THEORY OF ACCOUNTS

October 2012 CPA-Board Examination

TA-PREWEEK MATERIALS (PW1) (TA: 1001Q TA: 1005Q)

1. Which of the following best states the purpose of general-purpose financial statements? a. To disclose the market value of the firms assets and liabilities b. To determine the compliance with tax laws c. To identify shareholders d. To help users make decisions 2. A primary objective of financial reporting is to a. Assist investors in analyzing the economy b. Assist suppliers in determining an appropriate discount to offer a particular company c. Assist investors in predicting prospective cash flows d. Assists banks to determine an appropriate interest rate for their commercial loans 3. External decision makers include all of the following, except: a. Managers b. Owners c. Creditors d. Financial press

4. These financial statement users need information that will assist them in determining general trends and recent developments in the prosperity of the enterprise and the range of its activities a. Investors b. Lenders c. General public d. Customers 5. Which of the following is not a qualitative characteristics of financial statements according to the framework? a. Materiality b. Understandability c. Comparability d. Relevance 6. The primary qualitative characteristics of accounting information include which of the following? a. Comparability b. Understandability c. Relevance d. Materiality 7. Which one of the following is a secondary qualitative characteristic of accounting information? a. Continuity b. Relevance c. Comparability d. Reliability 8. Relevance is not a function of: a. Feedback value b. Verifiability c. Timeliness d. Predictive value

9. According to the conceptual framework, which of the following is an ingredient of reliability? a. Predictive value b. Materiality c. Understandability d. Verifiability 10. For financial information to be useful there must be a linkage between the decision makers and the decision they make. This link is a. Relevance b. Reliability c. Understandability d. Materiality 11. A firm does not know exactly how long its equipment will last. The firm decides to use shorter rather than longer useful lives for depreciating the equipment. This is an example of a. Reliability b. Conservatism c. Materiality d. Stable monetary unit 12. Accounting traditionally has been influenced by conservatism because of the a. Probability of undetected errors in the financial statements b. Difficulty in measuring net income on the accrual basis c. Inherent uncertainties of many accounting measurements d. Large number of transactions in any one period 13. The environmental assumptions of accounting include all of the following, except a. Prudence b. Separate entity c. Periodicity d. Continuity 14. Under the stable monetary unit assumption: a. All assets and liabilities are translated to pesos of constant purchasing power b. Inflation adjustments are incorporated directly into the financial statements c. The peso is assumed to have constant purchasing power, regardless of the time period d. Interest rates are increased for expected inflation 15. The implementation constraints include all of the following, except: a. Materiality b. Conservatism c. Cost/benefit d. Separate entity

16. According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of a. Consistency b. Reliability c. Cost/benefit d. Faithful representation

17. The accrual basis is most useful for a. Determining the amount of income tax an entity should pay b. Predicting the short-term financial performance of an entity c. Predicting the long-term financial performance of an entity d. Determining the amount of dividends an entity should pay 18. The Conceptual Framework of Accounting deals with a. Tax laws and regulations c. Code of Ethics for professional accountants b. SEC rules and regulations d. Concepts of capital and capital maintenance 19. The Conceptual Framework is intended to assist a. The FRSC b. The users of financial statements 20. Accounting concepts are not derived from a. Inductive reasoning b. Experience c. CPAs in public practice d. All of these c. Pragmatism d. Laws of nature

21. Generally accepted accounting principles a. Are fundamental truths or axioms that can be derived from laws of nature b. Derive their authority from legal court proceedings c. Derive their credibility and authority from general recognition and acceptance by the accounting profession. d. Have been specified in detail in the FRSC conceptual Framework 22. To qualify as generally accepted, accounting principles must a. Usually guide corporate managers in preparing financial statements, which will be understood by widely scattered stockholders b. Guide corporate managers in preparing financial statements, which will be used for collective bargaining agreements with trade unions c. Guide entrepreneur of the choice of an accounting entity like a sole proprietorship, partnership or corporation. d. Receive substantial authoritative support 23. Choose the correct statement about generally accepted accounting principles (GAAP) a. They are laws b. The Bureau of Internal Revenue enforces GAAP c. Firms that do not comply with GAAP may suffer negative economic consequences d. GAAP and tax principles are the same 24. Proper application of accounting principle is most dependent upon the a. Existence of specific guidelines c. External audit function b. Oversight of regulatory bodies d. Professional judgment of the accountant 25. Once an accounting standard is established, a. The standard is continually reviewed to see if modification is necessary b. The standard is not reviewed, unless Securities and Exchange Commission (SEC) makes a complaint c. The task of reviewing the standard to see if modification is necessary is given to PICPA d. The principle of consistency states that no revisions should ever be made to the standard 26. The process of establishing financial accounting standards a. Is a demographic process in that a majority of practicing accountants must agree with a standard before it becomes implemented. b. Is a legislative process based on rules promulgated by government agencies c. Is based solely on economic analysis of the effect each standard will have if it is implemented d. Is a social process which incorporates political actions of various interested user groups as well as professional research and logic 27. The purpose of International Financial Reporting Standards (IFRS) is to a. Issue enforceable standards which regulate the financial reporting of multinational entities b. Develop a uniform currency in which the financial transactions of entities throughout the world would be measured c. Promote uniform accounting standards among countries of the world d. Arbitrate accounting disputes between auditors and international entities 28. The manner in which the accounting records are organized and employed within a business is known as a. Accounting system b. Business document c. Voucher system d. Special journals 29. Which one of these is not among the criteria to consider an event as accountable? a. It must increase or decrease an element of the financial statements b. It must have already happen c. Its amount can be measured reliably d. It must be classified as an external event rather than an internal event

30. The double-entry concept in accounting means which of the following a. Only two accounts affected by each transaction recording b. The debit-credit must not be used c. For every asset increased, a revenue or liability must also be increased d. At least two accounts are affected by each transaction recorded 31. Which of the following is an application of the science aspect of accounting? a. Exercise of creative skill and judgment b. Interpreting the information presented in the financial statements through ratios and trend analysis c. Applying the rules of debit and credit d. Attesting to the fairness of presentation of financial condition and operating results 32. To post in accounting means to: a. Copy the information about account changes from the ledger and place it into the journal b. Copy the information about account changes from the journal, place it into the ledger, and then delete it from the journal c. Copy the information about account changes from the journal and place it into the ledger d. Copy the information about account changes from the source documents, and record it in the ledger 33. Accounts payable and accounts receivables are examples of: a. Permanent accounts c. Mixed balance accounts b. Temporary accounts d. Contra accounts 34. In the accounting cycle, a worksheet is prepared: a. After adjusting entries are entered in the journal and posted to the ledger b. Before adjusting entries are entered in the journal and posted to the ledger c. As a substitute for financial statements d. Only for the purpose for preparing reversing entries 35. What is the normal order of accounts in the unadjusted trial balance? a. Assets, equity, income, expenses, and finally liability b. All accounts with debit balances, then all accounts with credit balances c. Assets, liabilities, equity d. Assets, liabilities, equity, income, finally expenses 36. Adjusting entries are needed because an entity: a. Uses the accrual basis of accounting b. Has earned revenue during the period by selling products from its central operation c. Has expenses d. Uses the cash basis of accounting rather than the accrual basis 37. The adjusting entry at the end of the accounting year to reflect revenues earned but not yet collected or recorded will: a. Decrease liabilities c. Not affect assets b. Not affect income for the current period d. Increase assets 38. Which of the following would most likely be found in an adjusting entry? a. Prepaid expenses b. Accounts receivable c. Cash dividend paid d. Sales on account

39. Which of the following accounting concepts best justifies the use of accruals and deferrals? a. Cost/benefit constraint c. Continuity assumption b. Unit-of-measure assumption d. materiality constraint 40 A control devise that helps minimize and localize accounting errors is known as a. Subsidiary ledger b. Worksheet c. Trial balance d. Chart of accounts 41. An appropriate reversing entry: a. Must be made because they are required by the accounting standards b. Is dated the first day of the next accounting period c. Is usually made for adjusting entries that affect deferred items only d. Is often used to correct entries which were initially based on estimates 42. As a general rule, which of the following is not subject to reversal? a. Accrued expenses c. Prepaid expenses recorded as assets upon payment b. Accrued revenues d. Deferred revenues recorded as revenue upon receipt 43. Which of the following is an example of a closing entry? a. Posting the ending inventory balance in a perpetual inventory system b. Transferring an amount entered in a wrong account to the appropriate account c. Transferring the balance in the bad debt expense account to the income summary account d. Transferring the balance in a temporary account to a contra account

44. The last step in the accounting cycle is to a. Prepare the post-closing trial balance b. Journalize and post closing entries

c. Prepare financial statements d. Journalize and post adjusting entries

45. Which of the following reports is not a component of the financial statements according to PAS 1? a. Balance sheet c. Directors report b. Statement of changes in equity d. Notes to the financial statements 46. Which type of accounting change should always be accounted for in current and future periods? a. Change in accounting estimate c. Change in accounting principle b. Correction of error d. Change in reporting entity 47. Which of the following is a characteristic of a change in accounting estimate? a. It does not affect the financial statements of prior period b. It requires the reporting of pro forma amounts of prior period c. It never needs to be disclosed d. It should be reported through restatement of the financial statements 48. Which of the following changes should be accounted for prospectively? a. Change in the expected life of a depreciable asset b. Changing form FIFO to weighted average for merchandise inventory c. First time presentation of consolidated financial statements d. Correction of prior period errors 49. When a firm changes the estimated the residual value of equipment a. Depreciation must be recomputed for each previous year based on the new residual value b. The original cost, reduced by the new residual value, is the basis of subsequent depreciation c. The remaining book value, reduced by the new residual value, is the basis for the new depreciation d. No adjustment is needed 50. Which of the following is treated as a retrospective accounting principle change? a. A change in the residual value b. A change from declining balance to straight-line depreciation c. A change from FIFO method to weighted average method d. Correction of an error affecting current years income 51. When a public shareholding entity changes an accounting policy voluntarily, the entity should a. Inform shareholders prior to taking the decision b. Account for the change retrospectively c. Threat the effect of the change as an extraordinary item d. Treat the change prospectively and adjust the effect of the change in the current and future periods 52. The effect of the change in accounting policy should be reported as a(an) a. Separate line item on the face of the income statement in the year of change b. Adjustment to the opening balance of retained earnings c. Extraordinary item in the year of the change d. Prior period adjustment in the year of change 53. A change in an amortization rate, such as on a copyright, should be accounted for: a. Retrospectively b. By recording a prior period adjustment c. Prospectively d. Prospectively and retrospectively 54. In 2010, a firm changed from FIFO method of accounting for inventory to Weighted Average. The firms 2009 and 2010 comparative financial statements will reflect which method or methods? a. 2009: Weighted Average, 2010: Weighted Average b. 2009: FIFO, 2010: FIFO c. 2009: FIFO, 2010: Weighted Average d. 2009: Weighted Average, 2010: FIFO 55. In 2010, a firm changed from straight-line (SL) method of depreciation to double declining balance (DDB). The firms 2009 and 2010 comparative financial statements will reflect which method or methods a. 2009: SL, 2010: SL b. 2009: SL, 2010: DDB c. 2009: DDB, 2010: DDB d. 2009: SL, 2010: either SL or DDB 56. The concept of consistency is sacrificed in the accounting for which of the following items? a. Effect of change in accounting principle b. Extraordinary items c. Discontinued operations d. Loss on disposal of a segment of a business

57. When an entity opts to present the income statement classifying expenses by function, which of the following is not required to be disclosed as additional information? a. Depreciation expense c. Directors remuneration b. Employee benefits expense d. Amortization expense 58. Accounting income is a concept in which: a. Income is measured as the amount of real wealth that an entity could consume during a period and be as well off at the end of that period as it was at the beginning b. The transactions approach is used to record income and expenses throughout the reporting period c. Market values adjusted for the effects of inflation or deflation are used to calculate real wealth d. Income equals the change in market value of the firms outstanding common stock for the period 59. Which of the following is not required for the recognition of revenue? a. Receipt of cash by the seller at the time of sale b. Seller must receive an item ultimately realizable in cash, non-cash resources, or claims to cash c. The earnings process must be essentially complete d. The transaction must create a measurable FS element that satisfies the definition of an income 60. The matching principle is best demonstrated by: a. Allocating advertising expense to several reporting periods b. Recognizing rent as revenue when the cash was collected c. Not recognizing any expense unless some revenue is recognized d. Associating effort (cost) with accomplishment (revenue) 61. Which of the following is expensed under the principle of systematic and rational allocation? a. Salespeoples monthly salaries c. Transportation to customers b. Insurance premiums d. Electricity to light office building 62. Which of the following expenses is not directly related to sales of products? a. Sales commissions and shipping costs c. Warranty expense on product sold b. Cost of goods sold d. Institutional advertising 63. A discontinued operation is defined as the disposal of a separate or major line of business. Any resulting gain or loss on discontinued operations is reported as a (an): a. Prior period adjustment, after tax b. Separate item preceding extraordinary items, pretax c. Separate item from income under continuing operation, after tax d. Extraordinary gain or loss, after tax 64. It is a subsidiary, a major line of business or geographical segment whose operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. a. Component of an entity c. Discontinued operation b. Disposal group d. Extraordinary activities 65. What is the purpose of reporting comprehensive income? a. To report changes in equity due to transactions with owners b. To report a measure of overall enterprise performance c. To replace net income with a better measure d. To combine income form continuing operations and extraordinary items 66. Which of the following generally is considered a limitation of the statement of financial position? a. The statement of financial position reflects the current value of a business b. Due to measurement problems, some resources and obligations of the entity are not reported in the statement of financial position c. The statement of financial position reflects the instability of the peso d. Statement of financial position formats and classifications do not vary to reflect industry differences 67. Which of the following information is not specifically a required disclosure of PAS 1? a. Name of the reporting entity or other means of identification and any change in that information from the previous year b. Names of major shareholders of the entity c. Level of rounding used in presenting the financial statements d. Whether the financial statements cover the individual entities or a group of entities 68. As a general rule, the primary basis of measurement of assets upon acquisition is a. Historical cost c. Fair valueless cost to sell b. Fair value d. Discounted value 69. The valuation basis used in conventional financial statement is a. Replacement cost b. Market value c. Original cost d. A mixture of costs and values

70. Pending litigation would generally be considered a. Non-monetary liability b. Contingent liability

c. Estimated liability d. Current liability

71. Reporting in the main body of the financial statements is required for a. Loss contingencies that are probable and can be reasonably estimated b. Gain contingencies that are probable and can be reasonably estimated c. Loss contingencies that are possible and can be reasonably estimated d. All loss contingencies 72. Contingent assets shall be recognized only if a. Probable b. Reasonably possible c. Remote d. Virtually certain

73. The elements of the equity of balance sheet of a corporation should be classified primarily by: a. Source b. Maturity date c. Class of share capital d. Liquidity 74. Which of the following should be disclosed in the summary of significant accounting policies? a. Refinancing of debt subsequent to the balance sheet date b. Guarantees of indebtedness of others c. Criteria for determining which investments are treated as cash equivalent d. Adequacy of pension plan assets relative to vested benefits 75. Which one of the following falls within the definition of related parties as defined by PAS 24? a. Providers of finance in the course of their normal dealings with an enterprise by virtue only of those dealings b. A supplier with whom a reporting entity has a one-year contract for the supply of raw materials c. Government department and agencies d. The wife of key management personnel who has the authority to plan, direct, and control the activities of the reporting enterprise 76. Which of the following situations will require disclosure as a related party? a. In consolidated financial statements in respect to intra-group transactions b. In related party relationships where control exist, irrespective of whether there have been transactions between related parties c. In financial statements of state-controlled enterprise of transactions with other state-controlled enterprise d. In parent financial statements when they are made available or published with the consolidated financial statements 77. Under PAS 10, all of the following shall be classified as non-adjusting events after the reporting period, except a. The entity announced the discontinuance of its assembly operation b. The entity entered into an agreement to purchase the freehold of its currently leased office building c. Destruction of a major production plant by fire d. A mistake was discovered in the calculation of the allowance for uncollectible trade receivables resulting to understatement of the trade receivables 78. Which of the following is not true regarding standards for interim reporting? a. Declines in inventory value shall be deferred to future interim periods b. Use of the gross profit method for computing cost of goods sold must be disclosed c. Costs and expenses not directly associated with interim revenue must be allocated to interim periods on a reasonable basis d. Gains and losses that arise in the interim period shall be recognized in the interim period in which they arise if they would not normally be deferred at year-end 79. What approach is required by PFRS 8 in identifying an operating segment? a. Transaction approach c. Business approach b. Capital maintenance approach d. Management approach 80. In determining whether a particular operating segment is of significant size (i.e.) to warrant disclosure a. Three tests are applied and all tests must be met b. Three tests are applied but only one must be met c. Five tests are applied and all tests must be met d. Five tests are applied but only one must be met jp-2012