Accounting Theory

8th Boot Camp
3rd Tri 2013-2014

Theory of Accounts
April 24, 2014
Boot Camp 3rd Tri 2013-2014

Theory of Accounts
1. Financial accounting is the area of accounting that

emphasizes reporting to
A. Management
B. Regulatory Bodies
C. Auditors
D. Creditors and investors

Theory of Accounts
2. The term recognized is synonymous to the term

A. Recorded
B. Incurred / Realized
C. Disclosed
D. Booked

Theory of Accounts
3. Understandability in relation to information in financial

statements?
A. Users are willing to study the information with reasonable
diligence
B. Users are expected to have significant business knowledge
C. Financial statements shall exclude complex matters
D. Financial statements are expressed in the simplest way
possible.

Theory of Accounts
4. An accounting framework should

A. Lead to uniformity of financial statements among entities
within the same industry
B. Eliminate alternative accounting principles
C. Guide the PICPA in developing generally accepted auditing
standards
D. Define the basic objectives, terms and concepts of
accounting

Theory of Accounts
5. If the balance shown on the entitys bank statement is less

than the correct cash balance and neither the entity nor the
bank has made errors, there must be
A. Deposits credited by the bank but not yet recorded by the
entity
B. Outstanding checks
C. Deposit in transit
D. bank charges not yet recorded by the entity

Theory of Accounts
6. A proof of cash would be useful for

A. discovering cash receipts that have not been recorded in
the journal
B. discovering time lag in making deposits
C. discovering cash receipts that have been recorded but have
not been deposited
D. discovering an inadequate separation of incompatible
duties of employees

Theory of Accounts
7. Historical cost has been the valuation basis most commonly

used in accounting because of its
A. Timeliness
B. Conservatism
C. Reliability
D. Accuracy

Theory of Accounts
8. Conservatism is best described as selecting an accounting

alternative that
A. Understates assets and net income
B. Has the least favorable impact on owners equity
C. Overstates as opposed to understates liabilities
D. Is least likely to mislead users of financial information

Theory of Accounts
9. Non-trade receivables are classified as current only if they are

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 the operating cycle
notwithstanding

Theory of Accounts
10. Receivables denominated in a foreign currency should be:

A. translated to local currency using the exchange rate at the
time the receivables arise
B. shown at face value of the foreign currency
C. translated to local currency using the exchange rate at
balance sheet date
D. translated to local currency using the exchange rate when
the balance sheet is issued

Theory of Accounts
11. Which of the following statements is true if the company

employs the net price method of recording receivables?
A. the amount of cash discount is reflected in the accounting
records only when the discount is not taken
B. the amount of cash discount is reflected in the accounting
records only when the discount is taken
C. sales discount taken are deducted from sales on the income
statement to determine net sales
D. the company records the total invoice price in both the A/R
and Sales accounts at the time of sale as if no cash
discount were involved

Theory of Accounts
12. A company uses the allowance method for recognizing

doubtful accounts. The entry to record the write-off of a specific
uncollectible account:
A. affects neither net income nor working capital
B. affects neither net income nor accounts receivable
C. decreases both net income & working capital
D. decreases both net income & accounts receivable

Theory of Accounts
13. If receivables are hypothecated (pledged) against

borrowings, the amount of accounts receivable pledged should
be:
A. excluded from total receivables with disclosure
B. excluded from total receivables without disclosure
C. included in total receivables with disclosure
D. included in total receivables without disclosure

Theory of Accounts
14. What is the reclassification date for purposes of reclassifying

financial assets?
A. End of the current reporting period.
B. First day of the next reporting period following the change in
business model.
C. Date when management decided to change the business
model for managing financial assets.
D. Depends on the judgment of the management.

Theory of Accounts
15. Impairment loss is

A. The difference between the carrying amount and the present
value of estimated cash flows discounted at the original
effective interest rate.
B. The difference between the carrying amount and the present
value of estimated cash flows discounted at the current
market rate.
C. The difference between the carrying amount and the
absolute amount of estimated cash flows.
D. The difference between the absolute amount of estimated
cash flows and present value of estimated cash flows
discounted at eh original effective interest rate.

Theory of Accounts
16. What is the best evidence of the fair value of a financial

instrument?
A. The cost, including transaction cost.
B. The estimated value determined using discounted cash flow
technique or option pricing model.
C. The quoted price, if an active market exists for the financial
instrument.
D. The present value of the contractual cash flows.

Theory of Accounts
17. Which of the following items is not precluded from

classification as financial asset at amortized cost?
A. An investment in an unquoted equity instrument.
B. An investment in a quoted equity instrument.
C. A quoted derivative financial asset.
D. An investment in a quoted debt instrument.

Theory of Accounts
18. Statement 1: Financial assets at fair value through profit and

loss are no longer required by the standards to be tested for
impairment.
Statement 2: Financial assets at fair value through other
comprehensive income are to be tested for impairment since
the gains or losses associated with the changes in fair values of
these assets are not reported in profit or loss.
A. Only statement 1 is true.
B. Only statement 2 is true.
C. Both statements are true.
D. Both statements are false.

Theory of Accounts
19. According to PFRS 9, which of the following is (are) subject

to impairment?
A. Financial assets at fair value through profit or loss
B. Financial assets at fair value through other comprehensive
income
C. Financial assets at amortized cost
D. Both B and C

Theory of Accounts
20. Which of the following is not allowed under PFRS 9?

A. Reclassification to and from fair value through profit or loss.
B. Reclassification to and from fair value through other
comprehensive income.
C. Reclassification to and from amortized cost.
D. None of the above.

Theory of Accounts
21. Transaction costs that are directly attributable to the

acquisition of a financial asset shall be
A. Capitalized as cost of the financial asset.
B. Capitalized as cost of the financial asset unless the financial
asset is carried at fair value through profit or loss.
C. Capitalized as cost of the financial asset other than financial
assets held at amortized cost.
D. Expensed unless the financial asset is held at amortized
cost.

Theory of Accounts
22. Shares received in lieu of cash dividends are recorded as

A. Income at par value of the shares received.
B. Income at fair value of the shares received.
C. Income at the cash dividend that would have been received.
D. A memorandum entry stating the receipt of the shares.

Theory of Accounts
23. Statement 1: An investment in equity securities, to be

considered as investment in associate, must be at least 20% but
not more than 50% of the total preference shares of the issuing
company.
Statement 2: Under equity method of carrying investments, the
dividend income can be computed by multiplying the
associates net income by the investors ownership interest.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false

Theory of Accounts
24. Statement 1: Under the cost method of accounting for

investments, testing for impairment is not necessary since the
investor reports periodic dividends as income in the income
statement.
Statement 2: Under the equity method of carrying investments,
testing for impairment is not necessary since the investor and
the associate are considered as one and impairment in one
will have a direct effect to the other.
Statement 3: Under the fair value model of carrying
investments, testing for impairment is not necessary since
changes in fair value are reported directly to the statement of
comprehensive income.
Which of the above statements is true?
A. I only
B. II only
C. III only
D. II and III

Theory of Accounts
25. Statement 1: If an investment in bonds carried at amortized

cost is acquired at a discount and is subsequently sold at a
premium, the unamortized portion of the discount shall be
closed to the retained earnings account with the difference
between the carrying value of the bonds and the selling price
recognized as gain on sale of investment.
Statement 2: If an investment in bonds is carried at fair value, it
has to be presented at the face of the balance sheet at fair
value less unamortized discount or plus unamortized premium.

Theory of Accounts
26. When an investor purchases sufficient ordinary shares to

gain significant influence over the investee, what is the proper
accounting treatment of any excess of cost over carrying
amount of net assets acquired?
A. The excess is charged to retained earnings at the time the
investor resells the investment.
B. The excess is immediately expensed in the period in which
the investment is made.
C. The excess remains in the investment account until it is sold.
D. The excess is amortized over the time period that is
reasonable in the light of the underlying cause of the excess.

Theory of Accounts
27. How is goodwill arising on the acquisition of an associate

dealt with in the financial statements?
A. It is amortized.
B. It is tested for impairment individually.
C. It is written off against profit or loss.
D. It is not recognized separately within the carrying value of
the investment.

Theory of Accounts
28. If under equity method, an investors share of losses of an

associate equals or exceeds the carrying amount of an
investment, which of the following statements is incorrect?
A. The investor discontinues its share of further losses.
B. If the associate subsequently reports profits, the investor
resumes its share of those profits without regard to the
share of net losses not previously recognized.
C. Additional losses are provided for, or a liability is recognized
to the extent that the investor has incurred legal or
constructive obligations or made payments on behalf of the
associate.
D. The investment is reported at NIL value.

Theory of Accounts
29. The equity method is not required to be applied when the

associate has been acquired and held with a view of disposing it
within a certain time period. That is the period within which the
associate must be disposed of?
A. Six months from the end of the reporting period.
B. Twelve months from the date of classification as held for
sale.
C. Six months from the date of classification as held for sale.
D. Twelve months from the end of the reporting period.

Theory of Accounts
30. The effective interest rate on bonds is higher than the stated
rate when bonds sell
A. At face value
B. Above face value
C. Below face value
D. At maturity value

Theory of Accounts
31. Statement 1: As long as held by the lessor under an

operating lease, and it meets the other criteria, a machinery can
be classified as investment property.
Statement 2: A building originally owned by a lessor and leased
out under a finance lease is normally classified as property,
plant and equipment.

Theory of Accounts
32. Statement 1: As long as held by the lessor under an

operating lease, and it meets the other criteria, a machinery can
be classified as investment property.
Statement 2: A building originally owned by a lessor and leased
out under a finance lease is normally classified as property,
plant and equipment.

Theory of Accounts
33. In exchange for the right inherent in an option contract, the

owner of the option will typically pay a price
A. Only when a call option is exercised, regardless of whether it
is received or not.
B. Only when a put option is exercised, regardless of whether it
is received or not.
C. At the time when the option is received regardless of
whether the option is exercised or not.
D. At the time when the option is received and it is exercised.

Theory of Accounts
34. The amount initially paid be an entity for a call option is

referred to as
A. Option premium
B. Notional amount
C. Strike price
D. Intrinsic value

Theory of Accounts
35. Bifurcation
A. Separates an embedded derivative from its host contract.
B. Protects an entity from loss by entering into a transaction.
C. Includes entering into an agreement between two
counterparties to exchange cash flows over a specified
period of time in the future.
D. Is the interaction of the price or rate with an associate asset
or liability.

Theory of Accounts
36. How are derivative measured?

A. At cost, adjusted for transactional costs and changes in
terms of contract.
B. At fair value adjusted for costs to sell.
C. At fair value.
D. At either cost or fair value whichever is higher.

Theory of Accounts
37. In the acquisition of PPE on account, when will the account

Purchase Discount Lost appear in your books?
A. When discount is taken using Gross Method only
B. When discount is not taken using Gross Method only
C. When discount is not taken using Net Method only
D. When discount is not taken using Net or Gross Method

Theory of Accounts
38. When an item of PPE is already fully depreciated,

Statement 1: the asset account and the related accumulated
depreciation are closed and the residual value is set up in a
separate account
Statement 2: the asset account and related accumulated
depreciation shall not be removed from the accounts when the
fully depreciated asset is still being used
Statement 3: the company owning the asset is required to
disclose the fully depreciated asset.
C. Only statements 2 and 3 are true
D. Only statements 1 and 2 are true

Theory of Accounts
39. All of the following are necessary costs to bring an asset to

its intended use except one
A. payments to engineers to test equipment
B. payment to freight companies to transport the equipment
C. payment to authorities for documents needed by the
equipment
D. payment to professionals to train operators of the new
machine

Theory of Accounts
40. An equipment received through an exchange transaction

with commercial substance with additional cash payment shall
be measured at the books of the payer at
A. Fair value of asset received plus cash paid
B. Book value of asset received plus cash paid
C. Fair value of asset given less cash paid
D. Fair value of the asset given plus cash paid

Theory of Accounts
41. The following are applicable both to PPE and intangibles

except one:
A. Revaluation
B. Impairment
C. Systematic allocation of cost over period where benefit was
received from use
D. Borrowing costs to develop the asset

Theory of Accounts
42. Statement 1: Intangible assets will never have a residual

value unlike PPE items. Statement 2: In the absence of a useful
life or economic life, a Trademark shall be amortized over 20
years, being the legal life in the Philippines.
C. Both are true
D. Both are false

Theory of Accounts
43. It is difficult to estimate the useful life of a copyright. This is

because the useful life of the copyright is
A. up to 5 years from date of birth of author
B. up to 25 years from first printing
C. up to 50 years from date of first publication
D. up to 50 years from death of the author

Theory of Accounts
44. When is the technical feasibility of a patent established?

A. At the development phase of the product to be patented
B. At the research phase of the product to be patented
C. Upon production of the patented product
D. Upon registration of the patent

Theory of Accounts
45. Which of the following indicates that technological feasibility

is already established but before mass production?
A. preparation of the plans and designs in print
B. Retail of the product to the public for the first time
C. Editing and redesigning the product plan
D. Production of a prototype of the product

Theory of Accounts
46. Which of the following is an essential characteristic of a

liability?
A. It must be an obligation to transfer assets or provide
services in the future
B. The identity of the creditor must be known
C. It may be the result of future transactions
D. The exact amount due must be known

Theory of Accounts
47. Which of the following items would be excluded from current

liabilities?
A. A long-term liability callable or die on demand by the
creditor even though the creditor has given no indication
that the debt will be called
B. Normal accounts payable that the debt will be called
C. Long-term debt callable within one year or less because the
debtor violated a debt provision
D. A short-term debt which at the discretion of the entity can
be rolled over at least 12 months after the balance sheet
date

Theory of Accounts
48. Which of the following loss contingencies is usually not

accrued?
A. Product warranty obligations
B. Premium offer obligations
C. Risk of loss from fire
D. Non-collectability of receivables

Theory of Accounts
49. Which of the following provides the best explanation for why
warranty expense should be estimated and recorded in the year
of the related sales?
A. Full disclosure
B. Revenue Recognition
C. Matching
D. Materiality

Theory of Accounts
50. Liabilities whose amounts must be estimated are disclosed

in financial statements by:
A. including details in the footnotes
B. Describing the estimated liability among the liabilities on the
balance sheet but not including the amounts in the liability
totals
C. An appropriation of the retained earnings
D. Including the amounts in the liability totals

Theory of Accounts
51. Which of the following liabilities is not contingent?

A. A liability to replace specific defective television set already
returned to the manufacturer.
B. A liability to pay pension benefits if a specific employee lives
to retirement.
C. A liability to pay any adverse judgment for a product liability
case currently on appeal.
D. A liability to pay for the books received by the college
bookstore, terms allow for the return for full refund of any
books not sold.

Theory of Accounts
52. In classifying a liability whether current or noncurrent, the

current liabilities are generally the liabilities related to your daily
operations and are due to be settled within 12 months after
balance sheet date while the noncurrent liabilities are
A. extraordinary liabilities not usually being encountered
B. all other liabilities not classified under current
C. liabilities which are not measurable immediately upon
recognition
D. Liabilities which cannot be settled anymore

Theory of Accounts
53. It is the amount of cash that could currently be obtained by

selling the asset in orderly disposal.
A. Realization value
B. Fair Value
C. Market value
D. Present value

Theory of Accounts
54. Close family members of an individual include all of the

following except:
A. The individuals spouse and children
B. Children of the individuals spouse
C. Dependents of the individual or individuals spouse
D. Brothers and sisters of the individual.

Theory of Accounts
55. PAS 24 requires disclosure of compensation of key

management personnel. Which of the following would not be
considered compensation for this purpose?
A. Short-term benefits
B. Share-based payments
C. Termination Benefits
D. Reimbursement of out-of-pocket expenses.

Theory of Accounts
56. Under PAS 24, which of the following is not a related party of
an entity?
A. A shareholder of the entity owning 30% of the ordinary
shares.
B. An entity providing banking facilities to the entity.
C. An associate of the entity
D. Key management personnel of the entity.

Theory of Accounts
57. Who are major customers according to PFRS 8?

A. Those customers who have been dealing with the entity for
at least five years regardless of the volume of revenue
B. Those customers that individually account for revenue of at
least 90% of the entity external revenue.
C. Those customers that individually account for revenue of
10% or more of the entity external and internal revenue.
D. Those customers that individually account for revenue of
10% or more of the entity external revenue.

Theory of Accounts
58. 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. An
entity shall disclose all of the following information except
A. information about products and services
B. information about geographical areas
C. information about intercompany transactions
D. information about major customers.

Theory of Accounts
59. Following are four observations regarding the amounts

reported in financial statements that have been adjusted for
general price level changes. Which observation is valid?
A. The amount obtained by adjusting an assets cost for
general price level change usually approximates its current
fair value
B. The amount adjusted for general price level change is not
departure from historical cost
C. When inventory increases and prices are rising, FIFO
inventory accounting has the same effect on financial
statements as amounts adjusted for general price level
changes
D. When inventory remains constant and prices are rising,
average cost inventory accounting has the same effect on
financial statements as amounts adjusted for general price
level changes.

Theory of Accounts
60. When an entity prepares financial statements on a current

cost basis, how is the cost of goods sold computed?
A. Number of units sold times average current cost of units
during the year.
B. Number of units sold times current cost of units at the end of
the year
C. Number of units sold times current cost of units at the
beginning of the year
D. Beginning inventory at current cost plus cost of goods
purchased less ending inventory at current cost.

Accounting Theory

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8th Boot Camp

3rd Tri 2013-2014

Boot Camp 3rd Tri 2013-2014

1. Financial accounting is the area of accounting that

Boot Camp 3rd Tri 2013-2014

2. The term recognized is synonymous to the term

Boot Camp 3rd Tri 2013-2014

3. Understandability in relation to information in financial

Boot Camp 3rd Tri 2013-2014

4. An accounting framework should

Boot Camp 3rd Tri 2013-2014

5. If the balance shown on the entitys bank statement is less

Boot Camp 3rd Tri 2013-2014

6. A proof of cash would be useful for

Boot Camp 3rd Tri 2013-2014

7. Historical cost has been the valuation basis most commonly

Boot Camp 3rd Tri 2013-2014

8. Conservatism is best described as selecting an accounting

Boot Camp 3rd Tri 2013-2014

9. Non-trade receivables are classified as current only if they are

Boot Camp 3rd Tri 2013-2014

10. Receivables denominated in a foreign currency should be:

Boot Camp 3rd Tri 2013-2014

11. Which of the following statements is true if the company

Boot Camp 3rd Tri 2013-2014

12. A company uses the allowance method for recognizing

Boot Camp 3rd Tri 2013-2014

13. If receivables are hypothecated (pledged) against

Boot Camp 3rd Tri 2013-2014

14. What is the reclassification date for purposes of reclassifying

Boot Camp 3rd Tri 2013-2014

15. Impairment loss is

Boot Camp 3rd Tri 2013-2014

16. What is the best evidence of the fair value of a financial

Boot Camp 3rd Tri 2013-2014

17. Which of the following items is not precluded from

Boot Camp 3rd Tri 2013-2014

18. Statement 1: Financial assets at fair value through profit and

Boot Camp 3rd Tri 2013-2014

19. According to PFRS 9, which of the following is (are) subject

Boot Camp 3rd Tri 2013-2014

20. Which of the following is not allowed under PFRS 9?

Boot Camp 3rd Tri 2013-2014

21. Transaction costs that are directly attributable to the

Boot Camp 3rd Tri 2013-2014

22. Shares received in lieu of cash dividends are recorded as

Boot Camp 3rd Tri 2013-2014

23. Statement 1: An investment in equity securities, to be

Boot Camp 3rd Tri 2013-2014

24. Statement 1: Under the cost method of accounting for

Boot Camp 3rd Tri 2013-2014

25. Statement 1: If an investment in bonds carried at amortized

Boot Camp 3rd Tri 2013-2014

26. When an investor purchases sufficient ordinary shares to

Boot Camp 3rd Tri 2013-2014

27. How is goodwill arising on the acquisition of an associate

Boot Camp 3rd Tri 2013-2014

28. If under equity method, an investors share of losses of an

Boot Camp 3rd Tri 2013-2014

29. The equity method is not required to be applied when the

Boot Camp 3rd Tri 2013-2014

Boot Camp 3rd Tri 2013-2014

31. Statement 1: As long as held by the lessor under an

Boot Camp 3rd Tri 2013-2014