. Contra asset account for the face amount of the note
c. Liability account for the proceeds from the
discounting
d. Liability account for the face amount of the note
ANS: B
8. If a note receivable is discounted without recourse
a. The contingent liability may be disclosed
b. Liability for note receivable discounted is credited
c. Note receivable is credited
d. The transaction shall be accounted for as a secured
borrowing as opposed to a sale
ANS: C
9. Note receivable discounted with recourse should be
a. Excluded from total receivables without disclosure of
contingent liability
b. Excluded from total receivables with disclosure of
contingent liability
c. Included in total receivables without disclosure of
contingent liability
d. Included in total receivables with disclosure of
contingent liability
ANS: B
QUESTION 17-6 MULTIPLE CHOICE (AICPA ADAPTED)
1. When an entity factored accounts receivable without
recourse with a bank, the transaction is best described
as
a. Bank loan collateralized by the accounts receivable.
b. Bank loan to be repaid by the proceeds from the
accounts receivable.
c. Sale of the accounts receivable to the bank, with risk
of uncollectible accounts retained by the entity.
d. Sale of the accounts receivable to the bank with the
risk of uncollectible accounts transferred to the bank.
ANS: D
2. Which of the following statements is true when
accounts receivable are factored without recourse?
a. The transaction may be accounted for either as
secured borrowing or sale, depending upon the
substance of transaction.
b. The accounts receivable are used as collateral for a
promissory note issued to the factor.
c. The factor assumes the risk of collectability and
absorbs any credit losses in collecting the accounts
receivable.
d. The financing cost should be recognized ratably over
the collection period.
ANS: C
3. All but one of the following are required before a
transfer of accounts receivable can be recorded as a
sale.
a. The transferred accounts receivable are beyond the
reach of the transferor and the creditors.
b. The transferor has not kept effective control over the
transferred accounts receivable through a repurchase
agreement.
c. The transferor maintains continuing involvement.
d. The transferee can pledge or sell the transferred
accounts receivable.
ANS: C
4. If financial assets are exchanged for cash and other
consideration but the transfer does not meet the
criteria for a sale, the transaction should be accounted
for as
a. Secured borrowing
b. Pledge of collateral
c. Both secured borrowing and pledge of collateral
d. Neither secured borrowing nor pledge of collateral
ANS: C
5. Which of the following in used to account for
probable sale discounts, sales returns and sales
allowances?
a. Due from factor
b. Recourse liability
c. Both due from factor-and recourse liability
d. Neither due from factor nor recourse liability
ANS: A
6. After being held for 40 days, a 120-day 12% interest
bearing note receivable was discounted at a bank at
15%. The net proceeds from discounting are equal to
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face value less the discount at 12%
d. Face value less the discount at 15%
ANS: B
7. A note receivable bearing a reasonable interest rate
is sold to a bank with recourse. At the date of the
discounting transaction, the note receivable discounted
account should be
a. Decreased by the proceeds from the discounting
b. Increased by the proceeds from the discounting
c. Increased by the face amount of the note
d. Decreased by the face amount of the note
ANS: C
8. If receivables are hypothecated against borrowings,
the amount of receivables involved 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 between the face amount and the amount
of borrowings
ANS: A