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Theory of Accounts Reviewers / Test banks (a) It must be both material and relevant

(b) It must have reasonably certain future benefit to the


1. Which of the following statements is false? business.
(a) Financial reporting should provide information which is (c) It must be a physical object
relevant to investment, credit and public policy decisions. (d) It must be used in operation of the business.
(b) Generally speaking, GAAP are those accounting principles
with substantial authoritative support. 6. Which of the following is a current asset?
(c) GAAP are established to ensure the relevancy of the (a) cash surrender value of a life insurance policy, where the
general-purpose financial statements to the widespread uses company is the beneficiary
of the information by external decision makers. (b) investment in marketable securities for the purpose of
(d) Once established, GAAP should never be changed. controlling the issuing company
(c) cash designated for the purchase of tangible fixed assets
2. A firm signs a major contract in December to construct (d) trade installments receivable normally collectible in 24
custom machinery for a client. No work is begun the current year months
yet the footnotes to the firm’s financial statements discuss the
nature and peso amount of the contract. This is an example of 7. The basic components of financial statements include
(a) reliability (c) historical cost (choose the incorrect one):
(b) full disclosure (d) conservatism (a) statement of changes in equity (c) statement of retained
earnings
(b) profit (loss) statement (d) statement of cash flow
3. A corporation needed a new warehouse; a contractor quoted
a P250,000 prices to construct it. The corporation believed that it
could build the warehouse for P215,000 and decided to use 8. Which of the following reconciling items would require an
company employees to construct the warehouse. The final adjusting journal entry on the company’s books?
construction cost incurred by the corporation was P240,000 but (a) outstanding checks (c) deposits in transit
the asset was recorded at P250,000. This is in violation of the (b) non-sufficient funds checks (d) cash on hand
(a) time period assumption (c) cost principle 9. In recording the bank balance with the book cash balance, which
(b) matching principle (d) revenue principle of the following would not cause the bank balance shown on the
bank statement to be lower than the unadjusted book balance?
4. Which of the following accounting concepts best justifies the (a) cash on hand at the company
use of accruals and deferrals? (b) NSF checks from a customer, as reported on the bank
(a) Cost/benefit constraint (c) Continuity assumption statement
(b) Unit-measure assumption (d) Materiality constraint (c) interest credited to the account by the bank
(d) deposits in transit
5. Which of the following most clearly states the most important
quality which an expenditure must have to be recognized as an 10. In determining the cost of goods sold:
asset on the balance sheet? (a) purchase discounts are deducted net purchases
(b) freight out is added to net purchases (d) It will depend on the terms of payment (i.e., cash or credit)
(c) purchase returns and allowances are deducted from net
purchases
(d) freight in is added to net purchases 14. When the allowance method of recognizing bad debt expense is
used, the typical write off of a specific customer’s account:
11. Which of these would cause the inventory turnover ratio to (a) has no effect on net income (c) decreases current asset
increase the most? (b) decrease net income (d) decreases working
(a) increasing the amount of inventory on hand capital
(b) keeping the amount of inventory on hand constant but
increasing sales 15. Which of the following is the incorrect statement?
(c) keeping the amount of inventory on hand constant but (a) The fair value method of accounting is the most appropriate
decreasing sales method of accounting for short-term investments in
(d) decreasing the amount of inventory on hand and increasing marketable debt securities.
sales (b) Unrealized holding gains and losses on investments in
trading securities are recognized in income.
12. An entity is a large manufacturer of machines. A major customer (c) All investments in available for sale securities are reported at
has placed an order for a special machine for which it has given fair value.
a deposit to the entity. The parties have agreed on a price for (d) Only investments in bonds are accounted for by the fair
the machine. As per the terms of the sale agreement, it is FOB value method.
(free on board) contract and the title passes to the buyer when
goods are loaded into the ship at the port. When should the 16. Which of the following is false?
revenue be recognized by the entity? (a) A debit valuation allowance balance for an investment in
(a) When the customer orders the machine available for sale securities implies a corresponding owners’
(b) When the deposit is received equity account with a credit balance of the same amount.
(c) When the machine is loaded at the port (b) Unrealized holding gains on investments in available for sale
(d) When the machine has been received by the customer securities may be recognized as a direct increase to owners’
13. A large manufacturer of cosmetics sells merchandise to a equity.
retailer, which in turn sells the goods to the public at large (c) Investments in trading securities may be classified as current
through its chain of retail outlets. The retailer purchases or long-term.
merchandise from the manufacturer under a consignment (d) Investments in available for sale securities may be classified
contract. When should revenue from the sale of merchandise to as current or long-term.
the retailer be recognized by the manufacturer?
(a) When goods are delivered to the retailer
(b) When goods are sold by the retailer
(c) It will depend on the terms of delivery of the merchandise 17. Which of the following is incorrect?
(i.e., CIF cost, insurance, and freight or FOB)
(a) Investments classified as long-term are reclassified as short- between the old shares still owned and newly received stock
term investments only if it is the intention of the management rights related to those shares.
to dispose of them in the short term. (c) A stock dividend received on an investment reduces the per
(b) If an investor company does not have significant influence in share cost to the investor.
another company, it must use either the fair value method or (d) For the equity method to be applicable to equity investments,
the cost method to account for that investment in equity it is presumed that the investor owns enough voting shares
securities. of the investee to exercise managing control.
(c) If an investor company has a controlling interest in another
company, it must use either the cost method or the equity 20. An entity shall classify a noncurrent asset or disposal group as
method to account for that investment in equity securities. “held for sale” when:
(d) The cost method is sometimes applied to investments in (a) The carrying amount of the asset or disposal group will be
equity securities. recovered through continuing use.
(b) The carrying amount of the asset or disposal group will be
18. Select the incorrect statement. recovered through a sale transaction.
(a) The cost method of accounting for an investment in a (c) The noncurrent asset or disposal group is to be abandoned.
subsidiary recognizes the legal fact that the parent and (d) The noncurrent asset or disposal group is idle or retired from
subsidiary are one economic unit.
active use.
(b) Realized gains and losses on investments in equity
securities accounted for under the cost method are usually
21. Noncurrent asset or disposal group is classified as “held for sale”
measured by the difference between the cost and current
when the asset is available for immediate sale and the sale is
selling price.
highly probable. For the sale to be highly probable, (choose the
(c) Under the equity method of accounting for long-term
incorrect one)
investments in equity securities, the investor’ investment
(a) Management must be committed to a plan to sell the asset.
account is decreased by all dividends received from the
(b) An active program to locate a buyer and complete the plan
investee.
(d) The equity method of accounting for long-term investments must have been initiated.
in equity securities is based on the presumption that the (c) The asset must be actively marketed for sale at a
investor owns a sufficient number of the outstanding voting reasonable price in relation to its carrying value.
shares of another company to exercise significant influence (d) The sale is expected to qualify for recognition as a
over the operating and financing policies of the other completed sale within one year from the date of classification
company. of the asset as “held for sale”.
19. Which of the following is the incorrect statement?
(a) For a long-term equity investment, the investor accounts for 22. Which statement is incorrect concerning presentation of
a stock split in the same manner as for a stock dividend. noncurrent asset or disposal group classified as held for sale?
(b) The relative sales value method is usually used to apportion (a) An entity shall present a noncurrent asset held for sale and
the book or carrying value of a long-term equity investment the assets of a disposal group classified as held for sale
separately from other assets.
(b) The liabilities of a disposal group classified as held for sale (c) The assets and liabilities shall be presented as a single
shall be presented separately from other liabilities. amount and as a deduction from equity.
(c) The assets and liabilities a disposal group classified as held (d) There should be no separate disclosure of assets and
for sale shall be offset as a single amount. liabilities that form part of a disposal group.
(d) An entity shall not depreciate a noncurrent asset classified
as held for sale or while it is part of a disposal group 26. An entity acquires a subsidiary exclusively with a view to selling
classified as held for sale. it. The subsidiary meets the criteria to be classified as held for
sale. At the end of the reporting period, the subsidiary has not
23. What is the treatment of gain on an initial increase in the fair yet been sold, and six months have passed since its acquisition.
value less cost to sell of a noncurrent asset classified as held for How will the subsidiary be valued in the statement of financial
sale? position at the date of the first financial statements after
(a) The gain shall be recognized in full. acquisition?
(b) The gain shall not be recognized. (a) At fair value
(c) The gain shall be recognized but not in excess of the (b) At the lower of its cost and fair value less cost to sell
(c) At carrying amount
cumulative impairment loss previously recognized.
(d) The gain shall be recognized but only in retained earnings.
27. An entity classified a noncurrent asset accounted for under the
cost model as held for sale on December 31, 2009. Because no
offers were received at an acceptable price, the entity decided
on July 1, 2010 not to sell the asset but to continue to use it. In
24. Noncurrent asset classified as for rental to others shall be
accordance with PFRS 5, the asset shall be measured on July 1,
presented in the statement of financial position as:
2010 at:
(a) Current asset
(a) The lower of its carrying amount and its recoverable amount
(b) Other noncurrent asset
(b) The higher of its carrying amount and its recoverable amount
(c) Noncurrent investment
(c) The higher of its carrying amount on the basis that is had
(d) Property, plant and equipment
never been classified as held for sale and its recoverable
25. How should the assets and liabilities of a disposal group amount
classified as held for sale be shown in the statement of financial (d) The lower of its carrying amount on the basis that it had
position? never been classified as held for sale and its recoverable
(a) The assets and liabilities shall be offset and presented as a amount
single amount.
(b) The assets of the disposal group shall be shown separately 28. The following statements relate to the term “profit”.
from other assets in the statement of financial position, and Statement 1: Profit is any amount over and above that required
the liabilities of the disposal group shall be shown separately to maintain the capital at the
beginning of the period.
from other liabilities in the statement of financial position.
Statement 2: Profit is the residual amount that remains after (b) doubtful accounts computed using the aging schedule
expenses have been deducted (c) income earned but not yet recorded because was not yet
from income. received
(a) Both statements are false. (d) rent collected in advance and credited to a nominal account
(b) Statement 1 is false.
(c) Statement 2 is false. 33. In the equation, “Assets + Expenses = Liabilities + Revenue +
(d) Both statements are true. Capital”, the expenses and revenues are:
(a) contra asset and contra liability accounts, respectively, that
assist analysis of the financial progress of the firm
29. Which of the following is not true of a subsidiary ledger? (b) incorrectly stated because their signs are reversed, i.e., both
(a) The purpose of a subsidiary ledger is to store details of are contra items that should have negative signs in the
certain general ledger accounts. formula
(b) The sum of the individual balances in a subsidiary ledger (c) adjustments to capital that are postponed until the end of a
should equal the balance in the general ledger control specific accounting period to determine their net effect on
accounts. capital for that period
(c) Journal entries posted to a subsidiary ledger need not be (d) incorrectly included in the formula because “Assets =
posted to the general ledger. Liabilities + Capital”
(d) One benefit of a subsidiary ledger is that the number of
general ledger accounts necessary is reduced. 34. Which of the following statements is true?
(a) Service companies do not need to prepare financial
30. The purpose of trial balance is to: statements.
(a) indicate whether total debits equal total credits. (b) Manufacturing companies maintain the simplest accounting
(b) ensure that all transactions have been recorded. records.
(c) speed the collection of cash receipts from customers. (c) Merchandising companies purchase goods that are ready for
(d) increase assets and owner’s equity. sale and then sell them to customers.
(d) A drugstore is an example of a service company.
31. The closing entry for sales discounts is:
(a) debit sales discounts and credit income summary. 35. Which of the following is not an accurate statement regarding the
(b) debit sales discounts and credit sales revenue. rules of debit and credit in recording revenue and expense
(c) debit income summary and credit sales discounts. transactions?
(d) not used because sales discount is a real account which is (a) revenue increases owner’s equity; since increases in
not closed. owner’s equity are recorded by credits, revenue is recorded
by a credit
32. Which of the following is not reversed at the start of the new (b) expenses decreases owner’s equity; since decreases in
accounting period? owner’s equity are recorded by debits, expenses are
(a) expense paid in advance that is debited to the expense recorded by debits
account at the time of payment
(c) in recording revenue transactions, we debit the assets (a) revenue is recognized when the cash is received
received and credit the revenue account (b) a liability is recognized when cash is received
(d) expenses used up assets; since decreases in assets are (c) a liability is removed from the system when the cash is
recorded by credits, expenses are recorded by credits to the received
expense account (d) revenue is removed from the system when the services have
been performed or the goods have been delivered
36. Consider the following:
I. increase an asset VI. 40. If there is an objective evidence that AFS is impaired, the
decrease owner’s equity cumulative loss that had been recognized in other
II. decrease an asset VII. comprehensive income:
increase a revenue (a) Shall be amortized over a reasonable period
III. increase a liability VIII. (b) Shall remain unpaid until the financial asset is disposed of
decrease a revenue (c) Shall be recognized in profit or loss
IV. decrease a liability IX. (d) Shall be recognized as an adjustment of the beginning
increase an expense balance of retained earnings
V. increase owner’s equity X.
decrease an expense 41. A net unrealized loss on an entity’s portfolio of AFS equity
Using the above, if an asset account is debited, what are the five securities shall be reflected in the current financial statements
possible corresponding credits? as:
(a) I, IV, VI, VIII, IX (c) I, III, V, VII, IX (a) Direct reduction of retained earnings
(b) II, IV, VI, VIII, X (d) II, III, V, VII, X (b) Current loss resulting from holding equity securities
(c) Footnote or parenthetical disclosure only
37. The historical cost concept measures assets on the basis of: (d) Component of other comprehensive income
(a) the replacement cost of assets on the balance sheet
(b) the amount of cash for which the assets could be sold 42. What should happen when the financial statements of an
(c) an appraisal by the auditors associate are not prepared as of the same date as of the
(d) the fair market value of assets on the day they were financial statements of the investor?
acquired (a) The associate shall prepare financial statements for the use
of the investor at the same date as that of the investor.
38. In financial accounting, gains may be defined as: (b) The financial statements of the associate prepared up to a
(a) total receipts of cash different date shall be used as normal.
(b) total receipts of cash in excess of the historical costs of the (c) Any major transactions between the date of the financial
assets being sold statements of the investor and that of the associate shall be
(c) total revenues accounted for.
(d) total increases in net assets other than revenues (d) As long as the gap is not greater than 3 months, there is no
39. Under the accrual basis of accounting, if cash is received prior problem.
to the sale, then:
43. When an investor purchases sufficient ordinary shares to balance owed. As a result of this transaction, Jeff’s balance
gain significant influence over the investee, what is the proper sheet would reflect:
accounting treatment of any excess of cost over book value (a) an increase in assets and an increase in liabilities
acquired? (b) a decrease in assets and an increase in liabilities
(a) The excess remains in the investment account until it is sold. (c) an increase in assets and a decrease in liabilities
(b) The excess is immediately expensed in the period in which (d) an increase in assets and an increase in owner’s equity
the investment is made.
(c) The excess is amortized over the time period that is 47. The double-entry system of accounting means that every
reasonable in the light of the underlying cause of the excess. transaction:
(d) The excess is charged to retained earnings at the time the (a) is recorded initially on both the journal and the general
investor resells the investment. ledger
(b) increases one general ledger account while decreasing
44. Land, building and equipment should be reported on the another
balance sheet at their cost, less accumulated depreciation, (c) affects at least two general ledger accounts and is recorded
unless: by an equal amount of debits and credits
(a) some obsolescence is known to have occurred (d) results in changes in accounts on both sides of the balance
(b) some of the property still on hand were written down sheet
pursuant to a quasi-organization
(c) the amount of insurance carried on the property is well in 48. Which of the following statements is not correct?
excess of its book value (a) debits may increase assets
(d) not given (b) credits may increase liabilities
(c) debits may increase liabilities
45. Dave started his own cheese factory on March 16, 2003. (d) credits may increase owner’s equity
Which of the following transactions would not be admissible in
Dave’s accounting system for the month of March? 49. Tony owns a store specializing in bags. Tony has just
(a) On March 18, Dave purchased a cow on account for P3,000. completed a transaction that caused a P12,000 increase in total
(b) On March 20, Dave sold his cow to a fast food restaurant for assets and a P12,000 increase in liabilities. This transaction
P5,000. could have been:
(c) On March 21, Dave contracted with a local radio station to (a) the investment in his business of P12,000 in cash
run several one-minute advertising spots during the month of (b) the purchase of store equipment, paying P9,000 in cash and
April. issuing a P12,000 note payable for the balance owed
(d) All of the above transactions would be admissible for Dave’s (c) the purchase of bags for his inventory, paying P4,000 in cash
accounting system in the month of March. and issuing an P8,000 note payable for the balance owed
(d) none of the above transactions would cause total assets and
46. Jeff purchased a new register system for his grocery store, total liabilities to increase by P12,000
paying P1,000 in cash and issuing a P6,000 note payable for the
50. Dean has completed the posting process for the month of (a) The fair value method of accounting is the most appropriate
June and has prepared a trial balance in which the debits total method of accounting for short-term investments in
P11,000 and the credits total P11,100. Which of the following marketable equity securities.
errors would be the most likely candidate in causing the trial (b) All bond investments are accounted for by the amortized
balance not to balance by P100? cost method.
(a) a P100 debit was posted as a P100 credit (c) The carrying value of an investment in trading securities or
(b) a P100 debit was posted as a P100 credit and a P100 credit available for sale securities is limited to market value at the
was posted as a P100 debit date of acquisition.
(c) a P50 debit was posted as a P50 credit (d) The realized gain or loss on a short-term investment in an
(d) the purchase of supplies on account was never posted to the equity security is usually equal to the difference between its
general ledger cost and its sale price. A

51. Which of the following is the correct statement? 55. Which of the following is false?
(a) The best way to ascertain whether a marketable security is (a) A debit valuation allowance balance for an investment in
short-term or a long-term investment is to check with a available for sale securities implies a corresponding owners’
securities dealer. equity account with a credit balance of the same amount.
(b) For balance sheet classification, a security is classified as a (b) Unrealized holding gains on investments in available for sale
short-term investment if it is readily marketable. securities may be recognized as a direct increase to owners’
(c) For balance sheet classification, a security is classified as a equity.
short-term investment based on the intended holding period. (c) Investments in trading securities may be classified as current
(d) All investments in trading securities are reported at book or long-term.
values. C (d) Investments in available for sale securities may be classified
as current or long-term. C
53. Which of the following is the incorrect statement?
(a) The fair value method of accounting is the most appropriate 56. Which of the following is the correct statement?
method of accounting for short-term investments in (a) Investments in available for sale securities and trading
marketable debt securities. securities are classified separately in a balance sheet.
(b) Unrealized holding gains and losses on investments in (b) Investments in available for sale securities include only
trading securities are recognized in income. equity securities.
(c) All investments in available for sale securities are reported at (c) Investments in trading securities include only debt securities.
fair value. (d) Increases in the market value of trading securities and
(d) Only investments in bonds are accounted for by the fair available for sale securities investments always cause the
value method. D valuation account to decrease. A

54. Which of the following is true? 57. Tangible goods used in the productive process and directly
related to the products being manufactured are called:
(a) factory supplies. (c) raw materials.
(b) finished goods. (d) goods in process. (a) zero
58. When a portion of inventories has been pledged as security on a (b) the absolute sum of the lease payments
loan: (c) the present value of the sum of the lease payments
(a) the value of the portion pledged should be subtracted form discounted at an appropriate rate
the debt. (d) the market value of the asset at the date of the inception of
(b) an equal amount of retained earnings should be the lease A
appropriated.
(c) the fact should be disclosed but the amount of current assets 63. When equipment held under an operating lease is subleased by
should not be affected. the original lessee, the original lessee would account for the
(d) the cost of the pledged inventories should be transferred from sublease as:
current assets to noncurrent assets. (a) operating lease (c) direct financing lease
C (b) sales-type lease (d) capital lease

59. Slow-moving and obsolete inventory items should be priced for 64. Equal monthly rental payments for a particular lease should be
balance sheet purposes at: charged to rental expense by the lessee for which of the
(a) retail inventory price. following?
(b) cost or market, whichever is lower. Capital Operating lease
(c) moving average. Capital Operating lease
(d) at an amount not in excess of possible realizable value.
(a) Yes No (c) No No
60. Subnormal or obsolete goods, either under the cost or the lower (b) Yes Yes (d) No Yes
of cost or market basis:
(a) should be taken up an unrealized inventory loss. 65. In a lease that is recorded as an operating lease by the lessee,
(b) should be valued at bona-fide selling price less direct cost of the equal monthly rental payments should be:
disposition. (a) allocated between a reduction in the liability for leased asset
(c) should be valued by applying an inventory method that uses and depreciation expense
a constant or nominal value for the normal inventory level. (b) allocated between a reduction in the liability for leased asset
(d) should be adjusted in the cost of goods sold. and interest expense
61. Merchandise which a trader contracted to purchase but which (c) recorded as a reduction in the liability for leased asset
was not delivered or identified in the year should: (d) recorded as rental expense D
(a) not be included in the inventory.
(b) be included in the inventory at cost. 66. Where the balance sheet indicates that a portion of property,
(c) be included in the inventory at its probable retail value. plant and equipment the related accumulated depreciation
(d) be included in the inventory at a normal price. pertains to equipment leased to customers, it is evident that the:
(a) operating method of accounting is used for the lease
62. The appropriate valuation of an operating lease on the statement (b) financing method of accounting is used for the lease
of financial position of a lessee is: (c) lessor has violated GAAP
(d) lessor is using the income tax method of accounting for the (d) The intent to refinance is supported by an agreement to
lease A refinance which is completed after the issuance of the
financial statements. D
67. A 20-year property lease, classified as an operating lease,
provides for a 10% increase in annual payments every five 71. Which will demonstrate an agreement to refinance (choose the
years. In the 6th year compared to the 5th year, the lease will incorrect one)?
cause the following expenses to increase: (a) Long-term obligation has in fact been issued before the
Rent Interest Rent Interest issuance of the financial statements for the purpose of
(a) Yes No (c) No No refinancing.
(b) Yes Yes (d) No Yes (b) Equity security has in fact been issued before the issuance
of the financial statements for the purpose of refinancing.
68. Which is not an essential characteristic of an accounting liability? (c) Before the issuance of the financial statements, the
(a) The liability is the present obligation of a particular enterprise. enterprise has in fact entered into a financing agreement that
(b) The liability arises from past transaction or event. clearly permits the enterprise to refinance the currently
(c) The settlement of the liability requires an outflow of resources maturing long-term debt on a long-term basis.
embodying economic benefits. (d) Preferred stock has in fact been issued before the issuance
(d) The liability is payable to a specifically identified payee. of financial statements for the purpose of obtaining working
capital.
69. Current liabilities include: 72. Some obligations that are due to be repaid within the next
(a) only obligations which are expected to be settled within the operating cycle and expected to be refinanced or “rolled over”
normal operating cycle. should be classified as noncurrent:
(b) only obligations which are due to be settled within one year (a) If the refinancing or “rolling over” is at the discretion of the
from balance sheet date. enterprise and the refinancing agreement has been reached
(c) obligations which are expected to be settled within the before the issuance of the statements.
normal operating cycle and obligations which are due to be (b) If the refinancing or “rolling over” is at the discretion of the
settled within one year from balance sheet date. enterprise regardless of whether a refinancing agreement
(d) refinanced long-term debt falling due within one year from has been reached or not before the issuance of the
balance sheet. C statements.
70. A long-term debt falling due within one year should be reported (c) If the refinancing or “rolling over” is not at the discretion of
as noncurrent liability should be reported as noncurrent liability if the enterprise.
the following conditions are met (choose the incorrect one): (d) Subject to no conditions.
(a) The original term is for a period of more than one year.
(b) The enterprise intends to refinance the obligation on a long- 73. Which is not a characteristic of an intangible asset?
term basis. (e) the asset lacks physical substance
(c) The intent to refinance is supported by an agreement to (f) the asset is used in production or supply of goods and
refinance which is completed before the issuance of the services, for rental to others or for administrative purposes
financial statements. (g) the asset provides future economic benefits
(h) the asset has indeterminate useful life (d) The preparation of general-purpose financial statements is
usually based on the assumption that the primary users of
74. Which is not unidentifiable intangible asset? the information are external decision makers. D
(a) patent (c) copyright
(b) franchise (d) goodwill 79. Which of the following statements is false?
(e) Financial reporting should provide information which is
75. If the pattern in which the economic benefits from the asset are relevant to investment, credit and public policy decisions.
consumed cannot be predicted reliably, the method of (f) Generally speaking, GAAP are those accounting principles
amortization for an intangible asset should be: with substantial authoritative support.
(a) straight line (c) declining balance (g) GAAP are established to ensure the relevancy of the
(b) output method (d) sum of years’ digits general-purpose financial statements to the widespread uses
of the information by external decision makers.
76. Intangible assets should be carried (benchmark treatment): (h) Once established, GAAP should never be changed.
(a) gross cost
(b) fair value on balance sheet date 80. Which of the following statement is true?
(c) revalued amount minus accumulated amortization and (a) Managers of an entity are considered to be internal decision
accumulated impairment losses makers.
(d) cost minus accumulated impairment losses and accumulated (b) External decision makers can be obtained whatever financial
amortization D data they need whenever they need it.
(c) Accounting information is prepared for and useful to only
77. Which of the following is not considered in estimating the useful outside decision makers.
life of intangible assets? (d) The members of the Board of Directors are not “internal
(a) expected usage of the asset by the enterprise users” only. D
(b) stability of the industry in which the intangible asset operates
(c) salvage value of the asset 81. Choose the incorrect statement.
(d) level of maintenance expenditure required to obtain the (a) The objective of the external financial statements is to
future economic benefit from the asset C communicate the economic effects of completed
transactions and other events on the entity.
(b) The practice of accounting requires considerable
78. Choose the correct statement. professional judgment.
(a) Financial accounting is a social science and cannot be (c) Security analysis use information from financial statements
influenced by changes in legal, political, business and social and other sources to project future earnings.
environments. (d) The assessment of earnings quality has become an exact
(b) Financial accounting is an information system designed to science. D
provide information primarily to the internal users.
(c) General-purpose financial statements must be prepared by a 82. Which of the following statement is correct?
certified public accountant.
(a) Certified Public Accountants are not independent for the (b) a decrease in assets and an increase in liabilities
benefit of the users of the financial statements, because they (c) an increase in assets and a decrease in liabilities
are paid by the client. (d) an increase in assets and an increase in owner’s equity
(b) Accounting concepts, principles and standards are just as
broad and general today as they were sixty years old. 86. The double-entry system of accounting means that every
(c) Due the excellent work of the ASC, there are very few transaction:
choices among alternative accounting policies today. (a) is recorded initially on both the journal and the general
(d) Disclosure notes are an integral part of the financial ledger
statements. D (b) increases one general ledger account while decreasing
another
83. Which of the following equations is not true? (c) affects at least two general ledger accounts and is recorded
(a) Assets + Liabilities = Owner’s Equity by an equal amount of debits and credits
(d) results in changes in accounts on both sides of the balance
(b) Assets = Liabilities + Owner’s Equity sheet C

(c) Assets – Owner’s Equity = Liabilities 87. Which of the following statements is not correct?
(a) debits may increase assets
(d) Assets – Liabilities = Owner’s Equity (b) credits may increase liabilities
A (c) debits may increase liabilities
(d) credits may increase owner’s equity
84. Dave started his own cheese factory on March 16, 2003. Which C
of the following transactions would not be admissible in Dave’s 88. Tony owns a store specializing in bags. Tony has just completed
accounting system for the month of March? a transaction that caused a P12,000 increase in total assets and
(e) On March 18, Dave purchased a cow on account for P3,000. a P12,000 increase in liabilities. This transaction could have
(f) On March 20, Dave sold his cow to a fast food restaurant for been:
P5,000. (a) the investment in his business of P12,000 in cash
(g) On March 21, Dave contracted with a local radio station to (b) the purchase of store equipment, paying P9,000 in cash and
run several one-minute advertising spots during the month of issuing a P12,000 note payable for the balance owed
April. (c) the purchase of bags for his inventory, paying P4,000 in cash
(h) All of the above transactions would be admissible for Dave’s and issuing an P8,000 note payable for the balance owed
accounting system in the month of March. C (d) none of the above transactions would cause total assets and
total liabilities to increase by P12,000
85. Jeff purchased a new register system for his grocery store, B
paying P1,000 in cash and issuing a P6,000 note payable for the 89. Dean has completed the posting process for the month of June
balance owed. As a result of this transaction, Jeff’s balance and has prepared a trial balance in which the debits total
sheet would reflect: P11,000 and the credits total P11,100. Which of the following
(a) an increase in assets and an increase in liabilities
errors would be the most likely candidate in causing the trial II. Entities that are in the process of issuing ordinary shares in
balance not to balance by P100? the public market.
(a) a P100 debit was posted as a P100 credit a. I only b. II only c. Both I and II d. Neither I nor II
(b) a P100 debit was posted as a P100 credit and a P100 credit
was posted as a P100 debit 94) Under PAS 33, which of the following statements about an
(c) a P50 debit was posted as a P50 credit ordinary share is true?
(d) the purchase of supplies on account was never posted to the I. An ordinary share is an equity instrument that is superior to
general ledger C all other classes of equity instrument.
II. A potential ordinary share is a financial instrument or other
90. Increase in net assets may result from: contract that may entitle its holder to ordinary shares.
(a) revenues a. I only b. II only c. Both I and II d. Neither I nor II
(b) expenses subordinate
(c) withdrawals 95) Which of the following statements is true?
(d) all of the above are correct I. Earnings per share amounts should not be presented if they
A are negative, i.e. loss per share.
II. Earnings per share amounts calculated for discontinued
91. Which of the following statements is false? operations should be presented.
(a) Increases to owner’s capital are recorded with credits. a. I only b. II only c. Both I and II d. Neither I nor II
(b) Sales are recorded as debits.
(c) Expenses reduce owner’s capital. 96) When computing diluted EPS for an entity with a complex
(d) Expenses and dividends are both recorded as debits. capital structure, what is the denominator in the computation?
B a.Number of ordinary shares outstanding at year-end
b.Weighted average number of ordinary shares outstanding
92. Zinc Company recorded office supplies as an asset account c. Weighted number of ordinary shares outstanding plus all other
when the supplies were purchased. Failure to make an adjusting potentially antidilutive securities.
entry reflecting the use of these supplies will result in: d.Weighted average number of ordinary shares outstanding plus
(a) an understatement of assets all other potentially dilutive securities
(b) an overstatement of owner’s equity
(c) an understatement of liabilities 97) For purpose of computing the weighted average number of
(d) an understatement of owner’s equity shares outstanding in EPS calculation, a mid-year that must be
B treated as occurring at the beginning oif the year is the
a.Issuance of the share warrants
BPS/EPS b.Purchase of treasury shares
93) Under PAS 33, EPS disclosures are required for c. Issuance of share certificates
I. Entities whose ordinary shares or potential ordinary shares d.Issuance of new shares from share split
are publicly traded.
98) When EPS is computed, dividends on preferred stock are
a.Added because they represent earnings to preferred share c. Financial liabilities or equity instruments, including
holders preference shares, that are not convertible into ordinary
b.Reported separately on the income statement shares.
c. Subtracted they represent earnings to preferred shareholders d. Shares which would be issued upon the satsfaction of
d.Ignored because so they do not pertain to the common stock certain conditions resulting from contractual arrangements, such
as the purchase of a business or other assets.
99) It is reduction in earnings per share or an increase in loss
per share resulting from the assumption that convertible 103) For a company that has only ordinary share outstanding ,
instruments are converted, that options or warrants are exercised, total shareholder’s equity divided by the number of shares
or that ordinary shares are issued upon the satisfaction of specified outstanding represents the:
conditions. a. return on equity c. stated value per share
a. Dilution c. Either dilution or antidilution b. book value per share d. price-earnings ratio
b. Antidilution d. Neither dilution nor antidilution
104) A company with a simple capital structure for purposes of
100) What is the inherent justification underlying the concept of computing earnings per share would include which of the following
potential diluters in an earnings per share computation? in the computation of earnings per share?
a. form over substance a. potentially dilutive securities
b. substance over form b. dividends on ordinary share
c. form and substance considered equally c. dividends on nonconvertible cumulative preferred stock
d. substance over form or form over substance depending on d. number of shares of nonconvertible cumulative preferred
the circumstances stock

101) In determining earnings per share, interest expense, net of Sharebased


applicable income taxes, on convertible debt which is dilutive 105) The entity has issued a range of share options to
should be employees. In accordance with PFRS 2, what type of share-
a. Added back to net income for diluted earnings per share. based payment transaction does this represent?
b. Deducted from net income for basic earnings per share and a.Equity-settled share-based payment transaction
ignored for diluted earnings per share. b.Asset-settled share-based payment transaction
c. Deducted from net income for both basic earnings per share c. Cash-settled share-based payment transaction
and diluted earnings per share. d.Liability-settled share-based payment transaction
d. Added back to net income for basic earnings per share, and
ignored for diluted earnings per share. 106) In accordance with PFRS2, how should an entity recognize
the change in the fair value of the liability in respect of a cash-
102) Potential ordinary shares do not include settled share-based payment transaction?
a. Share warrants a.Should not recognize in the financial statements but disclose in
b. Employee share options the notes thereto
b.Should recognize in the statement of changes in equity
c. Should recognize in profit or loss option valuation techniques should not be used as a measure of
d.Should recognize in other comprehensive income fair value in the first instance?
a. Black – Scholes model c. Monte – Carlo model
107) A cash-settled share-based payment shall give rise to an b. Binomial model d. Intrinsic value
increase in which of the following?
a.A current asset c. Equity 112) It is the difference between the fair value of the shares to
b.A noncurrent asset d. A liability which the counterparty has the right to subscribe and the price the
counterparty is required to pay for those shares.
108) An entity has entered into a contract with another entity. The a. fair value c. Market value
latter will supply the former with a range of services. The b. Intrinsic value d. Book value
payment for those services will be in cash and based upon the
price of former’s ordinary shares on completion of the contract. 113) These are transactions in which the entity receives goods or
In accordance with PFRS 2, what type of share-based payment services as consideration for equity instruments of the entity
transaction does this represent? including shares and share options.
a.Asset-settled share-based payment transaction a. Equity settled share-based payment transactions
b.Cash-settles share-based payment transaction b. Cash settled share-based payment transactions
c. Liability-settled share-based payment transaction c. Equity payment transactions
d.Equity-settled share-based payment transaction d. Cash payment transactions

109) If share-based payment transaction provides that employees


have the right to choose the settlement whether in cash or shares, 114) Compensatory stock options were granted to executives on
the entity is deemed to have issued January 1, 2008, for services to be rendered during 2008, 2009,
a.An equity instrument and 2010. The fair value of the option was measured at the grant-
b.A liability instrument date fair value using the observable market price of an option with
c. A compound financial instrument similar terms. The fair value of the options was in excess of the
d.Either an equity instrument or liability instrument but not both amount the executives must pay for the stock. The stock options
were exercised on December 30, 2010 Compensation expense
110) Under PFRS 2 share – based Payment, the method that should be recognized in the income statement in which of the
must be used to measure employee stock options and other following years?
payments given to employees in the form of equity securities, is:
a. Initial cost c. Fair value 2008 2009 2010 2008 2009 2010
b. Discounted cash flows d. Selling price a.No No Yes c. Yes Yes Yes
b.No Yes Yes d. Yes No No
111) Many shares and most share options are not traded in an
active market. Therefore, it is often difficult to arrive at a fair value 115) For cash settled share-based payment transactions, an
of the equity instruments being issued. Which of the following entity shall measure the goods or services received and the liability
incurred at the
a. Fair value of the liability 119) Gains and losses on the purchase and resale of treasury
b. Fair value of the goods and services received stock may be only be reflected in
c. Either the fair value of the goods or services received or the a.Paid-in capital accounts
fair value of the liability b.Paid-in capital and retained earnings accounts
d. Neither the fair value of the goods or services received nor c. Income, paid-in capital and retained earnings
the fair value of the liability d.Income and paid-in capital accounts

116) Sydney Corporation granted 1,000 stock options to its 120) Deposits on subscriptions to a proposed increase in capital
employees on January 1, 2006, for services performed during stock are reported on the balance sheet as
2006 and 2007. At the date of the grant, the fair value of the stock a. Unearned revenue
options is P6,000. The options are exercisable on January 1, 2008, b. Advances from subscribers
and expire on June 30, 2008. On July 1, 2008, it was determined c. A separate item in the capital stock section
that none of the options were exercised. On December 31, 2008, d. An addition to retained earnings
Sydney Corporation should
a. Restate its financial statements for 2006 and 2007 and 121) Which of the following statements best describes the net
reduce compensation expense for each year. effect on retained earnings of the purchase and subsequent sale
b. Make a prior period adjustment to retained earnings for of treasury stock?
compensation expense recognized in 2006 and 2007. a. retained earnings may never be increased , but
c. Not adjust or reverse compensation expense. sometimes decreased.
d. Record P6,000 of compensation expense in 2008. b. Retained earnings may never be increased or decreased
c. Retained earnings may be increased but never be
SHE decreased.
117) Under IFRIC 17, a property dividend declared before the end d. Retained earnings account is always affected unless the selling
of the reporting period should be recognized as liability at the price is exactly equal to cost
end of the reporting period at
a.Carrying amount of the asset to be distributed 122) When stock rights are exercised, how much should be
b.Fair value of the asset on the date of declaration treated as total proceeds from the issuance of shares?
c. Fair value of the asset at the end of reporting period a. only the consideration received
d.Fair value of the asset at the date of distribution b. The total of the consideration received and the amount
previously recorded for the stock rights
118) Which of the following should be reported as a stockholder c. the amount previously recorded for the stock rights
equity account? d. The total par value of the shares
a.Discount on convertible bonds
b.Premium on convertible bonds 123) Liabilities and stockholders’ equity are similar in that
c. Cumulative foreign exchange translation loss a. Both provide certain amount of payments in the form of interest
d.Organization costs and dividends
respectively based upon written agreements.
b. Both provide specific timing of payments as a result of specific a. Zero because no entry is made
maturity dates. b. Par value
c. Both creditors and stockholders are equity holders although they c. Market value at the declaration
have different rights with respect to income, risk, control and d. Market value at the date of issuance
liquidation.
d. Both liabilities and owners equity are ranked equally when the 128) The peso amount of total shareholders’ equity remains the
enterprise’s assets are distributed. same when there is
a.Issuance of preference share in exchange for convertible
124) The declaration of a 10% stock dividend debentures
a. Would decrease both accumulated profits and total b.Issuance of nonconvertible bonds with share warrants
shareholders’ equity c. Declaration of a stock dividend
b. Would decrease accumulated profits but would have no d.Declaration of a cash dividend
effect on total shareholders’ total
c. Would have no effect on accumulated profits but would Income taxes
decrease total shareholders’ equity
d. Would have no effect both on accumulated profits and 129) Justification for the method of determining periodic deferred
total shareholders’ equity tax expense is based on the concept of
a. Matching of periodic expense to periodic revenue
b. Objectivity in the calculation of periodic expense
125) What is the most likely effect of a share split down? c. Recognition of asset and liability
Par value PER SHARE Numbers of shares d. Consistency of tax expense measurement with the actual tax
a. Decrease No effect planning strategies.
b. Decrease Increase
c. Increase Decrease 130) The deferred tax expense is the
d. No effect No effect a.Increase in balance of deferred tax asset minus the increase in
balance of deferred tax liability
126) How would the declaration of a liquidating dividend by a b.Increase in balance of deferred tax liability minus the increase in
corporation affect each of the following? balance of deferred tax asset
Contributed capital Total shareholders’ equity c. Increase in balance of deferred tax asset plus the increase in
a. Decrease No effect balance of deferred tax liability
b. No effect Decrease d.Decrease in balance of deferred tax asset minus the increase in
c. No effect No effect balance of deferred tax liability
d. Decrease Decrease
131) Where a business transaction requires a direct adjustment to
127) An entity issued what is called a “12% stock dividend” on its an equity account, the tax effect is adjusted against
share capital. At what amount per share, if any, should retained a.Income c. Equity
earnings be reduced for this transaction? b.Tax expense d. Cash
certain conditions are met.
132) Under PAS 12 Income Taxes, deferred tax assets and
liabilities are measured at the tax rates that: 137) As a result of differences between depreciation for financial
a.Applied at the beginning of the reporting period reporting purposes and tax purposes, the financial reporting
b.At the end of the reporting period basis of a company's plant assets falls below the tax basis.
c. At the rates that prevail at the reporting date Assuming the company had no other temporary differences, the
d.Are expected to apply when the asset or liability is settled company should report a
a. Current tax receivable. c. Deferred tax asset.
133) Which of the following could never be subject to interperiod b. Current tax payable. d. Deferred tax liability.
tax allocation?
a.Interest revenue on government bonds. 138) Income tax expense is computed based on
a.Depreciation expense on operational assets. a. Taxable income
b.Estimated warranty expense. b. Total-pretax financial income
c. Rent revenue c. Accounting income subject to income tax
d. The temporary difference
134) A temporary difference which would result in deferred tax
asset is 139) These are differences between carrying amount of an asset
a.Tax, penalty or surcharge or liability in the statement of financial position and its tax base.
b.Dividend received on stock investment a. Temporary differences c. Permanent differences
c. Excess tax depreciation over accounting depreciation b. Timing differences d. Accounting differences
d.Rent received in advance included in taxable income at the time
of receipt but deferred for accounting purposes 140) Which of the following differences would result in future
taxable amounts?
135) Differences between taxable income and pretax accounting a. Expenses or losses that are deductible after they are
income arising from transactions that, under applicable tax laws recognized in financial income.
and regulations, will not be offset by corresponding differences b. Revenue or gains that are taxable before they are
or turn around in future periods is a definition of recognized in financial income.
a.Temporary differences c. Deductible differences c Revenues or gains that are recognized in financial income
b.Permanent differences d. Taxable differences but are never included in taxable income.
d. Expenses and losses that are deductible before they are
136) When a temporary difference will result in taxable amounts in recognized in financial income.
5 years
a.A deferred tax liability is recognized in the current year. Benefits
b.A deferred tax asset is recognized in the current year. 141) Which of the following is not one of the six components of
c. A deferred tax liability may be recognized in the current year if pension expense (or part of a component)?
certain conditions are met. a.Initial transition asset
d.A deferred tax asset may be recognized in the current year if b.Amortization of unrecognized gain or loss
c. Expected return on plan assets b.Fair value d. Value in use
d.Growth (interest cost) in PBO/ABO since the beginning of the
period 145) In a rare circumstance, when a retirement benefit plan has
attributes of both defined contribution and defined benefit plan, it
142) What is measured by the accumulated benefit obligation? is deemed
a.The pension expense, computed by the plan formula applied to a.Defined contribution plan
years of service to date, assuming future salary levels b.Define benefit plan
b.The pension expense, computed by the plan formula applied to c. Neither a defined contribution nor a defined benefit plan
years of service to date, using existing salary levels d.Both defined contribution and defined benefit plan
c.The pension obligation, computed by the plan formula applied to
years of service to date, using existing salary levels. 146) Which is incorrect concerning the recognition and
d.The pension obligation, computed by the plan formula applied to measurement of a defined benefit plan?
year of service to date, assuming future salary levels. a. actuarial assumptions are required to measure the obligation
and expense and there is a possibility of actuarial gains and
143) Under which category should lump sum benefit of 1% of the losses.
final salary for each year of service and actuarial gains be b. the obligation is measured at a discounted basis.
accounted for? c. the defined benefit plan must be fully funded
a.Lump sum benefits should be accounted for under defined d. the expense recognized for a defined benefit plan is not
benefit plans. necessarily the amount of contribution due for the period
Actuarial gains should be accounted for under defined benefit
plans.
b.Lump sum benefit should be accounted for under short term 147) The vested benefits:
employee benefits a. are employee benefits that are not conditional of future
Actuarial gains should be accounted for under defined benefit employment
plans. b. are benefits to be paid to the retired employees in the
c. Lump sum benefit should be accounted for under defined benefit current period.
plans c. are benefits to be paid to the retired employees in the
Actuarial gains should be accounted for under defined subsequent period.
contribution plans d. are benefits accumulated in the hands of a trustee.
d.Lump sum benefit should be accounted for under short term
employee benefits 148) Any transition loss on first adopting PAS 19 shall be
Actuarial gains should be accounted for under defined recognized:
contribution plans I. as expense immediately
II. as expense over a maximum of 5 years
144) Investments held by retirement benefit plans should be a. I only c. Either I or II irrevocably
stated in the statement of net assets at b. II only d. Either I or II revocably
a.Net realizable value c. Original cost less impairment
149) An employer’s obligation for postretirement health benefits
that are expected to be provided to an employee must be fully
accrued by the date the
a. Employee is fully eligible for benefits
b. Employee retires
c. Benefits are utilized
d. Benefits are paid

150) For a defined benefit pension plan, the discount rate used to
calculate the projected benefit obligation is determined by the
Expected return on plan asset Actual return on plan
asset
a. yes yes
b. no no
c. yes no
d. no yes

151) The present value of pension benefits accrued to date using


assumptions as to future compensation levels is the
a. Prior service cost. c. Projected benefit obligation.
b. Accumulated benefit obligation. d.Accrued pension cost.

152) Interest cost included in the net pension cost recognized by


an employer sponsoring a defined benefit plan represents the:
a. amortization of the discount on unrecognized past service
cost
b. increase in the fair value of plan assets due to passage of
time
c. increase in the projected benefit obligation due to passage of
time
d. shortage between the expected and actual return on plan
assets