INTERIM FINANCIAL

REPORTING
CHAPTER 19
QUESTION 19-1
What is interim financial reporting?
ANSWER 19-1
Interim financial reporting means the preparation and presentation of
financial information for a period of less than one year.
Interim financial reports may be presented monthly, quarterly or
semiannually.
But quarterly interim reports are the most common although publicly
traded entities are encouraged to provide interim financial reports
semiannually and such reports are to be made available not later
than 60 days after the end of the interim period.

QUESTION 19-2
Is it required to prepare interim financial statements?
ANSWER 19-2
PAS 24 does not mandate which entities are required to publish
interim financial reports, how frequently, or how soon after end of
an interim period.
However, the Securities and Exchange Commission and Philippine
Stock Exchange require certain entities to file interim financial
statements.

QUESTION 19-3
What are the two views on interim financial reporting?
ANSWER 19-3
1. The integral view means each interim period is an integral part of
the annual accounting period.
2. The independent or discrete view means each interim period is a
basic accounting period and the results of operations shall be
determined in essentially the same way as if the interim period
were an annual accounting period.
QUESTION 19-4
Explain the integral view of interim financial reporting.
ANSWER 19-4
Under the integral view , annual reporting expenses are estimated
and then allocated to the interim periods based on forecasted
revenue or sales volume.
In other words, costs incurred which clearly benefit the entire year
are allocated to the interim periods benefited.

QUESTION 19-5
Explain the independent view of interim reporting.

ANSWER 19-5
Under the independent view or discrete view, each interim period
is considered a separate accounting period with status equal to
a fiscal year.
ANSWER 19-5 Continuation
Thus, no estimations or allocations are made for interim purposes,
unless such estimations or allocations are allowed for annual
reporting.
The same expense recognition rules shall apply as under annual
reporting and no special interim accruals or deferrals are
permitted.

QUESTION 19-6
What are the components of an interim financial report?
ANSWER 19-6
An interim financial report shall include, as a minimum, the
following components:
a. Condensed statement of financial position
b. Condensed statement of comprehensive income
c. Condensed statement of changes in equity
ANSWER 19-6 Continuation
d. Condensed statement of cash flows
e. Selected explanatory notes

PAS 34, paragraph 8A, provides that an entity may present a

separate income statement.
Nothing in he standard is intended to prohibit or discourage an
entity from publishing a complete set of financial statements.
In other words, PAS 34 allows an entity to publish a condensed set
financial statements or complete set of financial statements in
he interim financial report.
Condensed means that each of the headings and subtotals
presented in the most recent annual financial statements is
required but there is no requirement to include greater detail
unless this is specifically required
QUESTION 19-7
Explain selected explanatory notes.
ANSWER 19-7
The selected explanatory notes are designed to provide an
explanation of significant events and transactions arising since
the last annual financial statements.
PAS 34 assumes that financial statement users have an access to
the most recent annual report of an entity
As a result, the standards reiterates that it is a superfluity to provide
the same notes in the interim financial report that appeared in
the most recent annual financial report

QUESTION 19-8
Explain the presentation of comparative interim report.
ANSWER 19-8
1. Statement of financial position
a) Statement of financial position at the end of current interim
period.
b) Comparative statement of financial position at the end of
preceding year.

2. Income statement
a) Income statement for the current interim period
b) Income statement cumulatively for the financial year to date
c) Comparative income statement for the comparable interim
period of the preceding year
d) Comparative income statement cumulatively for the comparable
financial year to date of the preceding year
ANSWER 19-8 Continuation
3. Statement of comprehensive income
a. Statement of comprehensive income for the current interim
period
b. Statement of comprehensive income cumulatively for the
current financial year to date
c. Comparative statement of comprehensive income for the
comparable interim period of the preceding year
d. Comparative statement of comprehensive income cumulatively
for the comparable financial year to date of the preceding year

4. Statement of changes in equity

e. Statement of changes in equity cumulatively for the current
financial year to date
f. Comparative statement of changes in equity for the comparable
financial year to date of the preceding year
ANSWER 19-8 Continuation
5. Statement of cash flows
a. Statement of cash flows cumulatively for the current financial
year to date
b. Comparative statement of cash flows cumulatively for the
current financial year to date

QUESTION 19-9
What are the basic principles of interim financial reporting?
ANSWER 19-9
1. PAS 34, paragraph 28, provides that an entity shall apply the
same accounting policies in the interim financial statements
as are applied in the annual financial statements.
2. Revenues from products sold or services rendered are generally
recognized for interim reports on the same basis as for the annual
period
ANSWER 19-9 Continuation
3. Costs and expenses are recognized as incurred in an interim
period.
a) Expenses associated directly with revenue are matched against
revenue in those interim periods in which the related revenue is
recognized.
b) Expenses not associated directly with revenue are recognized in
interim periods are incurred or allocated over the interim periods
benefited.

Costs incurred such as year-end bonuses, insurance, property

taxes and depreciation are allocated over the interim periods
benefited.
4. PAS 34, paragraph 21, provides that if the business is seasonal,
in addition to the current interim period financial statements, the
entity is encouraged to disclose financial information:
ANSWER 19-9 Continuation
a. For the latest 12 months
b. Comparative information for the prior comparable 12-month
period
5. The preparation of interim financial reports generally requires a
greater use of estimation than annual financial reports.

QUESTION 19-10 Multiple choice (PAS 34)

1. Which statement is true regarding interim reporting?
c. The independent view is required for interim financial
statements.
d. Interim reports are required on a quarterly basis.
e. Interim reports are not required.
f. interim reports require the preparation of only a statement of
earnings and a statement of financial position
2. Which statement about an interim report is true?
a. An interim financial report must consist of a complete set of
financial statements.
b. An interim financial report must consist of a condensed set of
financial statements.
c. An interim financial report may consist of a condensed set or
complete set of financial statements.
d. All of these statements are true
3. Which basic financial statements are prepared as a minimum
for interim financial reporting?
e. Statement of financial position and income statement
f. Statement of financial position, income statement and statement of
comprehensive income
g. Statement of financial position, statement of comprehensive
income and Statement of cash flows
h. Statement of financial position, statement of comprehensive
income, statement of cash flows and statement of changes in
equity
4. Publicly traded entities are encouraged to provide interim
financial reports
a. At least at the end of the half year and within 60 days of the end
of the interim period.
b. Within a month of the half year-end.
c. Or a quarterly basis.
d. Whenever the entity wishes.
ANSWER 19-10

1. c
2. c
3. d
4. a
QUESTION 19-11 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.

2. If an entity does not prepare interim financial reports

e. The year-end financial statements are deemed not to comply
with IFRS.
f. The year-end financial statements’ compliance with IFRS is not
affected.
g. The year-end financial statements shall not be acceptable under
local jurisdiction.
h. Interim financial reports shall be included in the year-end
financial statements.
3. Interim financial reports shall included 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.

4. An interim financial report shall include as a minimum all of

the following components, except
e. Condensed statement of financial position and statement of
comprehensive income
f. Condensed statement of cash flows
g. Condensed statement of changes in equity
h. Accounting policies and explanatory notes
5. 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 repost.
d. Not make decisions based on the report.

6. When the business is seasonal, what does IFRS suggest?

e. Additional notes be written in the interim reports about seasonal
nature of the business
f. Disclosure of financial information for the latest 12-months and
comparative information for the prior comparable 12-month
period in addition to the interim report
g. Additional disclosure in the accounting policy note
h. No additional disclosure
7. Which statement 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.

8. An entity is preparing interim financial statements for six

months ended June 30, 2020. in the interim financial
statements for six months,. a statement of comprehensive
income for sis months ended June 30, 2020 and statement
cash flows for six months ended June 30, 2020 shall be
presented. In addition, all of the following shall be presented,
except
a. Statement of financial position on June 30, 2019
b. Statement of financial position on December 31, 2019
c. Statement of comprehensive income for six months ended June
30, 2019
d. Statements of cash flows for six months ended June 30, 2019
ANSWER 19-11

1. d
2. b
3. b
4. d
5. c
6. b
7. b
8. a
QUESTION 19-12 Multiple choice (AICA Adapted)
1. Interim financial statements are usually presented on a
a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. Nine-month basis

2. For interim reporting, an inventory loss from a market

decline in the second quarter shall be recognized as a loss
e. In the fourth quarter
f. Proportionately in each of the second, third and fourth quarters
g. Proportionately in each of the first, second, third and fourth
quarters
h. In the second quarter
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

4. For interim financial reporting, an expropriation gain

occurring in the second quarter shall be
e. Recognized ratably over the last three quarters
f. Recognized ratably over all quarters with the first quarter being
restated
g. Recognized in the second quarter
h. Disclosed in the second quarter
5. Advertising costs incurred shall be deferred 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

6. 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 to reversed. When
should the loss be reported in the interim income
statement?
e. Ratably over the second, third and fourth quarters
f. Ratably over the third and fourth quarters
g. In the second quarter
h. In the fourth quarter
7. 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

8. Interim financial reporting should be viewed

e. As a special type of reporting that need not follow International
Financial Reporting Standards.
f. As useful only if activity is evenly spread throughout the year so
that estimates are unnecessary.
g. As reporting for an integral part on an annual period.
h. As reporting for a separate accounting period.
 9. Which statement about interim reporting is true?
a. All entities that issue an annual report must 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.
10. For interim financial reporting, the income tax expense for the
second quarter should be computed by using the
e. Statutory tax rate fir the year.
f. Effective tax rate expected to be applicable for the second quarter.
g. Effective tax rate expected to be applicable for the full year as
estimated at the end of the first year.
h. Effective tax rate expected to be applicable for the full year as
estimated at the end of the second quarter.
ANSWER 19-12

1. b
2. d
3. a
4. c
5. d
6. c
7. a
8. c
9. d
10. a
OPERATING SEGMENTS
CHAPTER 20
QUESTION 20-1
What is the scope of segment reporting?
ANSWER 20-1
Segment reporting shall apply to the separate or individual
financial statements of an entity and to the consolidated
financial statements of a group with a parent:
a. whose debt or equity instruments are traded in a public market.
b. That files or is in the process of filing the consolidated financial
statements with securities commission or other regulatory
organization for the purpose of issuing any class of instruments
in a public market.
However, if a financial report contains both the consolidated
finnacial statements of a parent and the parent’s separate
financial statements, segment information is required only in the
consolidated finnacial statements.
QUESTION 20-2
What is an operating segment?
ANSWER 20-2
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. And for which discrete finnacial information is available.
An operating segment may engage in business activities for
which it has yet to earn revenue.
QUESTION 20-3
Explain the term “chief operating decision maker”
ANSWER 20-3
The term chief operating decision maker identifies a function and
not necessarily a manager with a specific title.
This function is to allocate resources to the segments and assess
their performance.
The chief operating decision maker may be the entity’s chief
executive officer, chief operating officer or a group of executive
directors depending on who within the organization is
responsible for the allocation of resources and assessing the
performance of operating segments.
QUESTION 20-4
What is the management approach of identifying operating
segments?
ANSWER 20-4
The management approach means that the operating segments are
identified on the basis of internal reports about components of an
entity that are regularly reviewed by the chief operating
decision maker in order to allocate resources to the segment and
to assess its performance.
In other words, operating segments are identified based on the
components of the entity that are considered to be important for
internal management reporting purposes.
A component of entity that sells primarily or exclusively to other
operating segments is included in the definition of an operating
segment if the entity is managed that way.
The idea is that the reporting of segment information is seen through
the “eyes of management” and users would wish to see the
business as the chief operating decision maker sees it.
QUESTION 20-5
What are the quantitative thresholds of identifying an operating
segment?
ANSWER 20-5
An entity shall disclose information about an operating segment
that meets any of the following quantitative thresholds:
1. The segment revenue, including both sales to external
customers and intersegment sales o transfers, is 10% or more
of the combined revenue, internal and external, of all operating
segments.
2. The absolute amount of profit or loss is 10% or more of the
greater in absolute amount of:
a. Combined profit of all operating segments that reported a profit.
b. Combined loss of all operating segments that reported a loss.
ANSWER 20-5 Continuation
3. The assets of the segment are 10% or more of the combined assets
of all operating segments.
Operating segments that do not meet any of the quantitative
thresholds may be considered reportable and separately disclosed
on a voluntary basis if management believes that information about
the segment would be useful to the users of financial statements.

QUESTION 20-6
Explain the “75% of entity revenue” threshold of identifying operating
segments.
ANSWER 20-6
If the total external revenue or reportable operating segments
constitutes less that 75% of the entity external revenue, additional
operating segments shall be identified as reportable segments even
if they do not meet the quantitative thresholds until at least 75% of
the entity external revenue I included in reportable segments.
ANSWER 20-6 Continuation
This “overall size test” is to ensure that all entities present a
sufficient level of information regarding their business activities
in order that users of financial statements can make informed
economic decisions.

QUESTION 20-7
What is the practical limit to the number or reportable segments to
be disclosed separately by an entity?
ANSWER 20-7
There may be a practical limit to the number of reportable
segments to be disclosed separately by an entity beyond which
segment information may become too detailed.
Although no precise limit has been determined, as the number
increases above ten, the entity shall consider whether a
practical limit has been reached.
ANSWER 20-7 Continuation
In other words, the standard suggests that if the number of reportable
segments exceeds ten, it is likely that the information may become
too detailed and consequently lose its usefulness.

QUESTION 20-8
Explain the “aggregation” of two or more operating segments to
constitute a “single operating segment”.
ANSWER 20-8
Two or more operating segments may be aggregated into a “single
operating segment” if the segments are similar in each of the
following respects:
a. Nature of products or service
b. Nature of production process
c. Type or class of customers
d. Marketing method or the method used to distribute the product
e. The nature of the regulatory environment, for example, banking,
insurance or public utility
ANSWER 20-8 Continuation
Accordingly, an entity may combine information about operating
segments that do not meet the quantitative thresholds to achieve
the “75% entity external revenue” threshold if the operating
segments have similar economic characteristics and share a
majority of the five aggregation criteria.

QUESTION 20-9
What are the disclosures required for reportable operating segments?
ANSWER 20-9
An entity shall disclose the following for each period:
1.General information about the operating segment
2. Information about segment profit or loss, including segment revenue
and expenses included in profit or loss
3. Information about segment assets and segment liabilities and the
basis of measurement.
ANSWER 20-9 Continuation
4. Reconciliations of the totals of segment revenue, profit or loss,
segment assets, segment liabilities and other material segment
items to corresponding items in the entity’s financial statements.

QUESTION 20-10
What data are included in the general information disclosure for an
operating segment?
ANSWER 20-10
An entity shall disclose the following general information about an
operating segment:
1. Factors used to identify the reportable segments, including the
basis of organization.
2. Types of products and services from which each reportable
segment derives its revenue.
QUESTION 20-11
Explain the reconciliations of segment amounts and entity mounts
shown in the statement of financial position and income
statement.
ANSWER 20-11
1. The total revenue of all reportable segments to the entity
revenue.
2. The total profit or loss of all reportable segments to the entity
profit or loss before income tax expense and discontinued
operations.
3. The total assets of all reportable segments to the entity total
assets.
4. The total liabilities of all reportable segments to the entity total
liabilities.
5. The total for every other material item of information disclosed by
the reportable segments to the corresponding amount for the
entity.
QUESTION 20-12
What are entity-wide disclosures?
ANSWER 20-12
Entity-wide disclosures are additional information that is required to be
disclosed by all entities if such information is not provided as part of
the reportable segment information.
Entity-wide disclosures include the following:
a. Information about products and services
b. Information about geographical areas
c. Information about major customers

QUESTION 20-13
What is a major customer?
ANSWER 20-13
A major customer is defined as a single external customer providing
revenue which amounts to 10% or more of an entity’s external
revenue.
QUESTION 20-14
Explain the major customer disclosure.
ANSWER 20-14
The major customer disclosure means that an entity shall provide
information about the extent of reliance on the major customers.
The entity shall disclose:
a. The fact of reliance on major customers.
b. The total amount of revenue from major customers.
c. The identity of the segment reporting the revenue.
The entity is not required to disclose the identity of the major
customer of the amount of revenue that each segment reports
from that customer.
QUESTION 20-15 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
consolidated financial statements of a group.
d. Neither the separate financial statements of an entity nor the
consolidated financial statements of a group.
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
e. The separate financial statements only
f. Consolidated financial statements only
g. Both the separate financial statements and consolidated
financial statements
h. Neither the separate financial statements nor consolidated
financial statements.
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.
b. Whose operating results are regularly reviewed by the entity’s
chief operating decision maker.
c. For which discrete information is available.
d. All of these characterize an operating segment.
4. Which quantitative threshold is not a requirement in
qualifying a reportable segment?
e. The segment revenue, both external and internal, is 10% or
more of the combined external and internal revenue of all
operating segments.
f. The segment profit or loss is 10% or more of the greater
between the combined profit of profitable segments are
combined loss of unprofitable segments.
g. c. The segment assets are 10% or more of the combined assets
of all operating 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.
5. Which statement 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
6. The term chief operating decision maker
a. Refers to a manager with a specific title.
b. Must be disclosed by the 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.
7. Which statement is not true with respect to a chief operating
decision maker?
e. The term chief operating decision maker identifies a function
and not necessarily a manager with a specific title.
f. In some cases, chief operating decision maker could be the
chief operating officer.
g. The board of directors acting collectively could qualify as the
chief operating decision maker.
h. The chief internal auditor would generally qualify as chief
operating decision maker.
8. In financial reporting for operating segments, an entity shall
disclose all of the following, except
a. Type of product and service from which each reportable segment
derives 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 and segment
assets.
9. Two or more operating segments may be aggregated into a
single operating segment if all of the following conditions are
satisfied, except
e. The segments have similar characteristics.
f. The segments share a majority of the nature of product or
service, nature of the production process, class of customer,
method of product distribution and regulatory environment.
g. The aggregation is consistent with the core principle of segment
reporting.
h. The segments have dissimilar characteristic.
10. 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 users of the financial statements.
c. May be considered reportable and separately disclosed if the
information is for internal use.
d. May be considered reportable and separately disclosed if this is
the practice within the economic environment in which the entity
operates.
ANSWER 20-15

1. c
2. b
3. d
4. d
5. c
6. d
7. d
8. b
9. d
10. b
QUESTION 20-16 Multiple choice (PFRS 8)
1. What are he disclosures required in relation to operating
segments?
a. General information about the operating segment.
b. Information about segment profit or loss, including specified revenue
and expenses included in profit or loss, segment assets and
segment liabilities.
c. 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.
2. An entity shall disclose which of the following general
information?
e. Factors used to identify the reportable segments
f. Types of products and services
g. Factors used to identify the reportable segments and types of
products and services
h. names of the board of directors
3. Segment reporting requires that an entity should provide
reconciliations of segment information. Which is not a
required reconciliation?
a. The total of the reportable segments’ revenue to the entity
revenue
b. The total of the reportable segments’ profit or loss to the entity
profit or loss before tax expense and discontinued operations.
c. The total number of major customers of all segments to the total
number of major customers of the entity
d. The total of the reportable segments’ assets to the entity assets.
4. Which of the following is a required enterprise-wide
disclosure regarding external customers?
e. The identity of any external customer considered to be major by
management
f. 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 the transaction with a particular external customer
constitute at least 10% of the total entity revenue.
5. An operating segment is considered reportable when any of
the following conditions is met, except
a. Segment is 10% or more of the combined revenue of all the
entity’s 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. Segments profit or loss is 10% or more of the combined profit of
all segments that did not incur a loss.
ANSWER 20-16

1. d
2. c
3. c
4. d
5. c
QUESTION 20-17 Multiple choice (PFRS 8)
1. entity-wide disclosures include all, except
a. Information about products
b. Information about geographical areas
c. Information about major customers
d. Information about intersegment revenue
2. Which statement is true about major customer disclosure?
e. A major customer is defined as one providing revenue which
amounts to 10% or more of combined external revenue of all
operating segments.
f. The identities of major customers need not be disclosed.
g. The entity shall disclose the total amount of revenue from major
customers.
h. All of these statements re true about major customerdisclosure.
3. Which entity is required to report on business segments?
a. Publicly traded
b. Not for profit
c. Joint venture
d. Nonpublic
4. An entity must disclose all of the following about each
reportable segment if the amounts are used by the chief
operating decision maker, except
e. Depreciation expense
f. Allocated expense
g. Interest expense
h. Income tax expense
5. An entity shall disclose for each reportable segment all of
the following specified amounts included in the measure of
profit or loss, except
a. Revenue from external customers
b. Revenue internal customers
c. Interest revenue
d. Gain on disposal of investment
6. An entity shall be disclose for each reportable segment all of
the following specified amounts included in the measure of
profit or loss, except
e. Depreciation and amortization
f. The entity’s interest in the profit or loss of associate.
g. Income tax expense
h. General corporate expenses
7. An entity must disclose all of the following about each
reportable segment if the amounts are used by the chief
operating decision maker, except
a. Unusual items
b. Income tax expense
c. Intersegment revenue
d. Cost of goods sold
8. For segment reporting purposes, which test must be applied
to determine if a component is a reportable operating
segment?
e. Revenue test and asset test
f. Revenue test, asset test and profit or loss test
g. Revenue test, asset test and expense test
h. Revenue test, asset test and cash flows test
9. What is the practical limit to the number of reportable
operating segments?
a. Five segments
b. Ten segments
c. Six segments
d. Four segments
10. The approach used in reportable is known as
e. Segment approach
f. Revenue approach
g. Management approach
h. Enterprise approach
ANSWER 20-17

1. d
2. d
3. a
4. b
5. d
6. d
7. d
8. b
9. b
10. c
CASH AND CASH
EQUIVALENTS
CHAPTER 21
QUESTIONS 21-1
What is cash?
ANSWER 21-1
From the point of view of a layman, “cash” simple means money.
Money is the standard medium of exchange in business
transactions which refers to the currency and ins which are in
circulation and legal tender.
However, in the accounting parlance, the term “cash” has a special
and broader meaning. Cash connotes more than money.
As contemplated in accounting, cash includes money and any other
negotiable instrument that is payable in money and acceptable
by the bank and immediate credit.
Accordingly, cash includes checks, bank drafts and money orders
because these are acceptable by the bank for deposit or
immediate encashment.
QUESTIONS 21-2
What is the meaning of unrestricted cash?
ANSWER 21-2
There is no specific standard dealing with “cash”
The only guidance is found in PAS 1, paragraph 66.
An entity shall classify an asset as current when it is cash or cash
equivalent unless it is restricted from being exchanged or used
to settle a liability for at least twelve months after the end of the
reporting period.
Accordingly, to be reported as “cash” as a current asset, an item
must be unrestricted in use.
The means that the cash must be readily available in the payment
of current obligations and not be subject to any restrictions,
contractual or otherwise.
QUESTIONS 21-3
What is the meaning of cash equivalents?
ANSWER 21-3
PAS 7, paragraph 6, defines cash equivalents as short-term and
highly liquid investments that are readily convertible into cash
and so near their maturity that they present insignificant risk of
changes in value because of changes in interest rates.
PAS 7 further states that “only highly liquid investments that are
acquired three months before maturity can qualify as cash
equivalents”.
Examples of cash equivalents are:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before
date of maturity
c. Three-month time deposit
d. Three-month money market instrument
QUESTIONS 21-4
Explain the financial statement presentation and classification of
cash and cash equivalents.
ANSWER 21-4
The caption cash and cash equivalents should be shown as the first
item among the current assets.
This caption includes all cash items, such as cash on hand, cash in
bank, petty cash fund and cash equivalents which are
unrestricted in the use for current operations.
However, the details comprising the “cash and cash equivalents”
should be disclosed in the notes to financial statements.
QUESTIONS 21-5
Explain classification of investments in time deposit, money market
instrument, and treasury bills.
ANSWER 21-5
Investments in time deposit, money market instruments and
treasury bills should be classified as follows:
a. If the term is three months or less, such instruments are
classified as cash equivalents and therefore included in the
caption “cash and cash equivalents”.
b. If the term is more than three months but within one year, such
instruments are classified as short-term or temporary
investments and presented separately as current assets.
c. If the term is more than one year, such instruments are
classified as long-term investments.
However, such investments that become due within one year from
the end of the reporting period are reclassified as a temporary
investments.
QUESTIONS 21-6
Explain classification of cash fund set aside for a certain purpose.
ANSWER 21-6
If the cash fund is set aside for use in current operations, it is a
current asset.
The cash fund is included as part of cash and cash equivalents.
Examples of such fund are petty cash fund, payroll fund, travel
fund, interest fund, dividend fund and tax fund.
On the other hand, if cash fund is set aside for noncurrent
purposes, it is shown as long-term investment.
Examples of such fund are sinking fund, preferred redemption fund,
contingent fund, insurance fund acquisition or construction of
property, plant ad equipment.
Classification of a cash fund as current or noncurrent should
parallel the classification of the related liability.
However, a cash fund set aside for acquisition of noncurrent asset
should be classified as noncurrent regardless of the year of
disbursement.
QUESTIONS 21-7
Explain the treatment of a bank overdraft
ANSWER 21-7
When the cash in bank account has a credit balance, it is said to be an
overdraft.
The credit balance in the cash in bank account results from the
issuance of checks in excess of the deposits.
A bank overdraft is classified as a current liability and should not be
offset against other bank accounts with debit balances.
However, when the entity maintains two or more accounts in one bank
and one account results in an overdraft, such overdraft may be
offset against the other bank account with a debit balance.
Moreover, an overdraft may also be offset against the other bank
account if the amount is not material.
Under IFRS, bank overdraft can be offset against other bank account
when payable on demand and often fluctuates from positive to
negative as an integral part of cash management.
QUESTIONS 21-8
What is a compensating balance?
ANSWER 21-8
A compensating balance is the minimum checking or demand
deposits account balance that must be maintained in connection
with a borrowing arrangement with a bank.
For example, an entity borrows P2,000,000 from a bank and
agrees to maintain 10% compensating balance or P200,000 in a
current or checking account.
In effect, this arrangement results in the reduction of the amount
borrowed because the compensating balance provides a source
of funds to the bank as partial compensation for the loan
extended.
QUESTIONS 21-9
Explain the treatment of compensating balance.
ANSWER 21-9
If the deposit is not legally restricted as to withdrawal by the
borrower because of an informal compensating balance
agreement, the compensating balance is part of cash.
If the deposit is legally restricted because of a formal
compensating balance agreement, the compensating balance is
classified separately as “cash held as compensating balance”
under current assets if the related loan is short-term.
If the related loan is long-term, the compensating balance is
classified as noncurrent investment.
QUESTIONS 21-10
Explain the imprest system
ANSWER 21-10
The imprest system is an internal control device for cash which requires that
all cash receipts should be deposited intact and all cash payments should
be made by means of check.
Small disbursements are paid out of the petty cash fund.

QUESTIONS 21-11
What are the two systems of handling petty cash fund?
ANSWER 21-11
1. Imprest fund system – Petty cash expenses are recorded upon
replenishment.
The amount of the replenishment is normally equal to the petty cash
disbursement.
2. Fluctuating fund system – Petty cash expenses are immediately
recorded.
The amount of replenishment may be equal to, more or less than, the petty
QUESTIONS 21-12 Multiple choice (IAA)
1. Which of the following should not be considered cash?
a. Petty cash fund
b. Money order
c. Coin and currency
d. IOU
2. Which of the following is usually considered cash?
a. Certificate of deposit
b. Checking account
c. Money market saving certificate
d. Postdated check
3. Which of the following should not be included in cash?
a. Travel cash advance
b. Certified check
c. Personal check
d. Manager check
4. All of the following may be included in cash, except
a. Currency
b. Money market instrument
c. Checking account balance
d. Saving account balance
5. Which statement is true about reporting bank overdraft
under IFRS?
a. Overdraft typically cannot be offset against positive balance in
other cash account but reported as current liability.
b. Generally, cash overdraft is not allowed.
c. Overdraft can be offset against other bank account when
payable on demand and often fluctuates from positive to
overdrawn as an integral part of cash management.
d. All of these statements are true about bank overdraft.
6. technically, cash may not include
a. Foreign currency
b. Money order
c. Restricted cash
d. Undeposited customer check
7. Restricted deposits in foreign bank are classified as
a. Current asset with appropriate disclosure.
b. Noncurrent asset with appropriate disclosure.
c. Be written off as loss.
d. As part of cash and cash equivalents.
8. What is compensating balance?
a. Saving account balance
b. Demand deposit account balance
c. Temporary investment as collateral for loan
d. Minimum deposit required to be maintained connection with a
borrowing arrangement
9. Compensating balance represents
a. Fund in a bank account that cannot be spent
b. Balance in a payroll checking account
c. Account that I subject to bank service charge
d. Account on which a bank pays interest
10. Compensating balance
a. Must be included in cash and cash equivalent.
b. Which is legally restricted and related to along term loan is
classified as current asset.
c. Which is legally restricted and relayed to a short-term loan is
classified separately as current asset.
d. Which is legally restricted as to withdrawal is classified
separately as current asset.
ANSWER 21-12

1. d
2. b
3. a
4. b
5. d
6. c
7. b
8. d
9. a
10. c
QUESTION 21-13 Multiple choice (IAA)
1. A cash equivalent is a short-term, highly liquid investment
readily convertible into known amount of cash and
a. Is acceptable as a means to pay current liability
b. Has a greater current market value
c. Bears a prime interest rate
d. Is so near maturity that is presents insignificant risk of change in
interest rate.
2. Highly liquid investments are cash equivalents if the
maturity is 90 days or less
a. From the date the investments are acquired
b. From the end of reporting period
c. From the date of issue of financial statements
d. From the beginning of reporting period
3. All can be classified as cash and cash equivalents, except
a. Redeemable preference shares due in 60 days
b. Commercial papers due for repayment in 90 days
c. Equity investments
d. A bank overdraft
4. Cash equivalents do not include
a. Money market funds
b. High grade marketable equity investments
c. BSP treasury bills
d. Commercial papers
5. Cash equivalents are
a. Treasury bills and money market instruments.
b. Investments with original maturity of three months or less.
c. Readily convertible into known amount of cash.
d. All of these are features of cash equivalents.
ANSWER 21-13

1. d
2. a
3. c
4. b
5. d
QUESTION 21-14 Multiple choice (IAA)
1. The internal control feature specific to petty cash is
a. Separate of duties
b. Assignments of responsibility
c. Proper authorization
d. Imprest system
2. What is major purpose of an imprest petty cash fund?
e. To effectively plan cash inflows and outflows
f. To ease the payment of cash to vendors
g. To determine the honesty of the petty cashier
h. To effectively control cash disbursements
3. 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 everytime 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.
4. Which statement 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 fund is debited when the fund is replenished.
d. The petty cash fund is reported as part of cash and cash equivalents
under current assets.
5. When an imprest petty cash fund is used, which statement 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 he appropriate general ledge 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.
6. In reimbursing the imprest petty cash fund, which of the
following statements is true?
a. Cash is debited
b. Petty cash is debited
c. Petty cash is credited
d. Expense accounts are debited
7. 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.
8. Petty cash fund is
a. Separately classified as current asset
b. Money kept on hand for making minor disbursements of coin and
currency rather than by writing checks
c. Set aside for the payment of payroll
d. Restricted cash
9. Which statement 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 he 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.
10. Which statement in relation to the cash short or over account is true?
a. It would be impossible to have cash shortage or overage if employees were
paid in cash rather than by check.
b. The entry to account for daily cash sales for which a small amount of cash
shortage existed would include a debit to cash shirt or over account.
c. If the cash short or over account has a debit balance at the end of the period it
must be debited to an expense account.
d. A credit balance in a cash short or over account shall be considered a liability
because the short changed customer will demand return of this amount.
ANSWER 21-14

1. d
2. d
3. c
4. c
5. c
6. d
7. c
8. b
9. d
10. b
QUESTION 21-15 Multiple Choice (IAA)
1. A bank reconciliation is
a. A formal finnacial statement that lists all of the bank account
balances of an entity.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the differences between cash balance
shown on the bank statement and the cash balance shown on the
general ledger.
2. 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?
e. Note receivable collected by bank in favor of the depositor and
credited to the account of the depositor
f. NSF customer check
c. Service charge
d. Erroneous bank debit
3. 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 note collected by the bank on behalf of the
depositor
4. Which of the following must be deducted from the bank
statement balance in preparing a bank reconciliation which
ends with adjusted cash balance?
e. Deposit in transit
f. Outstanding check
g. Reduction of loan charged to the account of the depositor
h. Certified check
5. If the balance shown in the bank statement is less than the
correct cash balance an 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
depositor
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the depositor
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
depositor
b. Deposits in transit
c. Outstanding checks
d. Bank charges not yet recorded by the depositor
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.
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
9. Which statement in relation to a certified check is not true?
a. A certified check is a liability of the bank certifying it.
b. A certified check will be accepted by many persons who would not
otherwise accept a personal check
c. A certified check is one drawn by a bank upon itself.
d. A certified check should not be included in the outstanding checks.
10. Which statement in relation to bank reconciliation is true?
a. Bank service charge will cause the cash balance per ledger to be
higher than that reported by the bank, all other things being equal.
b. Credit memos will cause the cash balance per ledger to be higher
than that reported by the bank, all other things being equal.
c. Outstanding check will cause the cash balance per ledger to be
greater than the balance reported by the bank, all other things
being equal.
d. The cash amount reported in the statement of financial position
must be the balance reported in the bank statement.
ANSWER 21-15

1. d
2. a
3. c
4. b
5. c
6. a
7. b
8. d
9. c
10. a
ACCOUNTS
RECEIVABLE
CHAPTER 22
QUESTION 22-1
Explain the classification of receivables in the statement of financial
position.
ANSWER 22-1
Trade receivables which are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer, are classified
as current assets.
Nontrade receivables which are expected to be realized in cash within one
year, the length of the operating cycle notwithstanding, are classified as
current assets.
if collectible beyond one year, nontrade receivables are classified as
noncurrent assets.

QUESTION 22-2
Explain the measurement of accounts receivables
ANSWER 22-2
Accounts receivable shall be measured initially at face amount or original
invoice amount.
ANSWER 22-2 Continuation
However, subsequently the accounts receivable shall be measured at
net realized value, meaning the amount of cash expected to be
collected or the estimated recoverable amount.
In estimating the net realizable value of trade accounts receivable,
the following deductions are made:
a. Allowance for freight charge
b. Allowance for sales return
c. Allowance for sales discount
d. Allowance for doubtful accounts

QUESTION 22-3
Explain the allowance method of accounting for bad debts.
ANSWER 22-3
The two methods of accounting for bad debts are the allowance
method and direct writeoff method.
ANSWER 22-3 Continuation
The allowance method requires recognition of bad debts loss if the
accounts are doubtful of collection.
Generally accepted accounting principles require the use of the allowance
method because it conforms with the matching principle.
Moreover, accounts receivable will be properly measured at net realized
value.

QUESTION 22-4
Explain the direct writeoff method of accounting for bad debts.
ANSWER 22-4
the direct writeoff method requires recognition of a bad debt loss only when
the accounts are worthless or uncollectible.
Worthless accounts are recorded by debiting bad debts and crediting
accounts receivable.
This approach is often used by small businesses because it is simple to
apply.
As a matter of fact, the Bureau of Internal Revenue recognizes only this
method for income tax purposes.
QUESTION 22-5
What is the treatment of “recoveries of accounts previously written off”?
ANSWER 22-5
If a collection is made on account previously written off, the customary
procedure is to recharge the customer’s account with the amount collected
and possibly with the entire amount previously charged off if it is now
expected that collection will be received in full.
In other words, the recovery is recorded by reversing the entry of writeoff by
debiting accounts receivable and crediting allowance for doubtful accounts.
The collection is then normally recorded by debiting cash and crediting
accounts receivable.

QUESTION 22-6
Explain the aging method of estimating doubtful accounts.
ANSWER 22-6
Doubtful accounts are recognized when the loss is probable and the amount
can be estimated reliably.
ANSWER 22-6 Continuation
There are three methods of estimating doubtful accounts, namely
aging of accounts receivable, percentage of accounts receivable
and percentage of sales.
The aging method involves an analysis of the accounts whether not
due or past due. Past due accounts are further classified in terms
of the length of the period past due.
The required allowance for doubtful accounts is then determined by
multiplying the total of each classification by the rate of loss
experienced by the entity for each category.
The major argument for this method is the more accurate and scientific
computation of allowance for doubtful accounts.
This method has the advantage of presenting fairly accounts receivable
at net realized value.
This method is a statement of financial position approach.
QUESTION 22-7
Explain the percentage of accounts receivable method of estimating doubtful
accounts.
ANSWER 22-7
Under the percentage of accounts receivable method, a certain rate is
multiplied by the ending accounts receivable in order to get the required
allowance balance.
The rate used is usually determined from past experience of the entity.
This procedure has also the advantage of presenting the accounts receivable
at estimated net realized value.
This method is also a statement of financial position approach because it
favors the statement of financial position.

QUESTION 22-8
Explain the percentage of sales method of estimating doubtful accounts.
ANSWER 22-8
under the percentage of sales method, the amount of sales for the year is
multiplied by a certain rate to get the doubtful accounts expense.
ANSWER 22-8 Continuation
The rate may be applied on credit sales or total sales.
When this method is used, proper matching is achieved because doubtful
accounts are directly related to sales from which they arise, and are
reported in the same year of sale.
This method is an income statement approach because it favors the
income statement.

QUESTION 22-9
What are customers’ credit balances?
ANSWER 22-9
Customers’ credit balance are credit balances in accounts receivable
resulting from overpayments, returns and allowances, and advances
payments from customers.
Customers’ credit balances are classified as current liabilities and shall
not be offset against the debit balances in other customers’ accounts.
However, when the amount is not material, only the net accounts
receivable may be presented in the statement of financial position.
QUESTION 22-10
How would you classify doubtful accounts in the income statement?
ANSWER 22-10
1. Distribution cost
If the granting of credit and collection of accounts are under the
charge of the sales manager, doubtful accounts shall be
considered as distribution cost.
2. Administrative expense
if the granting of credit and collection of accounts are under the
charge of an officer other than sales manager, doubtful
accounts shall be considered as administrative expense.
In the absence of any contrary statement, doubtful accounts shall
be classified as administrative expense.
QUESTION 22-10 Multiple choice (IAA)
1. Trade receivables are classified as current assets if
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.
2. Nontrade receivables are classified as current assets only if
reasonably expected to be realized in 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 operating cycle notwithstanding.
3. Credit balance in accounts receivable are classified as
a. Current liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts receivable
4. Which should be recorded in accounts receivable?
a. Receivable from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. Sales on account
5. Accounts receivable should normally be reported at
a. Present value of future cash receipts
b. Current value plus accrued interest
c. Expected amount to be received
d. Current value less expected collection cost
6. Which of the following does not change the balance in
accounts receivable?
a. Return on credit sales
b. Collection from customers
c. Bad debts expense adjusting entry
d. Writeoff
7. Which is recorded by a credit to accounts receivable?
a. Sale of inventory on account
b. Estimating the allowance for uncollectible accounts
c. Estimating annual sales returns
d. Writeoff of accounts receivable
8. Receivables from subsidiaries are classified as
a. Current assets
b. Noncurrent assets
c. Either current assets or noncurrent assets depending on the
expectation of realizing within one year or over one year
d. Partly current and partly noncurrent
9. Where the cycle extends beyond one year because of
normal credit terms as in the case of installment sales
a. The entire receivable are classified as current with disclosure of
the amount not realizable within one year.
b. The entire receivables are shown as noncurrent.
c. The portion due in one year is shown as current and the
balance as noncurrent.
d. The receivables are not recognized.
10. In the case of long-term real estate installment sales
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 not recorded.
ANSWER 22-11

1. d
2. d
3. a
4. d
5. c
6. c
7. d
8. c
9. a
10. c
 QUESTION 22-12 Multiple choice (IAA)
1. Which accounting principle primarily supports the use of allowance
for doubtful accounts?
a. Continuity principle
b. Full disclosure principle
c. Matching principle
d. Conservatism
2. Why is the allowance method preferred over the direct writeoff
method of accounting for bad debts?
e. Allowance method is used for tax purposes
f. Estimates are used
g. Determining worthless accounts under direct writeoff method is difficult to
do
h. Improved matching of bad debts expense with revenue
3. The entry 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 the accounts.
b. A previously defaulted customer pays the balance.
c. Estimate uncollectible accounts are too low.
4. In recording cash discounts related to accounts receivable,
which is more theoretically correct?
a. Net method
b. Gross method
c. Allowance method
d. All of three methods are theoretically correct.
5. All of these are problems associated with the measurement
of accounts receivable, except
a. Uncollectible accounts
b. Returns
c. Cash discounts under the net method
d. Allowance granted
ANSWER 22-12

1. c
2. d
3. c
4. a
5. c
QUESTION 22-13 Multiple choice (AICPA Adapted)
1. Which method of recording bad debt loss is consistent with
accrual accounting?
a. Allowance method
b. Direct writeoff method
c. Percent of sales method
d. Percent of accounts receivable method
2. When the allowance method is used, the entry to record the
writeoff of a specific account would
a. Decrease both accounts receivable and the allowance
b. Decrease accounts receivable and increase allowance
c. Increase both accounts receivable and increase allowance
d. Increase accounts receivable and decrease the allowance
3. Under the allowance method, the journal entry to record the
writeoff of a specific uncollectible account
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts receivable
c. Decrease both net income and working capital
d. Decrease both net income and accounts receivable
4. Under the allowance method, 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
5. Collection accounts receivable previously written off results in
an increase in cash and an increase in
a. Accounts receivable
b. Allowance for doubtful accounts
c. Bad debt expense
d. Retained earnings
ANSWER 22-13

1. a
2. a
3. a
4. d
5. b
QUESTION 22-14 Multiple choice (AICPA Adapted)
1. 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 writeoff
b. Aging the trade accounts receivable
c. Credit sales
d. Trade accounts receivable
2. A method of estimating uncollectible accounts that emphasize
asset valuation rather than income measurement is the
allowance method based on
a. Aging the trade accounts receivable
b. Direct writeoff
c. Gross sales
d. Credit sales returns and allowances
3. 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.
4. When specific customer account receivable is written off as
uncollectible, what will be the effect on net income under the
allowance and direct writeoff method?
e. No effect under both allowance method and direct writeoff method
f. Decrease under both allowance method and direct writeoff method
g. No effect under allowance method and decrease under direct
writeoff method
h. decrease under allowance method and No effect under direct
writeoff method
5. An entity uses the allowance method to recognize doubtful
accounts expense. What is the effect of a collection of an
amount 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
6. 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 off 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 expense for the year
d. Is the amount of desired credit balance of the allowance for
doubtful accounts to be reported at year-end.
7. When an aging approach is used for estimating
uncollectible accounts
a. Bad debt expense is measured indirectly and the allowance for
uncollectible accounts is measured directly,
b. Bad debt expense is measured indirectly and the allowance for
uncollectible accounts is measured indirectly.
c. Bad debt expense is measured directly and the allowance for
uncollectible accounts is measured directly.
d. Bad debt expense is measured directly and the allowance for
uncollectible accounts is measured indirectly.
8. Which is an accurate method of determining the amount of
the adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the
allowance
c. A percentage of accounts receivable not adjusted for the
balance in the allowance
d. An amount derived from aging accounts receivable and not
adjusted for the balance in the allowance
9. A debit balance I the allowance for doubtful accounts
a. Should never occur.
b. Is always the result o management not providing a large enough
allowance in order to manage earrings.
c. May occur before the year-end adjustment for uncollectible
accounts.
d. May exist even after the year-end adjustment for uncollectible
accounts.
10. Which is not permitted in accounting for uncollectible
accounts receivable?
a. Percentage of accounts receivable
b. Percentage of sales
c. Direct writeoff method
d. Aging of accounts receivable
ANSWER 22-14

1. c
2. a
3. a
4. c
5. c
6. d
7. a
8. b
9. c
10. c
QUESTION 22-15 Multiple choice (IAA)
1. Which method 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
2. Which method 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.
3. Which concept relates to the allowance method in
accounting for uncollectible accounts receivable?
a. Bad debt expense is an estimate based on historical 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.
4. Which of the following is not acceptable in estimating
uncollectible accounts receivable?
a. The estimate of uncollectible accounts based on a percentage of
sales for the period.
b. The estimate of uncollectible accounts based on a percentage of
accounts receivable at the end of a period.
c. The estimate of uncollectible accounts 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.
5. 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.
ANSWER 22-15

1. d
2. b
3. a
4. d
5. b