CHAPTER 5

CONCEPTUAL FRAMEWORK
ELEMENTS OF FINANCIAL
STATEMENTS
Question 5-1
 Explain the elements of the financial statements.
Answer 5-1:
Financial statements portray the financial effects of
transactions and other events by grouping them into
broad classes according to their economic
characteristics.
The board classes are termed the elements of financial
statements.
The elements of Financial statements refer to the
quantitative information reported in the statement of
financial position and income statement.
The elements of Financial statements are the building
blocks form which financial statements are constructed
The presentation of these elements in the statement of
financial position and the income statement involves a
process of classification and sub classification in a
manner most useful to users for purpose of making
economic decisions.
The elements directly related to the measurement of
financial position are asset, liability and equity.
The elements directly related to the measurement of
financial performance are income and expense.
The conceptual framework identifies no elements that
are unique to the statement of changes in equity
because such statement compromises items that
appear in the statement of financial position and the
income statement.
Equity is the residual interest in the assets of the entity
Question 5-2
 What is the new definition of asset?
Answer 5-2:
Under the revised Conceptual Framework , an asset
is defined as a present economic resource
controlled by the entity as a result if past events.
An economic resource is a right that has the
potential to produce economic benefits.
The new definition clarifies that an asset is an
economic resource and that the potential economic
benefits no longer need to be expected to flow to the
entity.
Essential Characteristics of asset
a. The asset is a present economic resource
b. The economic resource is a right that has the
potential to produce economic benefits.
c. The economic resource is controlled by the entity
as a result of past events.
Question 5-3
 Explain the right that has the potential to produce
economic benefits.
Answer 5-3:
An economic resource is a right that has the potential to
produce economic benefits.
For the potential to exist, it does not need to be certain or
even likely that the right will produce economic benefits.
It is only necessary that the right already exists.
A right can meet the definition od an economic resource
even if the probability that it will produce economic benefit
is low.
The economic reason is the present right that contains
the potential and not the future economic benefits that the
right may produce.
Question 5-4
 Give examples of rights that have the potential to
produce economic benefits.
Answer 5-4:
Rights that have the potential to produce economic
benefits may take the following forms:
1. Rights that correspond to an obligation od another
entity
a. Rights to receive cash
b. Rights to receive goods and services
c. Rights to exchange economic resources with
another party on favorable terms
d. Right to benefit from an obligation of another party
if a specified uncertain future event occur
2. Rights that do not correspond to an obligation of
another entity
a. Right over physical objects, such as property,
plant and equipment or inventory.
b. Right to intellectual property.
3. Rights established by contract or legislation such
as owning a debt instrument or an equity instrument
or owning a registered patent.
Question 5-5
 Explain control of an asset as a result of past
events.
Answer 5-5:
An entity controls an asset if it has the present
ability to direct the use of the economic benefits that
flow from it.
Control also includes the ability to prevent others
from using such asset and therefore preventing
others from obtaining the economic benefit from the
asset.
Control may arise if an entity enforces legal rights.
If there are no legal rights, control can still exist if an
entity has other means of ensuring that no other
party can benefit from an asset.
For example, an entity has access to technical
know-how and has ha ability to keep this know-how
secret
Question 5-6
 What id the new definition of liability?
Answer 5-6:
Under the Revised Conceptual Framework, a liability is
defined as present obligation of an entity to transfer an
economic resource as a result of past events.
The new definition clarifies that a liability is the
obligation to transfer an economic resource and not the
ultimate outflow of economic benefits.
The outflow of economic benefits no longer needs to
be expected similar to the definition of an asset.
The new definition of liability to some extent is
inconsistent with the definition of liability under IAS 37
In case of conflict, the IASB stated that the
requirements of a standard shall always prevail over
Essential Characteristic of Liability
a. The entity has an obligation.
b. The obligation is to transfer an economic
resource.
c. The obligation is a present obligation that exists
as a result of past event.
An obligation is a duty or responsibility that an entity
has no practical ability to avoid.
An obligation can either be legal or constructive.
Obligation may be legally enforceable as a
consequence of a binding contract or statutory
requirements.
This is normally the case, for example, with accounts
payable for goods and services received.
Constructive Obligation arises from normal business
practice, custom and a desire to maintain good
business relation or act in an equitable manner.
For example, an entity decides as a matter of policy
to rectify faults in the product even when these
become apparent after the warranty period.
Question 5-7
 Give examples of obligations to transfer an
economic resource.
Answer 5-7:
Obligations to transfer an economic resource as a
result of past event include:
a. Obligation to pay cash
b. Obligation to deliver goods or noncash resources
c. Obligation to provide services at some future time
d. Obligation to exchange economic resources with
another party on unfavorable terms
e. Obligation to transfer a economic resource if
specified uncertain future events occurs.
Question 5-7
 Define Income
Answer 5-7:
Income is defined as increases in assets or decreases
in liabilities that result in increases in equity, other than
those relating to contributions from equity holders.
The definition of income has changed to reflect the
change in the definition of asset and liability.
The definition of income encompasses both revenue
and gains.
Revenue arises in the course of the ordinary regular
activities and is referred to by variety of different
names including sales, fees, interest, dividends,
royalties and rent.
The essence of revenue is regularity.
Gains represents other items that meet the definition
of income and do not arise in the course if the
ordinary regular activities.
Gains include gain from disposal of non current
asset, unrealized gain on trading and gain from
expropriation.
Question 5-9
 Define Expense.
Answer 5-9:
Expense is defined as decreases in assets or
increases in liabilities that result in equity, other than
those relating to distributions to equity holders.
The definition of expense has charged to reflect the
change in the definition of asset and liability.
Expense encompass losses as well as those expense
that arise in the course of the ordinary regular
activities.
Expenses that arise in the course of ordinary regular
activities include cost of goods sold, wages and
depreciation.
Losses do not arise in the course of the ordinary
regular activities and include losses resulting from
disasters.
Examples include losses from fire, flood, storm
surge, tsunami and hurricane, as well as those
arising from disposal of noncurrent assets.
Question 5-10 Multiple Choice (ACP)
1. The elements directly related to the measurement of
financial position are
a. Asset, Liability and Equity
b. Asset and Liability
c. Income and Expense
d. Asset, Liability, equity, income and expense
2. The elements of financial position describe amount of
resources and claims against resources.
e. During a period of time
f. At a moment in time
g. During a period of time and at a moment in time
h. Neither during a period of time nor at a moment in
time
3. The elements directly related to the measurement
of Financial Performance are
a. Income and expense
b. Asset, liability and equity
c. Asset and liability
d. Income, expense and equity
4. It is a present economic resource controlled by
the entity as a result of past events
e. Assets
f. Liability
g. Equity
h. Income
5. It is a present obligation of the entity to transfer
an economic resource as a result of past events.
a. Assets
b. Liability
c. Equity
d. Expense
6. It is the residual interest in the assets of the entity
after deducting all of the liabilities.
e. Income
f. Equity
g. Retained earnings
h. All of the choices match the definition
7. It is an increase in asset or a decrease in liability that
results in increase in equity other than contribution from
equity holders.
a. Assets
b. Liability
c. Income
d. Expense
8. It is a decrease in asset or an increase in liability that
results in decrease in equity other than distribution to
equity holders.
e. Assets
f. Liability
g. Income
h. Expense
9. This arises in the course of ordinary regular
activities of the entity and is referred to by a variety
of different names including sales, fees, interest,
dividends, royalties and rent.
a. Income
b. Revenue
c. Profit
d. Gain
10. Which statement in relation to income is true?
e. Income encompasses both revenue and gain
f. Revenue encompasses both income and gain
g. Gain encompasses both income and revenue
h. Income is technically the same as revenue
Answers 5-10
1. A
2. B
3. A
4. A
5. B
6. B
7. C
8. D
9. B
10. A
Question 5-11 Multiple choice (Conceptual
Framework)
1. Which is not within the new definition of asset?
a. An asset id a present economic resource.
b. The economic resource is a right that has potential
to produce economic benefit
c. The economic resource is controlled by the entity
as a result of past event
d. Future economic benefit is expected to flow to the
entity
2.Which of the following criteria need not be satisfied
for a liability to exist?
e. The entity has an obligation
f. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exist as
a result of a past event.
d. The settlement is expected to result in an outflow
of economic benefits.
3. A present obligation exists as result of past event if
a. The entity has already obtained economic
benefits
b. The obligation is to transfer an economic
resource.
c. The entity as not yet obtained economic benefit
and must transfer an economic resource.
d. The entity has already obtained economic benefit
and must transfer economic resource.
4. Rights that have the potential to produce economic
benefits and correspond to an obligation of another
entity include all, except
a. Right to receive cash
b. Right to receive goods
c. Right to exchange economic resources with
another entity on favorable terms
d. Right over property plant and equipment
5. An economic resource could produce economic
benefit if an entity is entitled to all, except
e. To receive contractual cash flows
f. To exchange economic resources with another
entity on unfavorable terms
g. To receive cash by selling the economic resource
h. To extinguish a liability by transferring an economic
resource
6. It is the present ability to direct the use of an
economic resource and obtain the benefit that may
flow from it.
a. Control
b. Legal right
c. Obligation
d. Ownership
7. It is a duty or responsibility than an entity has no
practical ability to avoid.
e. Right
f. Obligation
g. Equity
h. Expense
8. Obligations to transfer an economic resource include
all, except
a. Obligation to pay cash
b. Obligation to deliver goods
c. Obligation to provide services
d. Obligation to transfer an economic resource even if a
specified future time does not occur
9. Which statement is not true about income and
expense?
e. Income is increase in asset of decrease in liability that
results in increase in equity other than contribution
from equity holders.
f. Expense is decreased in asset or increase in liability
that result in decrease in equity other than
contribution from equity holders.
c. Income and expense are the element that relate
to financial position.
d. Income is broader than revenue
10. This new term refers to the statement of profit or
loss and a statement presenting other
comprehensive income.
a. Income statement
b. Statement of comprehensive income
c. Statement of financial performance
d. Statement of financial position
Answer 5-11
1. D
2. D
3. D
4. D
5. B
6. A
7. B
8. D
9. C
10. C
Question 5-12 Multiple Choice (AICPA Adapted)
1. 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 liability from primary operations.
2. What is the primary distinction between revenue and
gain?
e. The materiality of the amount
f. The likelihood that the transaction will recur
g. The nature of the activity gives rise to the
transaction
h. The method of disclosing the transactions.
3. The term income
a. Includes revaluation surplus
b. Includes adjustment of prior period error
c. Includes gains resulting from the sale of an asset
in an arm’s length transaction
d. Is the same as retained earnings
4. A decrease in an asset arising from peripheral of
incidental transaction is called
e. Capital expenditure
f. Cost
g. Loss
h. Expense
5. An outflow of asset based on an activity that
represents the major operations is called
a. Loss
b. Liability
c. Expense
d. Equity
Answer 5-12
1. D
2. C
3. C
4. C
5. C
CHAPTER 6

CONCEPTUAL FRAMEWORK
RECOGNITION AND MEASUREMENT
Question 6-1
 Explain Recognition
Answer 6-1:
The revised conceptual frame work defines recognition
as the process of capturing for inclusion in the financial
statements an item that meets the definition of an
asset, liability, equity, income or expense.
The amount at which an asset, a liability or equity is
recognized in the statement of financial position is
reported as carrying amount.
Recognition links the elements to the statement of
financial position and statement of financial
performance.
The statement are linked because the recognition of
an item in one statement requires the recognition of
the same item in another statement.
Question 6-2
 Explain the new recognition criteria for the elements of
financial statements.
Answer 6-2:
Only items that meet the definition of an asset, a liability or
equity are recognized in the statement of financial position.
Similarly, only items that meet the definition of income or
expense are recognized in the statement of financial
performance.
Recognition does not focus anymore on how probable
economic benefits will flow to or from the entity and that the
cost can be measured reliably.
An asset or liability and any corresponding income or
expense can exist even if the probability of inflow or
outflow of the economic benefit is low.
QUESTION 6-3
 Explain the point of sale income recognition principle.
ANSWER 6-3
The basic principle of income recognition is that income
shall be recognized when earned.
But the question is when is income considered to be
earned?
With respect to sale of goods in the ordinary course of
business, the point of sale is unquestionably the point of
income recognition.
The reason is that it is at the point of sale that the entity
has transferred to the buyer the significant risks and
rewards of ownership of the goods.
Stated differently, legal title to the goods passes to the
buyer at the point of sale
QUESTION 6-4
 Explain the expense recognition principle.
ANSWER 6-4
The basic principle of expense recognition means that expenses
shall be recognized when incurred.
But the question is when are-expenses incurred
Actually, the expense recognition principle is the application of the
matching principle.
The generation of revenue is not without any cost.
There has got to be some cost in earning a revenue. "There is no
gain if there is no pain".
The matching principle requires that those costs and expenses
incurred in earning a revenue shall be reported in the same period.
The matching principle has three applications, namely:
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
QUESTION 6-5
 Explain the cause and effect association principle
ANSWER 6-5
The cause and effect association principle means that the
expense be recognized when the revenue is already recognized
on the basis of a presumed direct association of the expense
with specific revenue.
The cause and effect association principle is actually the strict
matching concept.
The best example is the cost of merchandise inventory.
Such cost is considered as an asset in the meantime that the
merchandise is on hand.
When the merchandise is sold, the cost thereof is expensed in
the form of cost of goods sold because at such time revenue
shall be recognized.
Other examples include doubtful accounts, warranty expense
and sales commissions
QUESTION 6-6
 Explain the systematic and rational allocation principle.
ANSWER 6-6
Under the systematic and rational allocation principle, some
costs are expensed by simply allocating them over the
periods benefited.
The reason for this principle is that the cost incurred will
benefit, future periods and that there is an absence of a
direct or clear association of the expense with specific
revenue.
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 systematic and allocation procedures.
Concrete examples include depreciation, amortization and
allocation of prepayments.
QUESTION 6-7
 Explain the immediate recognition principle.
ANSWER 6-7 Under this principle, the cost incurred is
expensed outright because of uncertainty of future economic
benefits or difficulty of reliably associating certain costs with
future revenue
An expense is recognized immediately
a. When an expenditure produces no future economic benefit.
b. When cost incurred does not qualify or ceases to qualify for
recognition as an asset.
Examples include officers' salaries and most administrative
expenses, advertising and most selling expenses, amount to
settle lawsuit and worthless intangibles.
Many losses, such as loss from disposal of building, loss from
sale of investments, and casualty loss, are immediately
recognized because they are not directly related to specific
revenue.
QUESTION 6-8
 Explain derecognition.
ANSWER 6-8
The Revised Conceptual Framework introduced the term
derecognition.
Derecognition is defined as the removal of all or part of a
recognized asset or liability from the statement of
financial position
Derecognition normally occurs when an item no longer
meets the definition of an asset or a liability.
Derecognition of an asset occurs when the entity loses
control of all or part of the asset.
Derecognition of a liability occurs when the entity no
longer has a present obligation for all or part of the
liability.
QUESTION 6-9
 Explain measurement.
ANSWER 6-9
Measurement is defined as quantifying in monetary
terms the elements in the financial statements.
The Revised Conceptual Framework mentions two
categories:
a. Historical cost
b. Current value
QUESTION 6-10
 Explain historical cost.
ANSWER 6-10
The historical cost of an asset is the cost incurred in
acquiring or creating the asset comprising the
consideration paid plus transaction cost.
The historical cost of a liability is the consideration
received to incur the liability minus transaction cost.
Simply stated, historical cost is the entry price or
entry value to acquire an asset or to incur a liability.
Historical cost of an asset is updated because of:
a. Depreciation and amortization
b. Payment received as a result of disposing part or all of
the asset
c. Impairment
d. Accrual of interest to reflect any financing component
of the asset
e. Amortized cost measurement of financial asset
2. Historical cost of a liability is updated because of:
a. Payment made or satisfying an obligation to deliver
goods
b. Increase in value of the obligation to transfer economic
resources such that the liability becomes onerous
c. Accrual of interest to reflect any financing component
of the liability
d. Amortized cost measurement of financial liability
QUESTION 6-11
 Explain current value.
ANSWER 6-11
Current value includes:
a. Fair value
b. Value in use for asset
c. Fulfilment value for liability
d. Current cost
QUESTION 6-12
 Explain fair value.
ANSWER 6-12
Fair value of an asset is the price that would be
received to sell an asset in an orderly transaction
between market participants at measurement date.
Fair value of liability is the price that would paid to
transfer a liability in an orderly transaction between
market participants at the measurement date.
Fair value is an exit price or exit value.
Fair value can be observed directly using market
price of the asset or liability in an active market. In
cases where fair value cannot be directly measured,
an entity can use present value of cash flows.
QUESTION 6-13
 Explain value in use
ANSWER 6-13
Value in use is the present value of the cash flows
that an entity expects to derive from the continuing
use of an asset and from the ultimate disposal.
Value in use does not include transaction cost on
the asset but includes transaction cost on the
disposal of the asset.
Value in use is an exit price or exit value.
QUESTION 6-14
 Explain fulfilment value
ANSWER 6-14
Fulfilment value is the present value of cash that an
en expects to transfer in paving or settling a liability
Fulfilment value does not include traction cost on
incurring a liability but includes transaction on
fulfilment of a liability.
Fulfilment value is an exit price or exit value
QUESTION 6-15
 Explain current cost.
ANSWER 6-15
Current cost or replacement cost of an asset is the
cost of an equivalent asset at the measurement date
comprising the consideration paid and transaction
cost.
Current cost of a liability is the consideration that
would be received less any transaction cost at
measurement date.
QUESTION 6-16
 Explain selecting a measurement basis.
ANSWER 6-16
The IASB did not mandate a single measurement
basis because the different measurement bases could
produce useful information under different
circumstances.
The information produced by the measurement basis
must be useful to the users of financial statements.
To achieve this, the information must be both relevant
and faithfully represented.
Historical cost is the measurement basis most
commonly adopted in preparing financial statements.
QUESTION 6-17 Multiple choice (Conceptual Framework
1. It is the process of capturing for inclusion in the final
statements an item that meets the definition elements of
financial statements.
a. Recognition
b. Measurement
c. Classifying
d. Derecognition
2. An item is recognized in the financial statements if
a. It is probable that economic benefits will flow to or from the
entity.
b. It meets the definition of an asset, liability, equity, income and
expense.
c. The entity has ownership of such item.
d. It is probable that economic benefits will flow to or from the
entity and that the cost can be measured reliably.
3. Recognition of an element is appropriate when
information results in
a. Relevance
b. Faithful representation
c. Both relevance and faithful representation
d. Neither relevance nor faithful representation
4. It is the removal of all or part of a recognized
asset or liability from the statement of financial
position.
b. Writeoff
c. Derecognition
d. Extinguishment
e. Retirement
5. Derecognition normally occurs when
a. An item no longer meets the definition of an
asset or a liability
b. The entity loses control of the asset.
c. The entity no longer has a present obligation for
the liability.
d. Under all of these circumstances.
ANSWER 6-17
1. A
2. B
3. C
4. B
5. D
QUESTION 6-18 Multiple choice (IAA)
1. Generally, revenue is recognized
a. At the point of sale.
b. When cause and effect are associated.
c. At the point of cash collection.
d. At appropriate points throughout the operating
cycle.
2. Which of the following is not an accepted basis
for recognition of revenue?
b. Passage of time
b. Performance of service
c. Completion of percentage of a project
d. Upon signing of contract
3. Revenue from sale of goods is recognized
a. When the customer order is received.
b. When the customer order is accompanied by a
check.
c. Only if the transaction will create an account
receivable.
d. When the title to the goods changes.
4. Which of the following practices may not be an
acceptable deviation from recognizing revenue at the
point of sale?
b. Upon receipt of cash
b. During production
c. Upon receipt of order
d. End of production
5. Which of the following represents the least
desirable choice for the recognition of revenue?
a. Recognition of revenue during production
b. Recognition of revenue when a sale occurs
c. Recognition of revenue when cash is collected
d. Recognition of revenue when production is
completed
ANSWER 6-18
1. A
2. D
3. D
4. C
5. C
QUESTION 6-19 Multiple choice (AICPA Adapted)
1. Revenue recognition conventionally refers to
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 during a 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 to the entity.
2. Which means the process of converting noncash resources
into cash or claims to cash?
b. Allocation
b. Collection
c. Recognition
d. Realization
3. Gains on assets unsold are identified by the term
a. Unrecorded
b. Unrealized
c. Unrecognized
d. Unallocated
4. The term recognized is synonymous with the term
b. Recorded
b. Realized
c. Matched
d. Allocated
5. Which statement 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 good
sold.
ANSWER 6-19
1. A
2. D
3. B
4. A
5. B
QUESTION 6-20 Multiple choice (AICPA Adapted)
1. Which of the following is not a theoretical basis for the
allocation of expense?
a. Immediate recognition
b. Systematic and rational allocation
c. Cause and effect association
d. Profit maximization
2. Costs that can be reasonably associated with specific
revenue but not with specific product should be
b. Expensed in the period incurred
b. Allocated to the specific product 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 then amortized over a reasonable period
3. Which of the following is an example of the cause
and effect association principle?
a. Sales commission
b. Allocation of insurance cost
c. Depreciation of property, plant and equipment
d. Officers' salaries
4. Which of the following is an application of the
systematic and rational allocation principle?
b. Doubtful accounts
b. Research and development cost
c. Warranty cost
d. Amortization of intangible asset
5. Which of the following would be matched with
current revenue on a basis other than association of
cause and effect?
a. Goodwill
b. Cost of goods sold
c. Sales commission
d. Warranty cost
6. Why are certain costs of doing business capitalized
when incurred and then depreciated or amortized
b. To reduce the income tax liability
b. To aid management in the decision-making process
c. To match the cost of production with revenue
d. To adhere to the accounting concept of conservatism
7. Which principle best describes the rationale for
matching depreciation with revenue?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
8. Which of the following should be expensed under
the principle of systematic and rational allocation?
b. Salesmen's monthly salaries
b. Insurance premiums
c. Transportation to customers
d. Electricity to light office building
9. The writeoff of a worthless patent is an example of
which of the following principles?
a. Associating cause and effect
b. Immediate recognition
c. Systematic and rational allocation
d. Objectivity
10. What is an example of cost that cannot be directly
related to particular revenue but incurred to obtain
benefits that are exhausted in the period when the cost
is incurred?
b. Sales commissions
b. Sales salaries
c. Freight in
d. Prepaid insurance
ANSWER 6-20
1. D
2. C
3. A
4. D
5. A
6. C
7. B
8. B
9. B
10. B
QUESTION 6-21 Multiple choice (IAA)
1. The matching principle is best demonstrated by
a. Not recognizing any expense unless some
revenue realized
b. Associating effort with accomplishment
c. Recognizing prepaid rent received as revenue
d. Establishing an appropriation for contingency
2. Bad debt expense is recognized according to
which expense recognition principle?
b. Direct matching
b. Immediate recognition
c. Systematic and rational allocation
d. Critical event recognition
3. What is the general approach as to when product
costs are recognized as expenses?
a. In the period when the expenses are paid.
b. In the period when the expenses are incurred.
c. In the period when the vendor invoice is received.
d. In the period when the related revenue is
recognized.
4. When should an expenditure be recorded as an
asset rather than an expense?
b. Never
b. Always
c. If the amount is material
d. When there is a right that has the potential to
produce economic benefit
5. Which accounting principle is being observed
when an accountant charges to expense a cost that
contributed to revenue during a period?
a. Revenue realization
b. Matching
c. Monetary unit
d. Conservatism
6. Which is not acceptable for recognition of
expense?
b. Systematic and rational allocation
b. Direct matching
c. Immediate recognition
d. Cash disbursement
7. A cause and effect relationship is implicit in the
a. Realization principle
b. Historical cost principle
c. Matching principle
d. Going concern assumption
8. An example of direct matching would be
b. Depreciation expense
b. Office salaries expense
c. Direct labor costs incurred to produce inventory
sold
d. Advertising expense
9. Which category is subject to immediate
recognition?
a. Utilities expense for the production line
b. Repairs and maintenance expense incurred on
production equipment of a manufacturer
c. The salary of the production foreman
d. The salary of the entity president
10. Which principle best describes the rationale for
distribution and administrative expenses?
b. Direct matching
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
ANSWER 6-21
1. B
2. A
3. D
4. D
5. B
6. D
7. C
8. C
9. D
10. C
QUESTION 6-22 Multiple choice (Conceptual
Framework)
1. Which statement is true about current value?
a. Fair value of an asset is the price that would be received
to sell an asset in an orderly transaction.
b. Value in use is the present value of the cash flows
expected to be derived from an asset.
c. Fulfillment value is the present value of the cash
expected for the payment of liability.
d. All of these statements are true about current value.
2. The measurement bases include
b. Historical cost
b. Current value
c. Assessed value
d. Historical cost and current value
3. Current value includes
a. Fair value and present value
b. Fair value and current cost
c. Current cost and value in use
d. Fair value, value in use and current cost
4. Which measurement attribute is not currently
used?
b. Present value
b. Fair value
c. Current cost
d. Inflation adjusted cost
5. Which term best describes the amount that
represents the immediate purchase cost of an
asset?
a. Historical cost
b. Realizable value
c. Present value
d. Current cost
ANSWER 6-22
1. D
2. D
3. D
4. D
5. D
CHAPTER 7

CONCEPTUAL FRAMEWORK
PRESENTATION AND DISCLOSURE
CONCEPTS OF CAPITAL
QUESTION 7-1
 Explain presentation and disclosure of financial
information
ANSWER 7-1
The presentation and disclosure can be an effective
communication tool about the information in financial
statements.
A reporting entity communicates information about its
assets, liabilities, equity, income and expenses by
presenting and disclosing information in the financial
statements.
Effective communication of information in financial
statements makes the information more relevant and
contributes to a faithful representation of an entity's
assets liabilities, income and expenses.
Effective communication of information in financial
statements also enhances the understandability and
comparability of information in the financial
statements.
Effective communication in financial statements is
supported by not duplicating information in different
parts of the financial statements.
Duplication is usually unnecessary and can make
financial statements less understandable.
Presentation and disclosure can be achieved by
classification and aggregation of assets, liabilities,
equity, income and expenses.
QUESTION 7-2
 Explain classification as a tool of presentation and disclosure.
ANSWER 7-2
Classification is the sorting of assets, liabilities, equity, income
and expenses on the basis of shared or similar characteristics
Classifying dissimilar assets. liabilities, equity, income and
expenses can obscure relevant information, reduce
understandability and comparability and may not provide a
faithful representation of financial information.
For example, it could be appropriate to classify an asset or a
liability into current and noncurrent.
It may be necessary to classify components of equity
separately if such components are subject to legal, regulatory
and other requirements.
Thus, ordinary share capital, preference share capital, share
premium and retained earnings should be disclosed separately.
QUESTION 7-3
 Explain aggregation of financial information.
ANSWER 7-3
Aggregation is the adding together of assets, liabilities,
equity, income and expenses that have similar or shared
characteristics and are included in the same classification.
Aggregation makes information more useful by summarizing
a large volume of detail.
However, aggregation may conceal some of the detail.
Hence, a balance should be made so that relevant
information is not obscured either by a large amount of
insignificant detail or by excessive aggregation.
Typically, the statement of financial position and the
statement of financial performance provide summarized or
condensed information. More detailed information is provided
in the notes to financial statements.
QUESTION 7-4
 Explain the capital maintenance approach. begins and
is the
ANSWER 7-4
The financial performance of an entity is determined
using two approaches, namely transaction approach and
capital maintenance approach.
The transaction approach is the traditional preparation of
an income statement
The capital maintenance approach means that net
income occurs only after the capital used from the
beginning of the period is maintained.
In other words, net income is the amount an entity can
distribute to its owners and be as "well-off" at the end of
the year as at the beginning.
The distinction between return of capital and return
on capital is important to the understanding of net
income. Shareholders invest in entity to earn a
return on capital or an amount in excess of their
original investment.
Return of capital is an erosion of the capital invested
in the entity.
The Conceptual Framework considered two
concepts of capital maintenance or well-offness,
namely financial capital and physical capital.
QUESTION 7-5
 Explain the financial capital concept.
ANSWER 7-5
Under a financial capital concept, such as invested
money or invested purchasing power, capital is
synonymous with net assets or equity of the entity:
Financial capital is the monetary amount of the net
assets contributed by shareholders and the amount
of the increase in net assets resulting from earnings
retained by the entity.
Financial capital is the traditional concept based on
historical cost and adopted by most entities.
QUESTION 7-6
 Explain the net income under the financial capital
concept
ANSWER 7-6
Under the financial capital concept, net income
occurs "when the nominal amount of the net assets
at the end of the year exceeds the nominal amount
of the net assets at the beginning of the period, after
excluding distributions to and contributions by
owners during the period."
QUESTION 7-9 Multiple choice (Conceptual
Framework)
1. The presentation and disclosure requirement
achieves all of the following, except
a. An effective communication tool
b. More relevant and faithfully represented information
c. Understandability and comparability of information
d. Financial position, performance and cash flows
2. It is the sorting of assets, liabilities, equity, income
and expenses with similar characteristics.
b. Classification
b. Summarization
c. Interpretation
d. Recognition
3. All of the following can considered appropriate
classification, except
a. Current and noncurrent assets
b. Current and noncurrent liabilities
c. Ordinary share capital and preference share
capital
d. Offsetting asset and liability
4. Income and expenses are classified as
b. Profit or loss and other comprehensive income
b. Profit loss and retained earnings
c. Retained earnings and other comprehensive
income
d. Ordinary and extraordinary
5. What is the new term to describe the statement
showing profit or loss and other comprehensive
income?
a. Income statement
b. Statement of profit or
c. Statement of other comprehensive income
d. Statement of financial performance
ANSWER 7-9
1. D
2. A
3. D
4. A
5. D
QUESTION 7-10 Multiple choice (Conceptual
Framework)
1. Financial capital is defined as
a. Net assets in monetary terms.
b. Net assets in terms of physical productive capacity.
c. Legal capital.
d. Share capital issued and outstanding.
2. The physical capital concept requires which
measurement?
b. Historical cost
b. Current cost
c. Fair value
d. Present value
3. Which concept is applied to net income and other
comprehensive income?
a. Financial capital
b. Physical capital
c. Legal capital
d. Borrowed capital
4. Which statement regarding the term profit is true?
b. Profit is any amount over and above that required to
maintain the capital at the beginning of the period.
b. Profit is equal to income minus expenses.
c. Profit is the equivalent of net income under IFRS.
d. All of these statements are true about the term profit.
5. Under the financial capital concept, net income
occurs when
a. The nominal amount of net assets at year-end
increased.
b. The physical productive capital at year-end
increased excluding equity transactions with
owners
c. The nominal amount of net assets at year-end
increased excluding equity transactions with
owners
d. The physical productive capital at year-end
increased.
ANSWER 7-10
1. A
2. B
3. A
4. D
5. C
CHAPTER 8

ACCOUNTING PROCESS
QUESTION 8-1
 What are the steps in the accounting cycle?
ANSWER 8-1
1. Analyzing the business documents or transactions.
This means that the accountant determines the
impact of the transactions on the financial position as
represented by the basic equation "assets equal
liabilities plus equity."
2. Journalizing - This is the process of recording the
transactions in a journal.
3. Posting - Transactions as classified and recorded
in the journal are transferred to the appropriate
accounts in the general ledger and subsidiary ledger,
if appropriate.
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a postclosing trial balance
9. Preparing the reversing entries
Actually, the accounting process can be classified into two
parts, namely recording phase and summarizing phase.
The recording phase includes analyzing the transaction,
journalizing and posting.
The summarizing phase includes the unadjusted trial
balance, djusting entries, financial statements, closing
entries, postclosing trial balance and reversing entries.
The postclosing trial balance, reversing entries and
worksheet are optional
QUESTION 8-2
 What is a journal?
ANSWER 8-2
The most fundamental journal is the general journal,
often called simply as journal.
A journal is a chronological record of transactions,
A general journal entry consists of the transaction
date, the accounts and amounts to be debited, the
accounts and amounts to be credited, and a brief
explanation of the transaction.
A simple journal entry consists of one debit and one
credit.
A compound journal entry consists of two or more
debits or two or more credits.
QUESTION 8-3
 What is a ledger?
ANSWER 8-3
The general ledger, often called simply as the
ledger, is a group of accounts.
An account is the accounting device used in
summarizing the effects of transactions on each
asset, liability, equity, revenue and expense.
The accounts used by a particular entity are usually
expressed in the form of chart of accounts.
A chart of accounts is a listing of all the entity's
general ledger accounts in a systematic form.
QUESTION 8-4
 What is a trial balance?
ANSWER 8-4
A trial balance is a list of general ledger accounts with
their respective debit or credit balance.
The trial balance prepared at this time is often called the
unadjusted trial balance because account balances do
not yet reflect adjustments.
A trial balance is prepared at the end of every accounting
period after all transactions for the period have been
recorded and posted to the general ledger.
The trial balance is a control device that helps eliminate
accounting errors. When total debits do not equal total
credits, the trial balance is out of balance. This condition
alerts the accountant that errors have been made.
On the other hand, if the total debits equal total
credits, the trial balance is said to be in balance.
However, this condition does not necessarily signify
the absence of errors.
For example, the trial balance does not indicate the
failure to record a transaction or the recording of a
transaction in the wrong accounts.
QUESTION 8-5
 What are the purposes of a trial balance?
ANSWER 8-5
1. The trial balance provides evidence that the total
debits in the general ledger equal credits.
2. 2. The trial balance provides information that
helps the accountant to formulate adjustments.
QUESTION 8-6
 Describe transposition, transplacement and error
of omission
ANSWER 8-6
1. Transposition - The figures are interchanged.
For example, P1,234 is written as P4,123.
2. Transplacement - Error in placing the decimal
point. For example, P12,000 is written as P1,200.
3. Error of omission - A transaction is not recorded.
For example, a sale of P10,000 is not journalized.
QUESTION 8-7
 What are the two methods of recording
expenses?
ANSWER 8-7
1. Expense method - The original payment is
debited to an expense account. For example, the
payment for a one-year insurance premium is
debited to insurance expense account.
2. Asset method - The original payment is debited
to an asset account. For example, the payment for a
one-year insurance premium is debited to prepaid
insurance account.
QUESTION 8-8
 What are the two methods of recording income?
ANSWER 8-8
1. Income method - An income account is credited
for the receipt of the income. For example, the
receipt of a one-year rental is credited to rental
income account.
2. Liability method - A Liability account is credited
for the receipt of the income. For example, the
receipt of a one-year rental is credited to unearned
rental income account.
QUESTION 8-9
 What are adjusting entries?
ANSWER 8-9
Adiusting entries are made at the end of every
accounting period in order to split mixed accounts or
to bring the accounts up to date.
Adiusting entries allocate revenue and expenses
between current and future periods. Moreover, every
adjusting entry affects both a real account and a
nominal account.
Under the cash basis of accounting, revenue is
recorded only when cash is received, and expenses
are recorded when paid in cash.
In contrast, the accrual basis of accounting requires
recognition of revenue when earned and recognition
of expenses when incurred.
Generally accepted accounting principles require
the use of accrual accounting.
Accordingly, adjusting entries are necessary for a
fair and accurate measurement of performance and
financial position on the accrual basis.
QUESTION 8-11
 What is a worksheet?
ANSWER 8-11
A worksheet is multicolumn sheet of paper that an account
uses in compiling and summarizing the information
necessary for the preparation of the financial statements.
A worksheet is not a formal statement.
A worksheet is only a tool of an accountant in the preparation
of financial statements.
The accountant prepares a worksheet at that stage of the
accounting cycle when it is time to make adjustments and
prepare financial statements.
A worksheet facilitates the preparation of financial statements
by:
a. Providing a place where adjusting entries can be made
informally before they are journalized and posted.
b. Providing an orderly means whereby each account can be
classified according to the financial statement in which it will
appear.
c. Providing a balancing mechanism that helps to uncover
accounting errors.
Actually, the balancing figure in the worksheet is the net
income or net loss. If the total of the debits exceeds the total
of the credits in the income statement columns, there is a net
loss.
Accordingly, in the statement of financial position columns, if
the total of the credits exceeds the total of the debits, there is
also a net loss. If the total of the credits exceeds the total of
the debits in the income statement columns, there is a net
income.
Accordingly, in the statementof financial position columns, if
debits exceeds the total of the credits, there is also a net
income.
QUESTION 8-12
 What are closing entries?
ANSWER 8-12
Closing entries are made at the end of an accounting period
after adjusting entries and financial statements have been
prepared for the purpose of closing all nominal or temporary
accounts.
To close an account means to reduce its balance to zero.
Closing nominal accounts is logical because they measure
activities that have occurred during a given period of time.
At the end of an accounting period, nominal accounts have
served their purpose.
Thus, their balances must be reduced to zero so that the new
nominal accounts can be used to measure activities in the next
accounting period.
Actually, nominal accounts are temporary equity accounts.
Accordingly, their balances may be transferred
directly to an equity account during closing.
However, most accountants transfer nominal
accounts to a clearing account known as income
summary.
The income summary account summarizes the net
income or net loss for the period and its balance is
ultimately closed to capital in the case of a
proprietorship or retained earnings in the case of a
corporation.
QUESTION 8-13
 What is a postclosing trial balance?
ANSWER 8-13
A postclosing trial balance is simply a listing of
general ledger accounts and their balances after the
closing entries have been made.
Accordingly, the postclosing trial balance consists
entirely of real or permanent accounts.
QUESTION 8-14
 What are reversing entries?
ANSWER 8-14
Reversing entries are made at the beginning of the new
accounting period in order to transfer all accrued and
prepaid items established by adjusting entries to the
nominal accounts that are to be used in recording
transactions during the new period.
These are called reversing entries because they are the
exact opposite of certain adjusting entries made at the
end of the preceding period.
Reversing entries do not mean that the adjusting entries
reversed are unnecessary or inaccurate.
The sole purpose of reversing entries is to simplify the
recording of certain kinds of recurring transactions.
The adjustments normally requiring reversal at the
beginning of the new period are:
a. Accrued expenses
b. Prepaid expenses, if the expense method is used
in recording expense
c. Accrued income
d. Deferred income, if the income method is used in
recording income
QUESTION 8-15
 Explain the principle of debit and credit.
ANSWER 8-15
The term "debit” refers to the left side of an account
and "credit” refers to the right side of an account.
When both sides of an account are each totaled, and
the smaller sum is deducted from the larger sum, the
difference is called the balance of the account.
Every account has a normal balance, which is simply
the balance ordinarily found in an account.
The normal balance may be either a debit or credit,
depending on the type of account. If an account has a
normal debit balance, it is increased when debited
and decreased when credited.
If an account has a normal credit balance, it is
increased when credited and decreased when
debited.
Thus, a debit does not necessarily mean an
increase and a credit does not necessarily mean a
decrease.
Proper analysis of transactions requires
understanding of the types of accounts with their
normal balances.
QUESTION 8-16 Multiple choice (IAA)
1. The first step in the accounting cycle is to
a. Record transactions in a journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger accounts
d. Adjust the general ledger accounts
2. What is the last step in the accounting cycle
considering the following?
b. Prepare a postclosing trial balance
b. Journalize and post closing entries
c. Prepare financial statements
d. Journalize and post adjusting entries
3. Which is done first in the accounting process?
a. Financial statements are prepared
b. Adjusting entries are recorded
c. Nominal accounts are closed
d. A postclosing trial balance is prepared
4. Which is not among the first five steps in the
accounting cycle?
b. Record transactions in journals
b. Record closing entries
c. Adjust the general ledger accounts
d. Post entries to general ledger accounts
5. Which is an optional step in the accounting
cycle?
a. Adjusting entries
b. Closing entries
c. Financial statements
d. Reversing entries
6. Which is logical order in the accounting cycle?
a. Posting, adjusting entries, trial balance
b. Closing entries, postclosing, reversing entries
c. Financial statements, recording, adjusting
entries
d. Reversing entries, adjusting entries, closing
entries
7. Factors that shape an accounting information system
include
a. Nature of business
b. Size of the entity and nature of business
c. Volume of data and size of entity
d. Nature of business, size of entity and volume of data
8. Basic steps in the recording process include all of the
following, except
b. Transfer the journal information to the appropriate
account in the statement of financial position
b. Analyze each transaction for the effect on the
accounts.
c. Enter the transaction information in a journal.
d. All of the choices are correct regarding the basic steps
in the recording process.
9. The accounting record where a transaction is
initially recorded is
a. Ledger
b. Account
c. Trial balance
d. Journal
10. The use of computers in processing accounting
data
b. Eliminates the need for accountants.
b. Eliminates the double entry system.
c. Eliminates the need for financial reporting
standards.
d. May result in the elimination of document trails
used to verify accounting records.
ANSWER 8-16
1. B
2. A
3. B
4. B
5. D
6. B
7. D
8. A
9. D
10. D
QUESTION 8-17 Multiple choice (IAA)
1. In recording transactions
a. The word "debit" means increase and the word "credit means
decrease
b. Assets, expenses, and drawing accounts are debited four
increases
c. Liabilities, revenue, and drawing accounts are debited for
increases
d. Assets, expenses, and capital accounts are debited for increases.
2. Which is false concerning the rules of debit and credit?
b. The left side of an account is always the debit side and the right
side is always the credit side
b. Increases in assets and expenses are debit entries, and increases
in liabilities, equity and revenue are credit entries
c. The normal balance of any account appears on the side for
recording increases
d. The word "debit” means to increase and the word "credit" means
to decrease.
3. Debits
a. Increase assets and decrease expenses, liabilities, revenue and
equity.
b. Increase assets and expenses and decrease liabilities, revenue and
equity.
c. Increase assets and equity and decrease liabilities, expenses and
revenue.
d. Decrease assets and expenses and increase liabilities, revenue and
equity.
4. Which statement is true regarding debits and credits?
b. 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.
c. 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.
5. The debit and credit analysis of a transaction
normally takes place
a. Before an entry is recorded in a journal.
b. When the entry is posted to the ledger.
c. When the trial balance is prepared.
d. At some other point in the accounting cycle.
6. Which of the following is not a possible
combination of a journal entry?
b. Increase in asset and increase in liability.
b. Decrease in equity and increase in liability.
c. Decrease in liability and decrease in asset.
d. Increase in asset and decrease in equity.
7. The normal balance of an account is on the
a. Debit side of the account
b. Credit side of the account
c. Side represented by increases in the account balance
d. Side represented by decreases in the account
balance
8. The double entry accounting system means
b. 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
ANSWER 8-17
1. B
2. D
3. B
4. C
5. A
6. D
7. C
8. C
QUESTION 8-18 Multiple choice (IAA)
1. The accounting equation must remain in
balance
a. Throughout each step in the accounting cycle.
b. Only when journal entries are recorded.
c. Only at the time the trial balance is prepared.
d. Only when formal financial statements are
prepared
2. The book of original entry is known as
b. Subsidiary ledger
b. Trial balance
c. General ledger
d. Journal
3. A general journal
a. Chronologically lists transactions and other
events expressed in terms of debit and credit.
b. Contains one record for each asset, liability,
equity, revenue and expense.
c. Lists all the increases and decreases in each
account in one place.
d. Contains only adjusting entries.
4. A simple journal entry
b. Consists of one debit and one credit
b. Consists of two debits and one credit
c. Consists of one debit and two credits
d. Is a memorandum entry
5. A journal entry that contains more than two
accounts is called
a. A posted journal entry
b. b. An adjusting journal entry
c. c. An erroneous journal entry
d. d. A compound journal entry
6. Which accounts measure economic flows over
a period of time?
e. Real accounts
b. Nominal accounts
c. Mixed accounts
d. Contra accounts
7. Which of the following is a nominal account?
a. Unearned revenue
b. Salary expense
c. Inventory
d. Retained earnings
8. Nominal accounts are also called
b. Temporary accounts
b. Permanent accounts
c. Real accounts
d. Mixed accounts
9. Real accounts include all of the following,
except
a. Dividends
b. Assets
c. Liabilities
d. Equity
10. Equity is not affected by all
b. Cash receipts
b. Dividends
c. Revenue
d. Expenses
ANSWER 8-18
1. A
2. D
3. A
4. A
5. D
6. B
7. B
8. A
9. A
10. A
QUESTION 8-19 Multiple choice (IAA)
1. Posting is to the process of transferring
information for
a. Journal to the general ledger
b. General ledger to the journal
c. Source document to the journal
d. Journal to the source document
2. A general ledger is defined as
b. A group of transactions
b. A group of all statement of financial position
accounts
c. A group of all income statement accounts
d. The entire group of accounts
3. What function do ledgers serve in the
accounting process?
. Reporting
b. Summarizing
c. Classifying
d. Recording
4. A subsidiary ledger is
a. A listing of the components of account
balances
b. A backup system to protect against record
destruction
c. A listing of accounts before closing entries
d. A listing of accounts of a subsidiary
5. A chart of accounts is
a. A flowchart of all transactions
b. An accounting procedure manual
c. A journal
d. A list of all account titles in the general ledger
ANSWER 8-19
1. A
2. D
3. C
4. A
5. D
QUESTION 8-20 Multiple choice (IAA)
1. The trial balance
a. Proves that debits are greater than credits when the
entity has net income.
b. Uncover any errors in journalizing and posting prior to
preparation of the statement of financial position
c. Is useful in preparing the statement of financial position
d. All of the choices are correct.
2. Which of the following is not a principal purpose of an
unadjusted trial balance?
b. 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
3. Which statement is true regarding the trial
balance?
a. Preparation of the trial balance ensures that
all amounts have been posted to the correct
accounts.
b. Preparation of the trial balance is a step in the
recording process.
c. Preparation of the trial balance determines
that total debits equal total credits.
d. Preparation of the trial balance determines
that total debits equal total credits and that all
amounts have been posted to the correct
accounts.
4. Which statement regarding a trial balance is
incorrect?
a. A trial balance is a test of the equality of the
debit and credit balances in the ledger.
b. A trial balance is a list of all of the open
accounts in the ledger with their balances.
c. A trial balance proves that no errors of any
kind have been made in the accounts during the
accounting period.
d. A trial balance helps to localize errors within
an identifiable time period.
5. An unadjusted trial balance
a. Provides information that is helpful when me adjusting
entries
b. Proves that no errors have been made
c. Usually contains the account balances that shows
appear in the financial statements
d. Is a summary taken directly from the general journal
6. The trial balance
b. Is a listing of all the account balances in the order the
accounts appear in the statement of financial position
b. Has as the primary purpose of proving that all journal
entries were made for the period.
c. Can be used to uncover errors in journalizing and
posting
d. Is used to prepare the statement of financial position.
7. Numerous errors may exist even though the trial
balance columns agree. Which is not one of these
errors?
a. A transaction is not journalized
b. Transposition error
c. A journal entry is posted twice
d. A transaction is recorded and posted at an incorrect
amount
8. A trial balance may prove that debits and credits are
equal, except
b. 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.
ANSWER 8-20
1. C
2. D
3. C
4. C
5. A
6. C
7. B
8. D
QUESTION 8-21 Multiple choice (IAA)
1. Adjusting entries involve
a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. One real and one nominal account
2. If an expense has been incurred but not yet
recorded, the adjusting entry would involve
b. A liability and an asset
c. b. A liability and a revenue
d. c. An expense and an asset
e. d. An asset and a revenue
3. The adjusting entry for depreciation has the same effect
as the adjusting entry for
a. An unearned income
b. A prepaid expense
c. An accrued expense
d. An accrued income
4. An adjusting entry to accrue wages incurred but not yet
paid is an example of
a. Aligning recorded costs with appropriate accounting
periods
b. Aligning recorded revenue with appropriate accounting
periods
c. Reflecting unrecorded expenses incurred during an
accounting period
d. Reflecting unrecorded revenue earned during an
accounting period
5. Which of the following least resembles a
typical adjusting entry?
a. Debit an asset and credit revenue
b. Debit an expense and credit liability
c. Debit revenue and credit liability
d. Debit an asset and credit liability
6. An adjusting entry should never include
b. Debit expense and credit liability
b. Debit expense and credit revenue
c. Debit liability and credit revenue
d. Debit revenue and credit liability
7. Adjusting entries
a. Are often prepared after the end of reporting period
but dated as of the end of reporting period.
b. Are necessary to conform with standards.
c. Include both accruals and deferrals.
d. All choices are correct about adjusting entries.
8. Which statement is incorrect regarding adjusting
entries?
b. Cash is neither debited nor credited.
b. Each adjusting entry affects one statement of financial
position account and one income statement account.
c. Each adjusting entry affects one revenue account and
one expense account
d. Adjusting entries involve accruals or deferrals.
9. An entity must make adjusting entries
a. To ensure that the revenue recognition and expense
recognition principles are followed
b. Each time it prepares financial statements.
c. To account for accruals or deferrals.
d. All of the choices are correct regarding adjusting entries.
10. Which statement best defines an accrual?
b. Adjusting entries where cash flow precedes revenue or
expense recognition
b. Adjusting entries where revenue or expense recognition
precedes cash flow
c. Adjusting entries where cash flow and revenue or
expense recognition are simultaneous
d. Adjusting entries where revenue or expenses are
recognized in the absence of cash flow evidence
ANSWER 8-21
1. D
2. C
3. B
4. C
5. D
6. B
7. D
8. C
9. D
10. B
QUESTION 8-22 Multiple choice (IAA)
1. A prepaid expense can best be described as an
amount
a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and currently matched with earnings
d. Not paid and not currently matched with earnings
2. An accrued expense can best be described as
an amount
b. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and not currently matched with earnings
d. Not paid and currently matched with earnings
3. An accrued revenue can best be described as an
amount
a. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses
4. An unearned revenue can best be described as an
amount
b. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses
5. Which of the following properly describes a
deferral?
a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid at the same time period that an
expense is incurred.
ANSWER 8-22
1. B
2. D
3. C
4. B
5. B
QUESTION 8-23 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
2. Which of the following closing procedures is unique to a
corporation?
b. Close each revenue account to the income summary
account
b. Close each expense account to the income summary
account
c. Close the income summary account to the retained
earnings account
d. Close the owner's drawing account to the owner's capital
account
3. After the accounts have been closed
a. All the accounts have zero balances
b. The asset, liability and shareholders' equity accounts have
zero balances.
c. The revenue, expense, income summary and retained
earnings accounts have zero balances. d. The revenue,
expense and income summary accounts have zero balances.
4. Which statement best describes the purpose of closing,
entries?
b. 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 that
these are used to accumulate the revenue, expense and
dividends of the next period.
d. To complete the record of various transactions that were
started in a prior period
5. The closing entries
a. Must debit or credit one income statement account and
one statement of financial position account.
b. Include closing the dividends account to income
summary.
c. Are posted to the appropriate general ledger accounts.
d. All of the choices are correct regarding closing entries
6. If income is greater than expenses, the income
summary account will be closed by
e. Crediting income summary and debiting retained
earnings
b. Debiting income summary and crediting retained
earnings
C. Debiting cash and crediting income summary
d. Debiting income summary and crediting cash
7. The postclosing 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 b.DOC
8. The postclosing trial balance
c. 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 postclosing
trial balance.
ANSWER 8-23
1. D
2. C
3. D
4. C
5. C
6. B
7. B
8. D
QUESTION 8-24 Multiple choice (IAA)
1. Reversing entries
a. Are normally prepared for accruals and prepayment
b. Are necessary to achieve a proper matching of rev and
expense.
c. Are desirable to exercise consistency and establish
standardized procedures.
d. Must be made at year-end.
2. Reversing entries
b. 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
3. Which statement regarding reversing entries is
incorrect?
a. Deferrals entered in statement of financial position
accounts make reversing entries unnecessary
b. All accruals should be reversed.
c. Adjusting entries for depreciation and doubtful
accounts, are never reversed.
d. Reversing entries change amounts reported in the
statement of financial position for the previous
4. Reversing entries apply to
b. All adjusting entries
c. b. All deferrals
d. c. All accruals
e. d. All closing entries
5. Reversing entries apply to all of the following,
except
a. Unearned revenue
b. Accrued wages
c. Prepaid insurance
d. Depreciation
6. Adjusting entries that should be reversed
include
b. All accrued revenue
b. All accrued expenses
c. Those that debit an asset or credit a liability
d. All of these adjusting entries require reversal
7. A reversing entry should never be made for an adjusting
entry that
a. Accrues unrecorded revenue.
b. Adjusts expired costs from an asset account to an
expense account.
c. Accrues unrecorded expenses.
d. Adjusts unexpired costs from an expense account to an
asset account.
8. Adjusting entries that should be reversed include those for
prepaid or unearned items that
b. Create an asset or a liability account.
b. Were originally entered in a revenue or expense, account.
c. Were originally entered in an asset or liability account.
d. Create an asset or a liability account and were originally
entered in a revenue or expense account.
9. An entity initially records prepayments in real
account and makes reversing entries when
appropriate. Which of the following year-end
adjusting entries should be reversed?
a. The adjusting entry to record depreciation for
the period
b. The adjusting entry to record the portion of
service fees received in advance that is earned
by year-end
c. The adjusting entry to record supplies used
during the period
d. The adjusting entry to record service fees
earned by year-end but not billed
10. An entity initially records prepayments in
nominal accounts. Which of the following year-
end adjusting entries should be reversed?
a. The adjusting entry to record inventory at
year-end
b. The adjusting entry to record the portion of
rental received in advance that is unearned at
year-end
c. The adjusting entry to record doubtful
accounts
d. The adjusting entry to record amortization of
patent
ANSWER 8-23
1. D
2. C
3. D
4. C
5. C
6. B
7. B
8. D