CEBU CPAR CENTER

Cebu City

THEORY OF ACCOUNTS Angelito R Punzalan, CPA,

MBA
Winding up Problems

CONCEPTUAL FRAMEWORK

1. 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. Assist banks to determine an appropriate interest rate for their commercial loans.

2. Financial accounting is concerned with

a. General purpose reports on financial position and results of operations.
b. Specialized reports for inventory management and control
c. Specialized reports for income tax computation and recognition.
d. General purpose reports on changes in stock prices and future estimates of market position.

3. Financial accounting can be broadly defined as the area of accounting that prepares
a. General purpose financial statements to be used by parties internal to the business enterprise
only.
b. Financial statements to be used by investor only.
c. General purpose financial statements to be used by parties both internal and external to
the business enterprise.
d. Financial statements to be used primarily by management.

4. The information provided by financial reporting pertains to

a. Individual business enterprises, rather than to industries or an economy as a whole or to
members of society as consumers.
b. Business industries, rather than to individual enterprises or an economy as a whole or to
members of society as consumers.
c. Individual business enterprises, industries, and an economy as a whole, rather than to member of
society as consumers.
d. An economy as a whole and to members to society as consumers, rather than to individual
enterprises or industries.

5. The role of the Security and Exchange Commission in the formulation of accounting principles can
be best described as
a. Consistently primary
b. Consistently secondary
c. Sometimes primary and sometimes secondary.
d. Non-existent

6. In the framework for the Preparation and Presentation of Financial Statements, which of the
following is an ingredient of reliability
a. Predictive value c. Understandability
b. Materiality d. Verifiability

7. If accounting information is timely and has predictive and feedback value, then it can be
characterized as
a. Verifiable c. Reliable
b. Relevant d. Qualitative

8. Comparability is sometimes sacrificed for

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a. Reliability c. Objectivity
b. Conservatism d. Relevance

9. Which of the following characteristics does the cost principle primarily support?
a. Predictive value c. Verifiability
b. Conservatism d. Timeliness

10. Estimating bad debts for the period is based primarily on the
a. Cost principle c. Full disclosure principle
b. Conservatism constraint d. Matching principle

11. The continuity assumption is the basis for the rule that
a. The income statement should not include material gains and losses that are both unusual and
infrequent.
b. Treasury stock should not be reported in the balance sheet as an asset.
c. The cost of installing a machine should not be included in the recorded cost of the machine, but
rather expenses immediately.
d. The cost of the operational assets should be allocated to expense systematically over their
useful lives.

11. The accounting assumption that a business enterprise will not be sold or liquidated in the near future
is known as the
a. Economic entity assumption c. Conservatism assumption
b. Monetary unit assumption d. Going concern assumption

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. Difficulty in making certain calculations.

13. Preparation of consolidated financial statements is primarily based on the

a. Time period assumption c. Cost principle
b. Full disclosure principle d. Separate entity assumption

14. The economic entity assumption

a. Is applicable to unincorporated businesses.
b. Recognizes the legal aspects of business organizations.
c. Requires periodic income measurement.
d. Is applicable to all forms of business organizations.

15. The measurement basis most commonly adopted by entities in preparing their financial statements is
a. Historical cost c. Realizable value
b. Current cost d. Present value

15. Current cost is the

a. Amount of cash paid or fair value of the consideration given at the time of acquisition.
b. Amount of cash that would have to be paid if the same or an equivalent asset is acquired
currently.
c. Amount of cash that could currently be obtained by selling the asset in an orderly disposal.
d. Discounted value of the future net cash inflows that the item is expected to generate in the
normal course of business.

16. In classifying the elements of financial statements, the primary distinction between revenues and
gains is
a. The materiality of the amounts involved.
b. The likelihood that the transactions involved will recur in the future.
c. The nature of the activities that gave rise to the transactions involved.
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d. The costs versus the benefits of the alternative methods of disclosing the transactions involved.

17. A decrease in net assets arising from peripheral or incidental transactions is called
a. Capital expenditure c. Loss
b. Cost d. Expense

18. Which of the following elements of financial statements is not a component of comprehensive
income?
a. Revenues c. Losses
b. Expenses d. Distribution to owners

19. Under a royalty agreement with another company, a company will pay royalties for the assignment
of a patent for three years. The royalties paid should be reported as expense
a. In the period paid.
b. In the period incurred.
c. At the date the royalty agreement began.
d. At the date the royalty agreement expired.

20. A company incurred costs associated with relocating employees in a restructuring of its operations.
How should the company account for these costs?
a. Measured at fair value and recognized over the next two years.
b. Measured at fair value recognized when the liability is incurred.
c. Recognized when the costs are paid.
d. Measured at fair value and treated as a prior period adjustment.

21. The matching concept

a. Requires that a debit is matched or posted for every credit.
b. Is the name applied to the process of associating expenses with revenues.
c. Treats all costs as being directly related to revenue generation.
d. Treats all costs as expenses

22. Certain costs of doing business are capitalized when incurred and then depreciated or amortized over
subsequent accounting periods to”
a. Aid management in decision-making
b. Match the costs incurred with revenues earned.
c. Conform to the conservatism constraint
d. Conform the comparability characteristic

23. A corporation reports the sale of some of its shares to a shareholder in its financial statements, and
the shareholder reports the same transaction as an investment. Therefore,
a. The revenue principle has been violated
b. The separate entity assumption has been violated.
c. The double entry accounting concept has been violated.
d. No accounting concept has been violated.

24. If the operating cycle of a business is fifteen months

a. Cash set aside for a purchase of equipment will be shown as a current asset.
b. A note receivable that is due one year and two months from the balance sheet date will be
shown as a current asset.
c. Balance sheets should be prepared more often than income statements.
d. A note that is payable by the business two years from the balance sheet date will be shown as a
current liability.

25. Which of the following would most likely be found in an adjusting entry?
a. Prepaid expenses c. Cash dividend paid
b. Accounts receivable d. Cash dividend declared

26. At the date of purchase of a service which is not immediately used up, the cost of such unused
service is
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a. Revenue c. Asset
b. Liability d. Expense

27. Adjusting entries are needed because entity

a. Uses the accrual basis of accounting
b. Has earned revenue during the period by selling products from its central operations.
c. Has expenses
d. Uses the cash basis of accounting rather than the accrual basis.

28. What is the underlying concept that supports the immediate recognition of a contingent loss?
a. Substance over form c. Matching
b. Consistency d. Conservatism

29. What is the underlying concept governing the generally accepted accounting principles pertaining to
recording gain contingencies?
a. Conservatism c. Consistency
b. Relevance d. Reliability

30. In calculating present value in a situation with a range of possible outcomes all discounted using the
same interest rate, the expected present value would be
a. The most likely outcome.
b. The maximum outcome.
c. The minimum outcome.
d. The sum of probability weighted present values.

31. Which of the following is NOT an objective of using present value in accounting measurements?
a. To capture the value of an asset or a liability in the context of a particular entity.
b. To estimate fair value.
c. To capture the economic difference between sets of future cash flows.
d. To capture the elements that taken together would comprise a market price if one existed.

CASH AND CASH EQUIVALENT

1. Which of the following is NOT considered cash for financial reporting purposes?
a. Petty cash fund and change funds.
b. Money orders, certified checks, and personal checks.
c. Coin, currency, and available funds.
d. Postdated checks and IOUs.

2. Which of the following is considered cash?

a. Certificates of deposits c. Money market savings certificates
b. Money market checking accounts d. Postdated checks

3. Bank overdrafts, if material, should

a. Be reported as a deduction from current asset section.
b. Be reported as a deduction from cash.
c. Be netted against cash and net cash amount reported.
d. Be reported as a current liability.

4. An imprest bank account is

a. A difference between the amount on deposit according to the company’s records and the amount
of collected cash according to the bank record.
b. The principal bank account through which most companies’ cash transactions are cycled.
c. An account used to make a specific amount of cash available for a limited purpose.
d. A local post office box from which a local bank is authorized to pick up and deposit remittances.

5. In most situations, the petty cash fund is reimbursed just prior to the year end and an adjusting entry
is made to avoid
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a. Overstatement of cash and understatement of expenses.
b. Understatement of cash and overstatement of expenses.
c. Misstatement of revenues.
d. Understatement of cash with the appropriate statement of expenses.

6. Cash short and over account

a. Is not generally accepted.
b. Is debited when the petty cash fund proves out over.
c. Is debited when the petty cash fund proves out short.
d. Is a contra account for cash.

7. Which of the following statements concerning compensating balance agreements is not true?
a. They reduce the amount of cash available to the borrower.
b. They always involve legal restrictions on the cash received.
c. They increase the effective interest rate to the borrower.
d. They must be disclosed in the financial statements footnote.

8. Bank statement provide information about all of the following except

a. Checks cleared during the period c. Bank charges for the period.
b. NSF checks d. Errors made by the company

9. Which of the following items would be added to the book balance on a bank reconciliation?
a. Outstanding checks.
b. A check written for P6,500 entered as P5,600 in the accounting records.
c. Interest paid by bank.
d. Deposit in transit.

10. When preparing a four-column bank reconciliation to correct amount for the month of November
a. Deposits in transit at October 31 are added to the October 31 bank balance and to the November
30 bank balance.
b. Outstanding checks at November 30 are added to November bank disbursements and
deducted from the November 30 bank balance.
c. An NSF check is deducted from November book receipts and from the November 30 book
balance.
d. Bank service charges at October 31 are deducted from the October 31 book balance and added to
November book disbursements.

11. Which of the following is a key element of internal control over cash payments?
a. Periodically reconciling the cash account balance on the
company’s books to the bank statement balance.
b. Making daily bank deposits.
c. Requiring that all petty cash vouchers be approved by two
signatures.
d. Authorizing and verifying that all cash fund received is recorded
daily.

12. Which is not a key element of internal control over cash receipts?
a. Daily recording of all cash receipts in the accounting records.
b. Daily entry in a voucher register.
c. Immediate counting by the person opening the mail or using the cash register.
d. Daily deposit intact.

RECEIVABLES

1. Which of the following should be recorded in Accounts Receivable?

a. Receivable from officers.
b. Receivable from subsidiaries.
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c. Dividend receivable.
d. Open accounts resulting from short-term extension of credit to customers.

2. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not make the
balance sheet misleading because
a. Most short-term receivables are not interest-bearing.
b. The allowance for uncollectible accounts includes a discount element.
c. The amount of the discount is not material.
d. Most receivables can be sold to a bank or factor.

3. If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be
a. Reported as a deduction from sales in the income statement.
b. Reported as an item of other expense in the income statement.
c. Reported as s deduction from accounts receivable in determining the net realizable value of
accounts receivable.
d. Reported as sales discount forfeited in the cost of goods sold section of the income statement.

4. The allowance method of recognizing bad debts expense can be applied in more than one way. What
two conditions must be met before the allowance method can be used?
a. Bad debts must be expected and material.
b. Bad debts must be probable and estimable.
c. Bad debts must be relevant and reliable.
d. Bad debts and the method used to estimate must be consistently applied.

5. Which of the following methods of determining bad debts expense does not properly match expense
and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable under the
allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the allowance
method.
d. Charging bad debts as accounts are written off as uncollectible.

6. Which of the following methods of determining annual bad debts expense best achieves the
matching concept?
a. Percentage of sales c. Percentage of ending accounts receivable
b. Direct write-off d. Percentage of average accounts receivable

7. Which of the following is a generally accepted method of determining the amount of the adjustment
to bad debts expense?
a. A percentage of sales adjusted for the balance in the allowance.
b. A percentage of sales not adjusted for the balance in the allowance.
c. A percentage of accounts receivable not adjusted for the balance in the allowance.
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance.

8. The balance in accounts receivable is not reduced in recording which of the following types of
financing arrangements?
a. Assignment of specific accounts receivable.
b. General assignment (pledge) of accounts receivable.
c. Factoring of accounts receivable.
d. Transfer of accounts receivable without recourse.

9. Which of the following is true when accounts receivable are factored without recourse?
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a. The transaction may be accounted for either as a secured borrowing or as a sale, depending
upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the owner of
the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost should be recognized ratably over the collection period of the receivables.

10. When accounts receivable are factored without recourse, what account does the transferor credit?
a. Accounts receivable assigned
b. Liability
c. Sales
d. Accounts receivable

11. An interest bearing note receivable

a. Causes no interest revenue to be recorded.
b. Includes a specified principal amount plus specified interest.
c. Includes a specified principal amount but an unspecified interest amount.
d. Includes an unspecified principal amount and an unspecified interest amount.

12. A note receivable that is sold (i.e., discounted) to obtain early cash must be
a. Retained in the accounts in the same manner as before discounting.
b. Reported as an extraordinary loss if it is dishonored.
c. Disclosed as a contingent liability if it is discounted without recourse.
d. Reported as a sale or loan.

13. Which of the following would indicate that a note receivable or other loan is impaired?
a. When it is written off.
b. When it is probable that principal payments will be delayed.
c. When the maker of the note experiences financial difficulties.
d. When the market value of the note falls below its book value due to interest rate changes.

14. Garfield Co. factored its receivables without recourse with Ross Bank. Garfield received cash as a
result of this transactions, which is best described as a
a. Loan from Ross collaterized by Garfield’s accounts receivable.
b. Loan from Ross to be repaid by the proceeds from Garfield’s accounts receivable.
c. Sale of Garfield’s accounts receivable to Ross, with the risk of uncollectible accounts retained by
Garfield.
d. Sale of Garfield’s accounts receivable to Ross, with the risk of uncollectible accounts
transferred to Ross.

15. If a transfer of receivables with recourse qualifies to be recognized as a sale, the proceeds from the
sale are
a. Accounted for as a secured borrowing.
b. Recorded at fair value for the assets obtained and liabilities incurred.
c. Recorded at the historical cost of the assets obtained.
d. Reduced by the fair value of the recourse obligation.

INVENTORIES

1. When a periodic inventory system is used

a. Cost of goods sold is a residual amount.
b. Ending inventory is transferred to expense and the beginning inventory is transferred to assets.
c. Two entries must be made when goods are purchased.
d. A purchase account is not used; all inventory purchase entries are debits to the inventory
account.
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2. Generally accepted accounting principles require the selection of an inventory cost flow method
which
a. emphasizes the valuation of inventory for balance sheet purposes.
b. Most closely approximates lower of cost and net realizable value for the ending inventory.
c. Most clearly reflects the periodic income.
d. Yields the most conservative amount of reported income.

3. All of the following correctly describe the average cost inventory cost flow method, except
a. A moving average cost is used with a perpetual inventory system only.
b. The average cost methods are based on the view that the cost of inventory on hand and the cost
of goods sold during a period should be representative of all purchase costs available for the
period.
c. A weighted average unit cost is used with a periodic inventory system only.
d. A moving average cost is used with either a periodic or a perpetual inventory system.

4. The purchase discount taken account may appear in the accounting records if which method is used to
account for purchase discounts?
a. Net price method c. Allowance method
b. Gross price method d. Sales price method
5. The specific identification method is more appropriate than a flow assumption
a. For a large inventory of identical low-priced items c. If purchase costs are rising
b. If each item in the inventory is unique d. If purchase costs are falling

6. Which method of inventory pricing best approximates specific identification of the actual flow of
costs and units in most manufacturing situations?
a. Average cost c. LIFO
b. FIFO d. Base stock

7. In period of rising prices, the inventory method which tends to give the highest reported net income
is
a. Base stock c. LIFO
b. FIFO d. Weighted average

8. In period of rising prices, the inventory method which tens to give the highest reported inventory is
a. FIFO c. LIFO
b. Moving average d. Weighted average

9. Net losses on firm purchase commitments for goods for inventory result from a contract price that
exceeds the current market price. If a firm expects that losses will occur when the purchase is
effected, expected losses, if material
a. Should be recognized in the accounts and separately disclosed
as losses on the income statement of the period during which the decline in prices takes
place.
b. Should be recognized in the accounts and separately disclosed as
net unrealized losses on the balance sheet at the end of the period during which the decline in
price takes place.
c. Should be recognized in the accounts and separately disclosed as
net unrealized losses on the balance sheet at the end of the period during which the contract was
executed.
d. Should not be recognized in the accounts until the contract is
executed and need not be separately disclosed in the financial statements.

10. If a material amount of inventory has been ordered through a formal purchase contract at the balance
sheet date for future delivery at firm prices
a. This fact must be disclosed.
b. Disclosure is required only if prices have declined since the date of order.
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary
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11. The credit balance that arises when a net loss on a purchase commitment is recognized should be
a. Presented as a current liability.
b. Subtracted from ending inventory.
c. Presented as an appropriation of retained earnings.
d. Presented in income statement.

12. The gross profit method of inventory valuation is INVALID when

a. A portion of the inventory is destroyed.
b. There is substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation.
d. The gross profit percentage applicable to the goods in ending inventory is different from
the percentage applicable to the goods sold during the period.

13. The retail inventory method is based on the assumption that the
a. Final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. Ratio of gross margin to sales is approximately the same each period.
c. Ratio of cost to retail changes at a constant rate.
d. Proportions of markups and markdowns to selling price are the same.

14. What is the maximum amount that the inventory can be valued at when the goods have experienced
a permanent decline in value?
a. Historical cost c. Net realizable value
b. Sales price d. Net realizable value reduced by a normal profit margin
INVESTMENTS

1. The test of marketability must be met before investments in equity securities can be properly
classified as?
a. Equity investments c. Trading securities or securities available for sale
b. Treasury stock d. Consolidated securities

2. The factors to consider in classifying investments in securities as short-term are?

a. Whether they are tangible or intangible.
b. Ready marketability and type of investment.
c. Ready marketability and management intentions.
d. Type of investment only.

3. A security available for sale (SAS) is

a. A security which is currently held for resale.
b. A debt security not intended to be held to maturity.
c. A debt security but not an equity security.
d. A security accounted for by the fair value method but is not a trading security.

4. For investments in TS, which of the following market value changes are recognized in earnings?
a. Realized gains only
b. Unrealized gains only
c. Realized losses only
d. Unrealized and realized gains and losses.

5. For investments in SAS, which of the following market value changes are recognized in earnings?
a. Realized losses only
b. Realized gains and losses only
c. Realized gains and unrealized losses only
d. Unrealized and realized gains and losses.

6. When an investment in TS is sold during the year, the realized gain or loss (assume no transaction
costs) equals?
a. The difference between book value at the date of sale and the market value at the date of sale.
b. The difference between original cost and the market value at the date of sale.
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c. The balance in the valuation account.
d. The market value change experienced during the year of sale.

7. Securities which could be classified as held to maturity are

a. Redeemable preferred stock c. Municipal bonds
b. Warrants d. Treasury stock

8. In accounting for investment in debt securities that are classified as trading securities
a. A discount is reported separately.
b. A premium is reported separately.
c. Any discount or premium is not amortized.
d. Any discount or premium is amortized.

9. Investments in debt securities are generally recorded at

a. Cost including accrued interest.
b. Maturity value.
c. Cost including brokerage and other fees.
d. Maturity value with a separate discount or premium account.

10. Icarus Corporation purchased 25% of the outstanding ordinary shares of ET Corporation yet it
obtained only a very minor degree of influence over ET’s affairs. Icaurs plans to hold the shares
indefinitely. ET’s ordinary share is traded on the Philippine Stock Exchange, therefore, Incarus
should account for its investment using which of the following methods.
a. Fair value method c. Equity
b. Cost d. It has a choice from among two of the methods in this list of answers

11. When a firm increases its interest in an investment in equity securities accounted for by the fair
value method, and changes to the equity method, what is the initial carrying value for purposes of
subsequent application of the equity method?
a. Book value at the date of the change.
b. The amount which would be reflected in the investment account had the equity method
been used all along.
c. Market value at the date of the change
d. Original cost plus or minus the net market value change since acquisition.

12. When the market value of a company’s portfolio of available for sale securities is lower than its cost,
the difference should be?
a. Accounted for as a liability.
b. Disclosed and described in a note to the financial statements but not accounted for.
c. Accounted for as a valuation allowance deducted from the asset to which it relates.
d. Accounted for as an addition in the shareholder’s equity section of the balance sheet.

13. Cash dividends declared out of current earnings were distributed to an investor. How will the
investor’s investment account be affected by those dividends under each of the following accounting
methods?
Fair value method Equity method
a. Decrease No effect
b. No effect Decrease
c. Decrease Decrease
d. No effect No effect

14. Pal Corp’s 2004 dividend revenue included only part of the dividends received from its Ima Corp.
investment. Pal Corp. has an investment in Ima corp. that it intends to hold indefinitely. The balance
of the dividend reduced Pal’s carrying amount for its Ima investment. This reflects the fact that Pal
accounts for its Ima investment
a. As an available for sale investment, and only a portion of Ima’s 2004 dividends represent
earnings after Pal’s acquisition.
b. As available for sale investment and its carrying amount exceeded the proportionate share of
Ima’s market value.
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c. As equity investment, and Ima incurred a loss in 2004.
d. As equity investment, and its carrying amount exceeded the proportionate share of Ima’s MV.

15. In its financial statements, Pare, Inc. uses the cost method of accounting for its 15% ownership of
Sabe Co. At December 31, 2004, Pare has a receivable from Sabe. How should the receivable be
reported in Pare’s December 31, 2004 balance sheet?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in Sabe, without separate
disclosure.
c. 85% of the receivable should be reported separately, with the balance offset against Sabe’s
payable to Pare.
d. The total receivable should be offset against Sabe’s payable to Pare without separate disclosure

16. An investor in common stock received dividends in excess of the investor’s share of investee’s
earnings subsequent to the date of investment. How will the investor’s investment account be
affected by those dividends for each of the following investments?
Available for sale securities Equity method investment
a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease

17. Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase
in the investment account if it has classified the stock as available for sale or uses the equity method
of accounting?
Available for sale securities Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes

18. Stock dividends on common stock should be recorded at their fair value by the investor when the
related investment is accounted for under which of the following methods?
Cost Equity
a. Yes Yes
b. Yes No
c. No Yes
d. No No

19. Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How
should Band record a 2% stock dividend received from Guard?
a. As dividend revenue at Guard’s carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Guard stock owned.
d. As a memorandum entry reducing the unit cost of all Guard stock owned.

PROPERTY, PLANT AND EQUIPMENT

1. Accounting for tangible operational asset is primarily in conformity with

the
a. Historical cost principle c. Historical cost principle and reporting principle
b. Matching principle d. Matching principle and historical cost principle
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2. Which of the following is least likely to be classified in property, plant and equipment?
a. Land improvement c. Natural resource
b. Land d. Idle land

3. Plant assets may properly include

a. Property held for investment purposes
b. Land held for possible use as a future plant site.
c. Self-constructed assets currently in use.
d. Idle equipment awaiting sale.

4. Capitalizable make-ready costs related to a new machine do not include

a. Rearrangement costs related to the machine.
b. Installation costs related to the machine.
c. Taxes related to the machine during the make-ready period.
d. Depreciation on the machine during the make-ready period.

5. Choose the correct statement about the accounting treatment for special one-time assessments made
by local government required a firm to pay for improvements including streetlights, sewer and other
infrastructure.
a. They are capitalized but not depreciated.
b. If probable and estimable, they are expensed when determinable.
c. They are expensed as incurred.
d. They are capitalized and depreciated over their useful life.

6. The amount of sale tax paid on the purchase of an operational asset should be debited to a
a. Machinery account c. Accumulated depreciation account
b. Tax expense account d. Separate deferred charge account

7. Discounts available for early payment of liabilities on purchases of operational assets should
a. Be capitalized as part of the cost of the asset, whether taken or not, and subsequently included as
depreciation expense.
b. Be recorded and reported as a contra account to the related liability account.
c. Not capitalized as cost of the asset whether taken or not.
d. Be given no recognition until taken or until the discount period has expired; if not taken, the
discount should be added to the cost of the asset.

8. When a firm receives a plant asset as a donation, what account should be credited?
a. Contributed capital c. Deferred credit
b. Income d. Revenue

9. Which of the following is least likely to result in revenue recognition?

a. Receipt of donated equipment.
b. Receipt of donated services to install the plumbing in a new building.
c. Receipt of an unconditional promise by another entity to transfer assets in the future.
d. Receipt of a conditional promise by another entity to transfer assets in the future.

10. Apportionment of the purchase price in a lump-sum acquisition of different asset may be used on all
of the following EXCEPT
a. Book values of the assets to the seller
b. Relative market values.
c. Tax assessment values.
d. Appraised values.

11. An exchange of assets with no cash exchanged

a. Records the cost of the asset received at the book value of the asset given.
b. Records the asset received at the market value of the asset given.
c. Culminates an earning process.
d. Results in recognition of a loss or gain to each party.
 13

12. It is permissible to capitalize interest on

a. Assets that are not being used in earning activities of the entity and that are not undergoing the
activities necessary to get them ready for such use.
b. Inventories that are routinely manufactured in large quantities on a repetitive basis.
c. Assets that already are in use or are ready for their intended use in the earnings activities on the
entity.
d. Assets under construction.

13. After determining which equity items on the balance sheet properly comprise the basis of interest
capitalization for operational asset under construction, the interest calculation is based on the
a. Accumulated borrowings used only for the construction.
b. Accumulated expenditures on qualifying assets as of the start of the construction period.
c. Average accumulated expenditures on qualifying assets during the construction period.
d. Accumulated expenditures on qualifying assets as of the end of the construction period.

14. Capitalization of construction period interest is based primarily upon the

a. Comparability principle c. Full-disclosure principle
b. Matching principle d. Revenue principle

15. The interest capitalization period for a self-constructed asset begins when certain conditions are met.
Which of the following is not one of those conditions?
a. Activities necessary to get the asset ready for its intended use actually are in progress.
b. Qualifying expenditures for the asset have actually been made.
c. Interest cost has actually been incurred.
d. Liabilities, such as trade payables or accruals, are incurred in connection with the asset.

DEPRECIATION, DEPLETION, REVALUATION AND IMPAIRMENT

1. A primary theoretical objection to the straight line method of depreciation is that it

a. Gives a lower periodic expense than the accelerated method over the life of the asset.
b. Recognizes the declining productivity of the asset.
c. Ignores variation in the rate of asset use among periods.
d. Tends to result in a constant rate of return on a diminishing investment base.

2. All of the following are causes of depreciation except

a. Obsolescence of the asset c. Wear and tear from operational use
b. Inadequacy of the asset d. Decline in current market value of the asset.

3. What is the minimum book value to be disclosed in the balance sheet for a plant asset which is
expected to be sold for reasonable amount at the end of its useful life?
a. Zero c. Salvage value
b. Depreciable cost d. Total original cost less accumulated depreciation

4. Which of the following items relevant to the depreciation of an asset can be negative?
a. Residual value c. Useful life
b. Depreciable cost d. Cost subsequent to acquisition

5. For each succeeding period, the declining balance method of depreciation recognizes an amount of
depreciation expense that is
a. Decreasing c. Increasing
b. Computed using a declining rate d. Constant

6. Under what conditions will the service hours and productive output methods of depreciation result in
the same depreciation expense for a particular year?
a. When the total estimated service hours and production in units are the same.
 14
b. When the ratio of actual service hours to productive output for the year is the same as
the ratio of the estimates used in their respective depreciation rates.
c. When the salvage value is zero.
d. The two methods cannot produce the same depreciation expense amount for any given year.

7. Which of the following methods permits total depreciation on a plant asset to exceed depreciable
cost?
a. Straight line c. No acceptable depreciation method
b. Declining balance d. All acceptable methods if salvage value is zero

8. For each succeeding period, the units of production method of depreciation usually recognizes an
amount of depreciation expense that is
a. Constant c. Increasing
b. Varying d. Decreasing

9. What does a depreciation amount for a period under the present value method (compound interest
method) represent?
a. The annual cost savings or net cash inflow.
b. The remaining book value at the beginning of the period less the annual cost savings or net cash
inflow.
c. The return on investment for the period.
d. None of the above.

10. A machine with a 4-year estimated useful life and an estimated 15% residual value was acquired on
January 1. Would depreciation expense using the sum of years’ digits method be higher or lower
than depreciation expense using the double declining balance method in the first and second year?
1st Year 2nd Year
a. Higher Higher
b. Higher Lower
c. Lower Higher
d. Lower Lower

11. At the end of the expected useful life of a depreciable asset with an estimated 15% residual value,
the accumulated depreciation would equal the original cost of the asset under which of the following
depreciation methods?
Straight line Sum of Years’ Digits
a. Yes Yes
b. No No
c. Yes No
d. No Yes

12. Exploration and evaluation expenditures are incurred

a. When searching for an area that may warrant detailed exploration, even though the entity has
not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resource are not yet
demonstrable
c. When a specific area is being developed and preparations for commercial extraction are
being made.
d. In extracting mineral resource and processing the resource to make it marketable or
transportable

13. Does PFRS 6 require an entity to recognize exploration and evaluation expenditure as an asset?
a. Yes, but only to the extent such expenditure is recoverable in future periods.
b. Yes, but only to the extent the technical feasibility and commercial viability of extracting the
associated mineral resource have been demonstrated
c. Yes, but only to the extent required by the entity’s accounting policy for recognizing
exploration and evaluation asset
d. No, such expenditure is always expensed in profit or loss as incurred.
 15

14. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resource
d. Expenditures for activities in relation to evaluating the technical feasibility and commercial
viability of extracting a mineral resource

15. Which measurement model applies to exploration and evaluation asset subsequent to initial
recognition?
a. The cost model
b. The revaluation model
c. Either the cost model or the revaluation model
d. The recoverable amount model

16. Which of the following facts or circumstances would not trigger a need to test an evaluation and
exploration asset for impairment?
a. The expiration of the period for which the entity has the right to explore in the specific area,
unless the right is expected to be renewed
b. The absence of budgeted or planned substantive expenditure on further exploration and
evaluation activities in the specific area
c. A decision to discontinue exploration and evaluation activities in the specific area when
those activities have not led to the discovery of commercially viable quantities of mineral
resources
d. Lack of sufficient data to determine whether the carrying amount of the exploration
and evaluation asset is likely to be recovered in full from successful development or by sale.

17. PAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant, and
equipment should be treated in one of the following ways. Which of the following options reflects
the requirements of PAS 16?
a. Debited to the class of property, plant and equipment that is being revalued and credited to
a reserve captioned “revaluation surplus” in the equity section of the balance sheet.
b. Credited to retained earnings as this is an unrealized gain.
c. Released to the income statement an amount equal to the difference between the depreciation
calculated on historical cost vis-à-vis revalued amount.
d. Deducted from current assets and added to the property, plant and equipment.

18. An entity owns a fleet of over 100 cars and 20 ships. It operates in a capital intensive industry and
thus has significant other property, plant and equipment that it carries in its books. It decided to
revalue its property, plant and equipment. The company’s accounts has suggested the alternatives
that follow. Which one of the options should the entity select in order to be in line with the
provisions of PAS 16?
a. Revalue only one-half of each class of property, plant and equipment, as that method is less
cumbersome and easy compared to revaluing all assets together.
b. Revalue an entire class of property, plant and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate.

19. Property, plant and equipment must be reviewed for impairment when which of the following events
occurs?
a. A significant change in the asset’s estimated useful life occurs.
b. The costs of constructing the asset are less than the budgeted amount.
c. A current period operating loss occurs.
d. Investing activities produce a negative cash flow.

20. When impairment testing a cash generating unit, any corporate assets, such as the head office
business or computer equipment should
a. Be allocated on a reasonable and consistent basis
b. Be separately impairment tested
 16
c. Be included in the head office assets or parent’s assets and impairment tested along with
that cash generating unit
d. Not be allocated to cash generating units

21. An impairment loss that relates to an asset that has been revalued should be recognized in
a. Profit or loss
b. Revaluation surplus that relates to the revalued asset
c. Opening retained profits
d. Any reserve in equity

22. Costs of disposal are deducted in determining fair value less cost to sell. Examples include all of the
following, except
a. Legal costs c. Costs of removing the asset
b. Stamps and similar transaction taxes d. Termination benefits

INTANGIBLE ASSETS

1. Which item listed below does not qualify as an intangible asset?

a. Computer software c. Copyright
b. Patent d. Notebook computer

2. A recognized intangible asset is amortized over its useful life

a. Unless the pattern of consumption of the economic benefits of the
asset is not reliably determinable.
b. If that life is determined to be finite.
c. Unless the precise length of that life is not known.
d. If that life is indefinite but not finite.

3. Which of the following items would qualify as an intangible asset?

a. Advertising and promotion on the launch of a huge product
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A program
at Harvard university while working with the company
c. Operating losses during the initial stages of the project
d. Legal costs paid to intellectual property lawyers to register a patent

4. Identifiable intangible assets include all of the following EXCEPT

a. Patent c. Goodwill
b. Computer software d. Copyright

5. Goodwill should properly appear on the financial statements of a company which

a. Has purchased an entity c. Consistently reports above-normal profits
b. Consistently operates profitably d. Meets all of the conditions regarding legal goodwill

6. Goodwill, when properly recognized, should be written off

a. by systematic charges to expense over the period benefited, but not more than 20 years.
b. As soon as possible against retained earnings.
c. As soon as possible as an ordinary item.
d. When impairment loss occurs.

7. What is the proper treatment of the recorded goodwill when an entity disposes of a portion of a
reporting unit that constitutes a stand-alone acquired business?
a. All of the carrying amount of the goodwill of the reporting unit should be considered part of the
cost of the assets sold.
b. The total carrying amount of the goodwill acquired with the business should be considered
part of the cost of the asset sold.
c. Goodwill cannot be considered sold; it should be written off as a loss.
d. Goodwill cannot be sold; it should be amortized over its useful life.
 17
8. Which intangible asset is amortizable?
Copyright Trademark
a. Yes Yes
b. No No
c. No Yes
d. Yes No

9. Which of the following should be expensed as incurred by a franchisee for a franchise with a useful
life of 10 years?
a. Amount paid to the franchisor for the franchise.
b. Payment to a company, other than the franchisor, for the franchise.
c. Legal cost paid to franchisee’s lawyer to obtain the franchise.
d. Periodic payments to the franchisor based on the frachisee’s
revenue.

10. Leasehold improvements should always be amortized over

a. forty years.
b. Useful life of the improvement.
c. Life of the lease.
d. The remaining life of the lease or the useful life of the improvement, whichever is shorter.

11. Which of the following is included in research and development expense in 2005?
a. The total cost of a building (useful life 25 years, completed January 1, 2005) to be used only in
research and development.
b. Depreciation in 2005 on the building used for research and development.
c. The cost incurred in 2005 to ensure quality control for existing production process.
d. The cost incurred in 2005 of research activities performed for another firm, the project is
expected to be completed in 2006.

12. Which of the following would not be included in research and development expense for JJ Co. for
the current period?
a. The portion of plant assets, devoted completely to research for JJ, which is amortized in the
current period.
b. The cost of materials used in conducting research for JJ during the current period.
c. Cash paid by JJ to FF for research performed by FF for JJ in the current period.
d. The cost of labor incurred by JJ in conducting research for GG during the current period.

13. Which of the following is a true statement concerning research and development (R&D) costs?
a. All R&D costs, without exception, must be charged to expense.
b. R&D costs can only be amortized over a life of 40 years or more.
c. Almost any treatment is acceptable for handling R&D costs.
d. Financial statements must disclose total R&D costs charged to expense in the period.

14. A newly set up dot-com entity has engaged you as its financial advisor. The entity has recently
completed one of its highly publicized research and development projects and seeks your advice on
the accuracy of the following statements made by one of its stakeholders. Which one is it?
a. Costs incurred during the “research phase” can be capitalized
b. Costs incurred during the “development phase” can be capitalized if criteria such as
technical feasibility of the project being established are met
c. Training costs of technicians used in research can be capitalized
d. Designing of jigs and tools would qualify as research activities

15. Which disclosure is NOT required with respect to intangible assets?

a. Useful lives of the intangible assets
b. Reconciliation of carrying amount at the beginning and the end of the year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by its competitors.
 18

LIABILITIES

1. Which of the following is a current liability?

a. A long-term debt maturing currently which is to be paid with cash in a sinking fund.
b. A long-term debt maturing currently which is to be retired with proceeds from a new debt issue.
c. A long-term debt maturing currently which is to be converted into common stock
d. A long-term debt maturing currently to be paid with current assets.

2. Among the short-term obligations of Lance Co. as of the balance sheet date are notes payable
totaling P250,000 with a bank. These notes are 90-day notes, renewable for another 90 days. These
notes should be classified on the balance sheet of Lance Co. as
a. Current liabilities c. Long-term liabilities
b. Deferred charges d. Intermediate debt

3. Which of the following is usually associated with payables classified as accounts payable?
Periodic payment of Interest Secured by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes

4. When can a “provision” be recognized?

a. When there is a legal obligation arising from a past obligating event, the probability of the
outflow of resources is more than remote but less than probable, and a reliable estimate can be
made of the amount of the obligation.
b. When there is a constructive obligation as a result of a past obligating event, the
outflow of resources is probable, and a reliable estimate can be made of the amount of the
obligation
c. When there is a possible obligation arising from a past event, the outflow of resources is
probable, and an approximate amount can be set aside toward the obligation
d. When management decides that it is essential that a provision be made for unforeseen
circumstances and keeping in mind this year the profits were enough but next year there may be
losses

5. The provision for restructuring shall include

a. Expenditures directly associated with the plan for restructuring
b. Cost of retraining or relocating continuing staff
c. Marketing
d. Investment in new system and distribution network
 19
6. Vic Co. sells appliances that include a 3-year warranty. Service calls under the warranty are
performed by an independent mechanic under a contract with Vic. Based on experience, warranty
costs are estimated at P300 for each machine sold. When should Vic recognize these warranty costs?
a. Evenly over the life of the warranty.
b. When the service calls are performed.
c. When payments are made to the mechanic.
d. When the machines are sold.

7. Which of the following contingencies should be accrued in the accounts and reported in the financial
statements?
a. The estimated expenses of a one-year product warranty.
b. The company is forcefully contesting a personal injury suit and a loss is possible and reasonably
estimable.
c. An accommodation endorsement involving a remote loss.
d. It is probable that the company will receive P50,000 in settlement of a lawsuit.

8. Which one of the following is a contingent loss that is required to be disclosed only in a note to the
financial statements?
a. A loss that is reasonably possible and the amount can be reasonably determined.
b. A loss that probably will never materialize, and the amount cannot be reasonably estimated.
c. A probable loss of a known amount.
d. A probable loss of a reasonably estimated amount.

9. Reporting in the body of the financial statements is required for?

a. Loss contingencies that are probable and can be reasonably estimated.
b. Gain contingencies that ate probable and can be reasonably estimated.
c. Loss contingencies that are possible and can be reasonably estimated.
d. All loss contingencies.

10. For a troubled debt restructuring involving only a modification of terms, which of the following
items specified by the new terms would be compared to the carrying amount of the debt to determine
if the debtor should report a gain on restructuring?
a. The total future cash payments.
b. The present value of the debt at the original interest rate.
c. The present value of the debt at the modified interest rate.
d. The amount of future cash payments designated as principal repayments.

BONDS PAYABLE

1. Bonds payable should be reported as a long-term liability in the balance sheet of the issuer at:
a. Current market price.
b. Lower-of-cost-or-market.
c. Issue price, excluding any accrued interest at purchase date.
d. Issue price plus any unamortized bond premium or less any unamortized discount.

2. If bonds are issued between interest dates, the entry on the books of the issuing company could
include
a. Debit to interest payable c. Credit to interest expense
b. Credit to interest receivable d. Credit to unearned interest

3. Stone Co. issued bonds with a maturity amount of P2,000,000 and a maturity of ten years from date
of issue. If the bonds were issued at a premium, this indicates that
a. The yield rate of interest exceeded the nominal rate.
b. The nominal rate of interest exceeded the yield rate.
c. The yield and nominal rates coincide.
d. No necessary relationship exists between the two rates.
 20
4. If bonds are initially sold at a discount and the straight line method of amortization is used, interest
expense in the earlier years will
a. Exceed what it would have been had the effective interest method of amortization been
used.
b. Be less than what it would have been had the effective interest method of amortization been
used.
c. Be the same as what it would have been had the effective interest method of amortization been
used.
d. Be less than the stated rate of interest.

5. Under the effective interest method of bond discount or premium amortization, the periodic interest
expense is equals to
a. The stated rate of interest multiplied by the face value of the bonds.
b. The effective rate of interest multiplied by the face value of the bonds.
c. The stated rate of interest multiplied by the beginning of period carrying amount of the bonds.
d. The effective rate of interest multiplied by the beginning of period carrying amount of the
bonds.

6. When the effective interest method is used to amortize bond premium or discount, the periodic
amortization will
a. Increase if the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium.
c. Increase if the bonds were issued at a premium.
d. Increase if the bonds were issued at either discount or premium.

7. Coke Co. issued P1,000,000 of ten year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by
the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

LEASES

1. In a lease that is recorded as a sales type lease by the lessor, interest

revenue
a. Should be recognized in full the revenue at the lease’s inception.
b. Should be recognized over the period of the lease using the straight line method.
c. Should be recognized over the period of the lease using the interest method.
d. Does not arise.

2. For a capital lease, the amount recorded initially by the lessee as a liability should normally
a. Exceed the total of the minimum lease payments.
b. Exceed the present value of the minimum lease payments at the beginning of the lease.
c. Equal the total of the minimum lease payments.
d. Equal the present value of the minimum lease payments at the beginning of the lease.

3. A six-year capital lease expiring on December 31, 2005, specified equal minimum annual lease
payments due on December 31 of each year. The first minimum annual lease payment, paid on
December 31, 2005, consists of which of the following?
Interest Expense Lease Liability
a. Yes Yes
b. Yes No
c. No Yes
d. No No
 21
4. On July 1, 2004, Dewey Co. signed a twenty-year building lease that it reported as a capital lease.
Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease
payments in the financing activities section of its 2004 statement of cash flows?
a. An inflow equal to the present value of future lease payments at July 1, 2004, less 2004
principal and interest payments.
b. An outflow equal to the 2004 principal and interest payments on the lease.
c. An outflow equal to the 2004 principal payments only.
d. The lease payments should not be reported in the financing activities section.

5. On January 1, 2002, Beck Co. entered into a 10-year capital lease for equipment. On December 1,
2005, Beck terminates the capital lease and incurs a P20,000 loss. How should Beck recognize the
lease termination on their financial statements?
a. Recognize a P20,000 loss in 2005 as a discontinued operation.
b. Recognize a P20,000 loss in 2005 as an extraordinary item.
c. Recognize a P20,000 loss from continuing operations in 2005.
d. Defer recognition of the loss and recognize pro rata over the life of the lease term.

6. Generally accepted accounting principles require that certain lease agreements be accounted for as
purchases. The theoretical basis for this treatment is that a lease.
a. Provides the used of the leased asset to the lessee for a limited period of time.
b. Effectively conveys all of the benefits and risks incident to the ownership of property.
c. Is an example of form over substance.
d. Must be recorded in accordance with the concept of cause and effect.

7. While only certain leases are currently accounted for as a sale or purchase, there is a theoretical
justification for considering all leases to be sales or purchases. The principal reason that supports
this idea is that:
a. A lease reflects the purchase or sale of a quantifiable right to the use of the property.
b. During the life of the lease, the lessee can effectively treat the property as it were owned by the
lessee.
c. All leases are generally for the economic life of the property and the residual value of the
property at the end of the lease is minimal.
d. At the end of the lease, the property usually can be purchased by the lessee.

8. Under a finance lease that includes a bargain purchase option (BPO), how is depreciation on the
asset under lease recognized by?
Lessor Lessee
a. Not recognized Depreciate over lease term
b. Not recognized Depreciate over remaining life
c. Depreciate over remaining life Depreciate over remaining life
d. Depreciate over remaining life Not recognized

9. The lessee measures the cost of a leased asset, and the corresponding lease liability of a finance
lease, as the:
a. Fair value of the leased asset.
b. Future value of the periodic rental payments.
c. Sum of the annual cash payments to be made during term of the lease.
d. Present value of the periodic rental payments.

10. The market value of an asset to be leased exceeds the original cost of the asset. The lease will
contain a bargain purchase option. The collectibility of lease payments is assured, and there are no
material cost uncertainties for the lessor. Therefore, the lease will be accounted for by the lessor as a
a. Direct financing lease c. Sales-type lease
b. Operating lease d. Unguaranteed lease

11. Among the following types of finance leases, for the lessor, which likely recognizes the greatest
amount of revenue at inception?
a. Sales-type c. Direct financing
b. Among those in this list, there would be no material difference d. Operating
 22

12. When the lessee guarantees the residual value at the end of the lease term, for accounting purposes,
the?
a. Annual rentals will be the same as they would have been if the residual value was not
guaranteed.
b. Guaranteed residual value does not affect the annual rentals because it is a cash flow at the end
of the lease term.
c. Annual rentals will always be more than they would have been if the residual value was not
guaranteed.
d. Annual rentals will always be less than they would have been if the residual value was not
guaranteed.

13. The lessor must classify a sale-and-leaseback arrangement as a (n)?

a. Direct financing lease or a sales-type lease.
b. Direct financing lease or an operating lease.
c. Operating lease or a finance lease.
d. Operating lease or a sales-type lease.

14. One incentive for entering into a sale-and-leaseback arrangement on substantially all of the market
value of an asset is?
a. Tax implications are favorable for the lessor, compared with other lending arrangements.
b. Improvement in cash flow for the lessor.
c. Improvement in cash flow for the lessee.
d. Entire gain appears on lessee income statement in sale year.

15. In a sale and leaseback arrangement, the lessee is also:

a. The new owner of the property. c. The seller
b. The buyer d. A third party guarantor

RETIREMENT BENEFITS

1. Which is not a characteristic of short-term employee benefits?

a. No actuarial assumptions are required to measure the benefit obligation
b. There is no possibility of any actuarial gain or loss
c. Short-term employee benefits include nonmonetary benefits, such as medical care,
housing, car or subsidized goods for current employees
d. Short-term employee benefit obligations are measured on a discounted basis

2. Plan assets are assets held by a long-term benefit fund and must satisfy all of the following
conditions, except
a. The assets are held by an entity, the fund itself, that is legally separate from the reporting
entity
b. The assets in the fund are available only to pay employee benefits
c. The assets in the fund are not available to the reporting entity’s own creditors
d. The assets in the fund can be returned to the entity if the remaining assets are
insufficient to meet all employee benefit obligations.

3. The discount rate used in making actuarial assumptions shall be determined by reference to
a. Market yields on balance sheet date on high quality bonds
b. Stated rate on high quality bonds
c. Market yields on balance sheet date on government bonds
d. Stated rate on government bonds

4. Retirement benefit plan investments shall be carried at

a. Fair value
b. Historical cost
c. Amortized cost
 23
d. Value in use

5. In rare circumstances, when a retirement benefit plan has attributes of both defined contribution
and defined benefit plan, it is deemed
a. Defined benefit plan
b. Defined contribution plan
c. Neither defined benefit plan nor defined contribution plan
d. Both defined benefit plan and defined contribution plan

6. In the case of a defined benefit plan, the Standard

a. Makes it incumbent upon the plan to obtain an annual actuarial valuation
b. Does not make in incumbent upon the plan to obtain an annual actuarial valuation
c. Allows the plan to estimate the present value of future benefits based on valuations done
by other similar plans.
d. Allows the plan to add a percentage based on consumer price index to the previous year’s
valuation of actuarial valuation

7. A company that maintains a defined benefit pension plan for its employees reports an unfunded
accrued pension cost. This cost represents the amount that the
a. Cumulative net pension cost accrued exceeds contributions to the plan.
b. Cumulative net pension cost accrued exceeds the vested benefit obligation.
c. Vested benefit obligation exceeds plan assets.
d. Vested benefit obligation exceeds contributions to the plan.

8. A company with a defined pension plan must disclose in the notes to its financial statements a
reconciliation of
a. The vested and nonvested benefit obligation of its pension plan with the accumulated benefit
obligation.
b. The accrued or prepaid pension cost reported in its balance sheet with the pension expense
reported in its income statement.
c. The accumulated benefit obligation of its pension plan with its projected benefit obligation.
d. The funded status of its pension plan with the accrued or prepaid pension cost reported in
its balance sheet.

9. An employer’s obligation for postretirement health benefits that are expected to be provided to or
for an employee must be fully accrued by the date the
a. Employee is fully eligible for benefits c. Benefits are utilized
b. Employee retires d. Benefits are paid

10. For external reporting purposes, assuming an underfunded ABO, the liability that must be reported
in the balance sheet is?
a. ABO less plan assets at fair value c. The underfunded ABO
b. Balance in accrued pension cost d. Additional minimum liability

11. Defined contribution plans and defined benefit plans are two common types of pension plans.
Choose the correct statement concerning these plans.
a. The required annual contribution to the plan is determined by formula or contract in a
defined contribution plan.
b. Both plan provide the same retirement benefits.
c. The retirement benefit is usually determinable well before retirement in a defined contribution
plan.
d. In both types of plans, pension expense is generally the amount funded during the year.

12. Which of the following is not one of the six components of pension expense (or part of a
component)
a. Initial transition asset c. Amortization of unrecognized gain or loss
b. Actual return on plan assets d. Growth (interest cost) in ABO since the beginning of the period
 24
13. Interest cost included in the net pension cost recognized by an employer sponsoring a defined
benefit pension plan represents the
a. Amortization of a discount on unrecognized prior service cost.
b. Increase in the fair value of plan assets due to the passage of time.
c. Increase in the accumulated benefit obligation due to the passage of time.
d. Shortage between the expected and actual returns on plan assets.

14. On July 31, 2005, Tinkerbell Company amended its single-employer defined benefit pension plan by
granting increase benefits for services provided prior to 2005. This prior service cost will be
reflected in the financial statement (s) for
a. Years before 2005 only c. 2005 and years before and after 2005
b. 2005 only d. 2005 and the following years only

INCOME TAXES

1. Under current generally accepted accounting principles, which approach is used to determine income
tax expense?
a. Assets and liability approach c. Net of tax approach
b. “With or Without” approach d. Deferred approach

2. Interperiod tax allocation accounts for

a. All differences between tax regulations and PAS.
b. Tax effects of specific income statement items in the same period.
c. Permanent differences.
d. Temporary differences.

3. Which of the following could never be subject to interperiod tax allocation?

a. Rent revenue c. Estimated warranty expense
b. Depreciation expense on operational assets d. Interest revenue on government bonds

4. One objective of PAS 12 Income Taxes regarding deferred tax accounting is to provide reasonable
matching of
a. Income tax expense with the taxable income on the tax return.
b. Income tax expense with the pretax income on the income statement.
c. Income taxes payable with the other items on the balance sheet.
d. Income tax paid with other items on the income statement.

5. PAS 12 Income Taxes regarding deferred tax accounting provides the following instructions with
regard to deferred tax assets?
a. Record them only if future benefit is sure beyond a reasonable doubt.
b. Record them only if future benefit is more likely than not
c. Record them without regard to future benefit; then provide an allowance to reduce them to the
portion for which future benefit is sure beyond a reasonable doubt
d. Record them without regard to future benefit; then provide an allowance to reduce them
to the portion for which future benefit is more likely than not.

6. At the end of Year I, Codd Co. reported a profit on a partially completed construction contract by
applying the percentage of completion method. By the end of Year 2, the total estimated profit on
the contract at completion in Year 3 had been drastically reduced from the amount estimated at the
end of Year 1. Consequently, in Year 2, a loss equal to one-half of the Year 1 profit was recognized.
Codd used the completed contract method for income tax purposes and had no other contracts. The
Year 2 balance sheet should include a deferred tax
Asset Liability
a. Yes Yes
b. No Yes
c. Yes No
d. No No
 25
7. Rein Co. reported deferred tax assets and deferred tax liabilities at the end of 2004 and at the end of
2005. For the year ended 2005, Rein should report deferred income tax expense or benefit equal to
the
a. Decrease in the deferred tax assets.
b. Increase in the deferred tax liabilities.
c. Amount of the current tax liability plus the sum of the net changes in deferred tax assets and
deferred tax liabilities.
d. Sum of the net changes in deferred tax assets and deferred tax liabilities.

8. At the most recent year end, a company had a deferred income tax liability arising from accelerated
depreciation that exceeded a deferred income tax asset relating to rent received in advance which is
expected to reverse in the next year. Which of the following should be reported in the company’s
most recent year-end balance sheet?
a. The excess of the deferred income tax liability over the deferred income tax asset as a noncurrent
liability.
b. The excess of the deferred income tax liability over the deferred income tax asset as a current
liability.
c. The deferred income tax liability as a noncurrent liability.
d. The deferred income tax liability as a current liability.

9. Which of the following statements is correct regarding the provision for income taxes in the financial
statements of a sole proprietorship?
a. The provision for income taxes should be based on business income using individual tax rates.
b. The provision for income taxes should be based on business income using corporate tax rates.
c. The provision for income taxes should be based on the proprietor’s total taxable income,
allocated to the proprietorship at the percentage that business income bears to the proprietor’s
total income.
d. No provision for income taxes is required.

10. A valuation allowance would exist as a contra account to the deferred tax assets, if it is?
a. “More likely than not” that only a portion of the gross amount of the deferred tax assets is
expected to be realized.
b. “Probable” that some amount of the assets is absolutely realizable.
c. “Possible” that the entire amount will not be realized.
d. “Remotely possible” that not all of the asset will be realized.

11. Temporary differences arise when expenses are deductible for tax purposes
After recognized in Before recognized in
financial Income financial income
a. No No
b. No Yes
c. Yes Yes
d. Yes No

STOCKHOLDERS’ EQUITY

1. Which of the following business enterprises are distinct legal entities from their owners?
Corporations Sole Proprietorship Partnership
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No No No

2. Ownership of shares usually entitles the holders to all of the following rights EXCEPT?
a. To elect the board of directors of the corporation.
b. To share in the profits of the corporation.
c. To purchase new shares of share capital when they are offered for sale.
d. To control the day-to-day operations of the corporation.
 26

3. Which of the following is not a basic right of shareholders?

a. To inspect the books of account and to insist upon an audit in the event of dissatisfaction
with results revealed by such inspection.
b. To participate in the management of the corporation through taking part in and voting
shareholder’s meetings.
c. To participate in the profits of the corporation through dividends declared by the board of
directors.
d. To share in the distribution of assets of the corporation at liquidation or through liquidating
dividends.

4. The type of share capital that normally carries the most rights is
a. Participating preference shares (nonvoting) c. Convertible preference share (non-voting)
b. Ordinary shares d. Cumulative preference shares (non-voting)

5. Which of the following statements is true?

a. Businesses engage in many transactions are unaffected by the form of the business:
proprietorship, partnership, or corporation.
b. Domestic corporations are so classified when they have no major foreign operations.
c. Par value is typically set at a low amount so that the corporation can pay a minimum amount in
dividends to the preference shareholders.
d. The Philippine government encourages the issuance of no par shares so that a share discount is
not a material concern.

6. Which of the following statements is correct?

a. Legal capital is related directly to the total number of shares issued.
b. Both preference and ordinary shares may be cumulative.
c. A corporation may not share in payment of its expenses because it usually does not receive
adequate consideration.
d. Contributed capital includes the investment made by the owners and retained earnings
capitalized through share dividends.

7. Which of the following statements is incorrect?

a. The corporate charter is controlling in determining what business activities the corporation is
permitted to perform.
b. The contributed capital accounts should be classified by source.
c. The original purpose of requiring par value share was to protect the creditors of the corporation
by providing a minimum asset ‘cushion”
d. A balance in an account “discount on share capital” should be closed directly to retained
earnings.

8. On December 1, 2004, shares of authorized common stock were issued on a subscription basis at a
price in excess of par value. a total of 20% of the subscription price of each share was collected as a
down payment on December 1, 2004, with the remaining 80% of the subscription price of ea h share
due in 2005. Collectibility was reasonably assured. At December 31, 2004, the stockholders’ equity
section of the balance sheet would report additional paid-in capital for the excess of the subscription
price over the par value of the shares of common stock subscribed and
a. Common stock issued for 20% of the par value of shares of common stock subscribed.
b. Common stock issued for the par value of shares of common stock subscribed.
c. Common stock subscribed for 80% of the par value of the shares of common stock subscribed.
d. Common stock subscribed for the par value of the shares of common stock subscribed.

9. How should gain from the sale of treasury shares be reflected when using the cost method of
recording treasury share transactions?
a. As an extraordinary item shown on the income statement.
b. As ordinary earnings shown on the income statement.
c. As contributed capital from treasury share transactions.
d. As an increase in the amount shown for ordinary shares.
 27
10. A company reacquires shares of its own during the fiscal year and reports the transaction in the
theoretically correct manner. What effect will this transaction have on shareholders’ equity and
earnings per share, respectively?
a. Increase and decrease c. Decrease and increase
b. Decrease and decrease d. Increase and no effect

11. Identify the missing component (x) in the following equation:

Retained earnings, ending balance = Net income to date + prior period adjustments to date – cash
and property dividends to date – X
a. Share dividends to date c. Share dividends and split date
b. Share split to date d. Net unrealized gain or loss on securities available for sale

12. When rights are issued to current shareholders, the number of rights to be issued per existing share
will
a. Be the number of rights needed to obtain one additional share multiplied by the number of shares
already held.
b. Vary depending on the number per share already held as determined and announced by the
corporation
c. Usually be only one right per share already held.
d. Depend on the number purchased by existing shareholders.

13. On December 1, 2006, Hot Pot Co. declared and distributed a property dividend when the fair value
exceeded the carrying amount. As a consequence of the dividend declaration and distribution, what
are the accounting effects?
Property dividend recorded at Retained earnings
a. Fair value Decreased
b. Fair value Increased
c. Cost Increased
d. Cost Decreased

14. Ole Co. declared and paid liquidating dividend of P1,000,000. This distribution resulted in a
decrease in Ole’s
Paid in capital Retained earnings
a. No No
b. Yes Yes
c. No Yes
d. Yes No

15. Blue Co. issued preferred stock with detachable common stock warrants at a price that exceeded
both the par value and the fair value of the preferred stock. At the time the warrants are exercised,
Blue’s total equity is increased by the
Cash received upon Carrying amount
Exercise of the warrants of the warrants
a. Yes No
b. Yes Yes
c. No No
d. No Yes

16. The redemption privilege on preference share provides that the preference shareholders can
a. Purchase treasury shares any time they become available
b. Purchase enough shares of any new issue, so that their percentage ownership remains the same.
c. Turn in the preferred shares for a specified cash price.
d. Exchange the preferred shares for ordinary shares.

17. Companies that carry no insurance against insurable casualty losses sometimes use an account called
reserve for self-insurance. In preparing a balance sheet, this account should be reported as a (n)
a. Appropriated retained earnings c. Liability
b. Deferred credit d. Unappropriated retained earnings
 28

18. What does an appropriation of retained earnings and a declaration of a cash dividend (for the same
amount) have in common?
a. Both increase the amount of appropriated retained earnings.
b. Both have the same consequences for shareholders.
c. Both permanently reduce future ability to pay dividends.
d. Both result in a decrease in unappropriated retained earnings.

19. Choose the most correct statement regarding a 2-for1 share split and a 100% share dividend.
a. Neither affects par value.
b. Both cause the same reduction in retained earnings.
c. Both double the number of shares outstanding.
d. Both cause a significant increase in the ordinary shares account.

20. Treasury shares may be reissued as dividends, in which case what amount shall be charged to
retained earnings?
a. Cost of the treasury stock
b. Par value of the treasury stock
c. Fair value of the treasury on the date of declaration
d. Fair value of the treasury stock on the date of issuance

21. In certain cases, stock dividends are declared on the basis of a proposed increase in authorized share
capital, the application for which has been filed but not yet approved by the SEC as at balance sheet
date. Under these circumstances, which may not be done?
a. The proposed increase and such dividend declaration generally shall not be reflected
in the balance sheet prior to SEC approval.
b. These matters shall be disclosed in the notes to financial statements
c. If the proposed increase is approved by SEC after balance sheet date but before the
release of the statements, the new authorized share capital may be presented and the stock
dividend may be shown as part of issued share capital
d. A note to the financial statements is unnecessary to disclose the fact that the
proposed increase and dividend declaration have been reflected in the financial statements

22. A company declared a cash dividend on a certain date, payable on another date. retained earnings
would
a. Increase on the date of declaration
b. Not be affected on the date of declaration
c. Not be affected on the date of payment
d. Decrease on the date of payment

23. The “actual total amount” of a cash dividend to be paid is determined on the date of
a. Record c. Declaration or record, whichever is earlier
b. Declaration d. Payment

BOOK VALUE AND EARNINGS PER SHARE

1. If preferences share is non cumulative, then

a. The preference shareholders are entitled to current dividends before ordinary shareholders can
receive dividends.
b. Cash dividends not declared in prior years are lost permanently
c. The preference shareholders are only entitled to a specific percent of the cash dividends,
regardless of the amount declared.
d. Prior year’s cash dividends must be paid to the preference shareholders before any dividends
may be paid to the ordinary shareholders.

2. In calculating basic earnings per share, the amount of preference dividends

that is deducted from the net income for the period is the
 29
a. Amount of any preference dividends on noncumulative
preference shares in respect of the period, whether or not the dividends have been declared
b. Amount of any preference dividends on noncumulative
preference shares in respect of the period.
c. Full amount of the required preference dividends for cumulative preference shares only when
declared.
d. Full amount of the required preference dividends for cumulative preference shares for the current
and previous periods, whether or not the dividends have been declared.

3. An entity has an ordinary “A” class, nonvoting share, which is entitled to a

fixed dividend of 6% per annum. The “A” class ordinary share will
a. Be included in the “per share” calculation after adjustment for the
fixed dividend
b. Be included in the “per share” calculation for EPS without
adjustment for the fixed dividend
c. Not be included in the “per share” calculation for EPS
d. Be included in the calculation of diluted EPS

4. Earnings per share is calculated before accounting for which of the

following items?
a. Preference dividend for the period c. Taxation
b. Ordinary dividend d. Minority interest

5. Ordinary shares issued as part of a business combination are included in

the EPS calculation in the case of the “purchase” method from
a. The beginning of the accounting period
b. The date of acquisition
c. The end of the accounting period
d. The midpoint of the accounting year

6. When an entity makes a bonus issue/stock split/stock dividend or a rights

issue
a. The previous year’s EPS is not adjusted for the issue
b. The previous year’s EPS is adjusted for the issue
c. Only a note of the effect on the previous year’s EPS is made
d. Only the diluted EPS for the previous year is adjusted

7. If a bonus issue occurs between the year-end and the date that the financial
statements are authorized
a. The EPS both for the current and the previous year are adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted

8. If a share option is converted on March 31 of the current year

a. The potential ordinary shares are included in diluted EPS up
to March 31, and in basic EPS from the date converted to the year-end, both weighted
accordingly
b. The ordinary shares are not included in the diluted EPS calculation
but are included in basic EPS
c. The ordinary shares are not included in the basic EPS but are included in diluted EPS
d. The effects of the share option are included only in previous year’s EPS calculation

9. In calculating whether potential ordinary shares are dilutive, the profit

figure used as the “control number” is
a. Net profit after taxation including discontinued operations
b. Net profit from continuing operations
c. Net profit before tax including discontinued operations
d. Retained profit for the year after dividends
 30

10. If a new issue of shares for cash is made between the year-end and the
date that the financial statements are authorized
a. The EPS both for the current and the previous year are adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted

11. The weighted average number of shares outstanding during the period for
all periods other than the conversion of potential ordinary shares shall be adjusted for
a. Any change in the number of ordinary shares without a change in resources
b. Any prior-year adjustment
c. Any new issue of shares for cash
d. Any convertible instruments settled in cash

12. On January 31, 2005, Pack, Inc. split its common stock 2 for 1, and Young, Inc. issued a 5% stock
dividend. Both companies issued their December 31, 2004 financial statements on March 1, 2005.
Should Pack’s 2004 , basic earnings per share (BEPS) take into consideration the stock split, and
should Young’s 2004 BEPS take into consideration the stock dividend?
Pack’s 2004 BEPS Young’s 2004 BEPS
a. Yes No
b. No No
c. Yes Yes
d. No Yes

13. For purposes of computing the weighted average number of shares outstanding during the year, a
mid-year event that must be treated as occurring at the beginning of the year is the
a. Issuance of warrants c. Sale of additional ordinary shares
b. Purchase of treasury stock d. Declaration and payment of share dividend

14. Grid Corp. acquired some of its own common shares at a price greater than both their par value and
original issue price but less than their book value. Grid uses the cost method of accounting for
treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book
value per common share?
Total stockholders’ equity Book value per share
a. Increase Increase
b. Increase Decrease
c. Decrease Increase
d. Decrease Decrease

STATEMENT OF CASH FLOWS

1. On September 1, 2004, Canary Co. sold used equipment for a cash amount equaling its carrying
amount for both book and tax purposes. On September 15, 2004, Canary replaced the equipment by
paying cash and signing a note payable for new equipment. The cash paid for the new equipment
exceeded the cash received from the old equipment. How should these equipment transactions be
reported in Canary’s 2004 statement of cash flows?
a. Cash outflow equal to the cash paid less the cash received.
b. Cash outflow equal to the cash paid and note payable less the cash received.
c. Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note
payable.
d. Cash inflow equal to the cash received and a cash outflow equal to the cash paid.

2. In a statement of cash flows:

a. Net cash flow from operating activities is always the same as net income.
b. Net cash flow from operating activities must be the same as net increase in cash during the
period.
 31
c. Net cash flow from operating activities maybe less than or greater than net income.
d. Net cash flow from operating activities is always greater than net income

3. Which of the following would least likely be shown in one of the three activity sections of the
statement of cash flows?
a. Refinancing a bond issue currently due with a new bond issue
b. An increase in trade accounts receivable over the period.
c. Purchase of a subsidiary corporation
d. A decrease in long-term notes payable over the period

4. Which statement is true for gains and losses from capital asset sales?
a. They do not affect cash and are excluded from the statement of cash flows.
b. They are included in the cash flows from operating activities
c. They are included in the cash flows from investing activities
d. They are included in the cash flows from financing activities

5. When using the indirect method to prepare the statement of cash flows, the amortization of goodwill
should be presented as a/an
a. Cash flow from investing activities c. Addition to net income
b. Deduction from net income d. None of the answers are correct

6. Depreciation expense is added to net income under the indirect method of preparing a statement of
cash flows in order to
a. Report all assets at gross carrying amount.
b. Ensure depreciation has been properly reported.
c. Reverse noncash charges deducted from net income.
d. Calculate net carrying amount.
7. A statement of cash flows typically would NOT disclose the effects of
a. Capital stock issued at an amount greater than par value.
b. Stock dividends declared.
c. Cash dividends paid.
d. A purchase and immediate retirement of treasury stock.

8. Declaration of a cash dividend on common stock affects cash flows from operating activities under
the direct method and indirect method as
Direct Method Indirect Method
a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect

9. When preparing a statement of cash flows, a decrease in accounts receivable during a period would
cause which one of the following adjustments in determining cash flow from operating activities?
Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease

10. When preparing a statement of cash flows, an increase in accounts payable during a period would
require which of the following adjustments in determining cash flow from operating activities?
Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
 32
INCOME STATEMENTAND BALANCE SHEET

1. In financial reporting for segments of a business, an enterprise shall disclose all of the following
except?
a. Types of products and services from which each reportable segment derives its revenues.
b. The title of the chief operating decision maker of each reportable segment.
c. Factors used to identify the enterprises reportable segments.
d. The basis of measurement of segment profit or loss and segment assets.

2. In financial reporting for segments of a business enterprise, segment data may be aggregated.
a. Before performing the 10% tests if a majority of the aggregation criteria are met.
b. If the segments do not met the 10% tests but meet all of the aggregation criteria.
c. Before performing the 10% tests if all of the aggregation are met.
d. If any one of the aggregation criteria are met.

3. The method use to determine what information to report for business segments is referred to as the
a. Segment approach c. Enterprise approach
b. Operating approach d. Management approach

4. What is the “matrix” presentation of segment reporting?

a. Both business segment and geographical segment are presented as primary segment
reporting format
b. Both business segment and geographical segment are presented as secondary segment reporting
format
c. The business segment is the primary segment reporting format with secondary information for
geographical segment
d. The geographical segment is the primary segment reporting format with secondary information
for business segment

5. Which of the following criteria is NOT required for a component ’ results to be classified as
discontinued operations?
a. Management must have entered into a sales agreement.
b. The component is available for immediate sale.
c. The operations and cash flows of the component will be eliminated from the operations of the
entity as a result of the disposal.
d. The entity will not have any significant continuing involvement in the operations of the
component after disposal.

6. A component of a company was discontinued during 2006. The loss on disposal should
a. Exclude the associated employee relocation costs.
b. Exclude operating losses for the period.
c. Include associated employee termination costs.
d. Exclude associated lease cancellation costs.

7. The results of a discontinued operation, net of tax shall be presented

a. As a single amount on the face of income statement with no details disclosed in the notes.
b. As a single amount on the face of income statement with appropriate disclosure of the
details in the notes.
c. Side by side by continuing operations with the details for revenue and expenses attributable to
the discontinued operation shown on the face of the income statement.
d. In the notes only

8. A firm, in business just a few years, decided to change from FIFO to Weighted Average for inventory
measurement purposes. The firm carries only a few items of inventory, but sells in large volume. An
excellent historical record is kept of inventory purchases, quantities and costs. In making the
accounting change, the firm
a. Must report the cumulative effect of the change on all previous years’ income.
 33
b. Need not report the cumulative effect of the changes on all previous years’ income even
though it is able to do so.
c. Cannot make the change unless it is able to determine the cumulative effect of the change in all
previous years’ income.
d. Should report the cumulative effect of the change on retained earnings if it is not
prohibitively expensive to do so.

9. In 2005, a firm changed from the Straight-line (SL) method of depreciation to double declining
balance (DDB). The firms’ 2004 and 2005 comparative financial statements will reflect which
method/s.
2004 2005
a. SL SL
b. SL DDB
c. DDB DDB
d. SL Either SL or DDB

10. In 2005, a firm changed from the FIFO method of accounting for inventory to Weighted Average
(WA). The firms’ 2004 and 2005 comparative financial statements will reflect which method or
methods.
2004 2005
a. WA WA
b. FIFO FIFO
c. FIFO WA
d. WA Either WA or FIFO

11. Which of the following is characteristic of a change in accounting estimate?

a. Does not affect the financial statements of prior periods.
b. Requires the reporting of pro forma amounts for prior periods.
c. Never needs to be disclosed
d. Should be reported through restatement of the financial statements.

12. A change in an amortization rate, such as on a copyright, should be accounted for

a. Retrospectively c. Currently
b. By recording a prior period adjustment d. Prospectively

13. Which of the following is not an example of a change in accounting estimate?

a. Change in the residual value of natural resources subject to depletion
b. Change in the expected warranty costs on goods under a warranty
c. Change in the expected recovery of a deferred charge
d. Change in the composition of inventory cost

14. When a firm changes only the estimated 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 subsequent
depreciation
d. No adjustment is needed

15. The accounting changes identified under PAS 8 are

a. Change in accounting estimate and change in accounting policy
b. Change in accounting estimate and change in reporting entity
c. Change in accounting policy, change in accounting estimate and change in reporting entity
d. Change in accounting policy and change in reporting entity

16. The effect of a change in the expected pattern of consumption of economic benefit of a depreciable
asset should be
a. Included in the determination of income or loss in the period of change only
b. Included in the determination of income or loss in the period of change and future periods.
 34
c. Included in the statement of retained earnings as an adjustment of the beginning balance
d. Included in the statement of recognized gains and losses of the current and future periods.

17. What is the treatment of a change in accounting policy?

a. Retrospectively, meaning, any resulting adjustment is reported as an adjustment to the
opening balance of retained earnings
b. Currently, meaning, any resulting adjustment is included in recognized gains or losses
c. Currently, meaning, any resulting adjustment is included in income or loss of the current period.
d. Prospectively, meaning, no adjustments to prior periods are made either to the opening balance
of retained earnings or in reporting the net income or loss for the current period because existing
balances are not recalculated.

18. Prospective application of a change in accounting policy is required

a. Anytime
b. When the amount of adjustment to the opening balance of retained earnings can be reasonably
determined.
c. When the amount of adjustment to the opening balance of retained earnings cannot be
reasonably determined.
d. When ordered by management.

19. A change in the measurement basis is

a. Change in accounting estimate c. Prior period error
b. Change in accounting policy d. Not an accounting change

20. Technically, offsetting in financial statements is accomplished when

a. The allowance for doubtful accounts is deducted from accounts receivable
b. The accumulated depreciation is deducted from property, plant and equipment
c. The total liabilities are deducted from total assets to arrive at net assets
d. Gain or losses from disposal of noncurrent assets are reported by deducting from the
proceeds the carrying amount of the assets and the related selling cost

8. As a minimum, disclosures of related party transactions necessary for an understanding of the

financial statements include all of the following, except
a. Amount of the transactions.
b. Amount of outstanding balances.
c. Pricing policies.
d. Provision for doubtful debts related to the amount of outstanding balances.

9. Related parties include all of the following, except

a. Subsidiaries
b. Associates
c. Key management personnel and close family members of such individuals.
d. Two entities that have a common director.

10. Which statement is incorrect concerning related party disclosure?

a. The new standard requires disclosure of the compensation of key management personnel.
b. State-controlled entities that are profit-oriented are exempted from disclosing transactions
with other state-controlled entities.
c. Disclosures that related party transactions were made on terms equivalent to those that prevail in
arm’s length transactions are made only if such terms can be substantiated.
d. Two venturers are not necessarily related parties simply because they share joint control over a
joint venture.

11. This is a pricing policy between related parties which sets the price by reference to comparable
goods sold in an economically comparable market to a buyer unrelated to the seller.
a. No price method c. Resale price method
b. Cost plus method d. Uncontrolled price method

12. A related party transaction is a transfer of resources or obligations.

 35
a. Between related parties when a price is charged.
b. Between related parties, regardless of whether a price is charged.
c. Between unrelated parties when a price is charged.
d. Between unrelated parties, regardless of whether a price is charged.

13. A development stage enterprise should use the same generally accepted accounting principles that
apply to establish operating enterprises for
Revenue Recognition Deferral of Expenses
a. Yes Yes
b. Yes No
c. No No
d. No Yes

14. Deficits accumulated during the development stage of a company should be

a. Reported as organization costs.
b. Reported as a part of equity.
c. Capitalized and written off in the first year of principal operations.
d. Capitalized and amortized over 5 year period beginning when principal operations commence.

15. Financial reporting by a development stage enterprise differs from financial reporting for an
established operating enterprise in regard to footnote disclosures
a. Only
b. And expenses recognition principles only.
c. And revenue recognition principles only.
d. And revenue and expense recognition principles.

16. A company was organized in 2002 and earned no significant revenues until the first quarter of 2005.
During the period 2002 – 2004, it acquired plant and equipment, raised capital, obtained financing,
trained employees, and developed markets. In its financial statements as of December 31, 2004, the
company should defer all costs incurred during 2002- 2004
a. Net revenues earned that are recoverable in the future periods.
b. Net revenues earned.
c. That are recoverable in future periods.
d. Without regard to net revenue earned or recoverability in future periods.

17. A statement of cash flows for a development stage enterprise

a. Is the same as that of an established operating enterprise and, in addition, shows
cumulative amounts from the enterprise’s inception.
b. Is the same as that of an established operating enterprise, but does not show cumulative amounts
from the enterprise’s inception.
c. Shows only cumulative amounts from the enterprise’s inception.
d. Is not presented.

18. The primary distinction between the financial statements of a development stage company and those
of a company which has passed the development stage is that the statements of the former
a. Can report losses properly as deferred charges.
b. Are more likely to reflect goodwill among the assets.
c. Are more likely to show continually increasing profits.
d. Will reflect specified cumulative amounts arising from date of the company’s inception.

INTERIM REPORTING
1. The Securities and Exchange Commission and Philippine Stock Exchange require companies covered
by the reportorial requirements of the Revised Securities Act to file
a. Quarterly interim financial reports within 45 days after the end of each of the first three
quarters.
b. Quarterly interim financial reports within 30 days after the end of each of the first three quarters.
c. Semiannual interim financial reports within 45 days after the end of the first six months.
 36
d. Semiannual interim financial reports within 30 days after the end of the first six months.

2. An interim financial report shall include, as a minimum, all of the following components, except
a. Condensed balance sheet and income statement.
b. Condensed cash flow statement.
c. Condensed statement of changes in equity or condensed statement of recognized gains and
losses.
d. Accounting policies and explanatory notes.

3. Selected explanatory notes in an interim financial report include all of the following, except
a. Writedown of inventories to net realizable value.
b. Commitments for the purchase of property, plant and equipment.
c. Related party transactions
d. Nonfinancial disclosures.

HYPERINFLATIONARY ECONOMY
1. During a period of inflation, an account balance remains constant. A purchasing power gain is
reported if the account is a
a. Monetary asset c. Non-monetary asset
b. Monetary liability d. Non-monetary liability

2. A method of accounting based on measures of historical price in pesos, each of which has the same
general purchasing power is
a. Current cost/constant peso accounting
b. Current cost/nominal peso accounting
c. Historical cost/constant peso accounting
d. Historical cost/nominal peso accounting

3. Which of the following is a method of accounting based on measures of current cost, without
restatement into units having the same general purchasing power?
a. Current cost/constant peso accounting
b. Current cost/nominal peso accounting
c. Historical cost/constant peso accounting
d. Historical cost/nominal peso accounting

4. Which item should a company hold during an inflationary period to experience the greatest gain in
general purchasing power?
a. Bonds payable c. Accounts receivable
b. Cash d. Certificate of deposit

5. In the context of general price level adjustments, which of the following is non-monetary item?
a. Receivables under capitalized leases c. Goodwill
b. Obligations under capitalized leases d. Non-convertible preferred stock

DERIVATIVES

1. The basic purpose of derivative financial instruments is to manage some kind of risk such as all of the
following except
a. Stock price movements c. Currency fluctuations
b. Interest rate variations d. Uncollectibility of accounts receivables

2. Which of the following criteria must be met for bifurcation to occur?

a. The embedded derivative meets the definition of a derivative instrument.
b. The hybrid instrument is regularly recorded at fair value.
 37
c. Economic characteristics and risks of the embedded instrument are clearly and closely related
to those of the host contract.
d. All of the above.

3. Which of the following is a general criterion for a hedging instrument?

a. Sufficient documentation must be provided at the beginning of the process.
b. Must be highly effective only in the first year of the hedge’s life.
c. Must contain a nonperformance clause that makes performance probable.
d. Must contain one or more underlyings.

4. A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an
unrecognized firm commitment is classified as a
a. Fair value hedge c. Foreign currency hedge
b. Cash flow hedge d. Underlying

5. Which of the following is not a type of foreign currency hedge?

a. A forecasted transaction.
b. An available for sale security.
c. A recognized asset or liability.
d. An unrecognized firm commitment.

6. Disclosure of information about significant concentrations of credit risk is required for

a. All financial instruments.
b. Financial instruments with off-balance sheet credit risk only.
c. Financial instruments with off-balance sheet market risk only.
d. Financial instruments with off-balance sheet risk of accounting loss only.

7. Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values
of the entity’s financial instruments is required when
a. It is practicable to estimate those values.
b. The entity maintains accurate cost of records.
c. Aggregated fair values are material to the entity.
d. Individual fair values are material to the entity.

8. Uncertainty about the future market value of an asset is referred to as

a. Price risk c. Interest rate risk
b. Credit risk d. Exchange rate risk

9. Uncertainty that the party on the other side of an agreement will abide by the terms of the agreement
is referred to as
a. Price risk c. Interest rate risk
b. Credit risk d. Exchange rate risk

10. A contract giving the owner the right, but not the obligation, to buy or sell an asset at a specified
price any time during the a specified period in the future is referred to as
a. Interest rate swap c. Future contract
b. Forward contract d. Option

OTHER TOPICS
1. Which of the following statements is correct with respect to a limited partnership?
a. A limited partner may not be an unsecured creditor of the limited partnership.
b. A general partner may not also be limited partner at the same time.
c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners.
 38
2. Which of the following best characterizes the bonus method of recording a new partner’s
investment in a partnership?
a. Net assets of the previous partnership are not revalued.
b. The new partner’s initial capital balance is equal to his or her investment.
c. Assuming that recorded assets are properly valued, the book value of the new
partnership is equal to the book value of the previous partnership and the investment of
the new partner.
d. The bonus always results in an increase to the previous partners’ capital balances.

3. An enterprise uses a branch accounting system in which it establishes separate formal accounting
systems for its home office operations and its branch office operations. Which of the following
statements about this arrangement is false?
a. The home office account on the books of a branch office represents the equity interest of the
home office in the net assets of the branch.
b. The branch office account on the books of the home office represents the equity interest
of the branch office in the net assets of the home office.
c. The home office and branch office accounts are reciprocal accounts that must be eliminated in
the preparation of the enterprise’s financial statements that are presented in accordance with
GAAP.
d. Unrealized profit from internal transfers between the home office and a branch must be
eliminated in the preparation of the enterprise’s financial statements that are presented in
accordance with GAAP.

4. Cash collection is a critical event for income recognition in the

Cost recovery method Installment method
a. No No
b. Yes Yes
c. No Yes
d. Yes No

5. A business combination may be legally structured as a merger, a consolidation, an investment in stock

, or a direct acquisition of assets. Which of the following describes a business combination that is
legally structured as a merger?
a. The surviving company is one of the two combining companies.
b. The surviving company is neither of the two combining companies.
c. An investor-investee relationship is established.
d. A parent-subsidiary relationship is established.
 39
6. Perez, Inc. owns 80% of Senior Inc. During 2004, Perez sold goods with a 40% gross profit to
Senior. Senior sold all of these goods in 2004. For 2004 consolidated financial statements, how
should the summation of Perez and Senior income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.

7. Which of the following items should be treated in the same manner in both combined financial
statements and consolidated statements?
Different fiscal periods Foreign operations
a. No No
b. No Yes
c. Yes Yes
d. Yes No

8. In a traditional job order cost system, the issuance of supplies to a production department increases
a. Stores control c. Factory overhead control
b. Work in process control d. Factory overhead applied

9. In a job order cost system, the use of direct materials previously purchased usually recorded as an
increase in
a. Work in process control c. Factory overhead applied
b. Factory overhead control d. Stores control

10. A direct labor overtime premium should be charged to a specific job when the overtime is caused by
the
a. Increased overall level of activity.
b. Customer’s requirement for early completion of the job.
c. Management’s failure to include the job in the production schedule.
d. Management’s requirement that the job be completed before the annual factory
vacation closure.

11. Which of the following organization would be most likely to use a job order costing system?
a. The loan department of a bank.
b. The check clearing department of a bank.
c. A manufacturer of processed cheese food.
d. A manufacturer of video cassette tapes.

12. The difference between EUP calculated using FIFO and EUP calculated using weighted average is
the equivalent units
a. Started and completed during the period.
b. Residing in beginning work in process inventory.
c. Residing in ending work in process inventory.
d. Uncompleted in work in process inventory.

13. Normal spoilage is defined as unacceptable production that

a. Arises because of a special job or process.
b. Occurs in on-going operations.
c. Is caused specifically by human error.
d. Is in excess of that which is expected.

14. Spoiled units are

a. Units that cannot be economically reworked to bring them up to standard.
b. Units that can be economically reworked to bring them up to standard.
c. The same as defective units.
d. Considered abnormal losses.
 40

15. Activities, their drivers, and their costs may be classified as unit level, product level, batch level, and
plant level. If activity-based costing information is prepared for internal purposes, which costs are
most likely to be treated as period costs?
a. Unit level. c. Product level
b. Batch level. d. Plant level

16. What is the normal effect on the numbers of cost pools and cost assignment bases when an activity-
based cost system replaces a traditional cost system?
Cost pools Cost assignment bases
a. No effect No effect
b. Increase No effect
c. No effect Increase
d. Increase Increase

17. The allocation of joint costs to individual products is useful primarily for purposes of
a. Determining whether to produce one of the joint products.
b. Inventory costing.
c. Determining the best market price.
d. Evaluating whether an output is a main product or a by-product.

18. In a joint production process, a by-product is also described as

a. A simultaneously produced product of relatively low value.
b. A form of main product with controllable production proportions.
c. Products of low value recovered at the end of a production process.
d. A product with no value contribution to help offset production costs.

19. A building contractor has a contract to construct a large building. It is estimated that the building
will take 2 years to complete. Progress billings will be sent to the customer at quarterly intervals.
Which of the following describes the preferable point for revenue recognition for this contract?
a. After the contract is signed.
b. As progress is made toward completion of the contract.
c. As cash is received.
d. When the contract is completed.

20. How should the balances of progress billings and construction in progress be shown at reporting
dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in progress as inventory.
c. Net, as current asset if debit balance and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction is debit
balance.

21. The calculation of the income recognized in the third year of a 5-year construction contract
accounted for using the percentage of completion method includes the ratio of
a. Total costs incurred to date to total estimated costs.
b. Total costs incurred to date to total billings to date.
c. Costs incurred in year 3 to total estimated costs.
d. Costs incurred in year 3 to total billings to date.

22. Which of the following is true?

a. A debtor may not grant a security interest in certain assets to a lender to serve as collateral with
recourse.
b. A debtor may not grant a security interest in certain assets to a lender to serve as collateral
without recourse.
c. The arrangement of having collateral transferred to a secured party is known as a pledge.
d. Secured parties are never permitted to sell collateral held under a pledge.
41
 42
23. On October 1, 2002, Mild Co., purchased machinery from a foreign company with payment due
on April 1, 2003. If Mild’s 2002 operating income included no foreign currency transaction gain or
loss, the transaction could have been
a. Resulted in an extraordinary gain.
b. Been denominated in Philippine pesos.
c. Cause a foreign currency transaction gain to be reported as a contra account against
machinery.
d. Caused a foreign currency translation gain to be reported in other comprehensive income.

24. Goods on consignment should be included in the inventory of

a. The consignor but not the consignee.
b. Both the consignor and consignee.
c. The consignee but not the consignor.
d. Neither the consignor nor the consignee.

25. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the
a. Consignor when the goods are shipped to the consignee.
b. Consignee when the goods are shipped to the third party.
c. Consignor when notification is received that the consignee has sold the goods.
d. Consignee when cash is received from the customer.

26. Which of the following is ordinarily not considered one of the major distinguishing characteristics of
non-business organizations?
a. Significant amounts of resources are provided by donors in non-reciprocal transactions.
b. There is an absence of defined, transferable ownership interests.
c. Performance indicators similar to a business enterprise’s profit are readily available
d. The primary operating purpose is not to provide goods or services at a profit.

27. Which of the following is a characteristic of non-business organizations?

a. Non-economic reasons seldom underlie the decision to provide resources to non-business
enterprises.
b. Business and non-business organizations usually obtain resources in the same way.
c. Both business and non-business organizations use scarce resources in the production and
distribution of goods and services.
d. The operating environment of non-business organizations ordinarily differs from that of business
organizations.

28. Financial statements of Not-for-Profit Organization focuses on

a. Basic information for the organization as a whole.
b. Standardization of funds nomenclature.
c. Inherent differences of not–for-profit organization that affect reporting presentations.
d. Distinctions between current fund and noncurrent fund presentations.

29. A not-for-profit organization has cash available for investment from contributions with different
restrictions. Its policy is to maximize its financial resources. How may the organization pool its
investments?
a. The organization may not pool its investments.
b. The organization may pool all investments but must equitably allocate realized and
unrealized gains and losses among participants.
c. The organization may pool only unrestricted investments but must equitably allocate realized and
unrealized gains and losses among participating funds.
d. The organization may pool only restricted investments but must equitably allocate realized and
unrealized gains and losses among participants.

30. This provides for the ceiling or maximum amount an agency can spend or incur in the performance
of its functions.
a. Fund Accounting c. Obligation Accounting
b. Budgetary Accounting d. Treasury Disbursement Coding System
 43

31. No money shall be paid out of the National Treasury except in pursuance of the appropriation law.
Consequently, if a government official disburse funds beyond the approved budget, he may be
charged with
a. Technical malversation c. An administrative case
b. Estafa d. Graft and corruption

32. It is the preparation of the national budget where the total estimated revenue must be more than the
total estimated expenditures.
a. Balanced budget c. Special budget
b. Supplemental budget d. Performance budget

33. This fund constitutes the annual contributions from each province, city or municipality in the
amounts approved by law for each barrio, and which is spend solely for community development
projects.
a. Barrio Development Fund c. Special Education Fund
b. Infrastructure Fund d. Trust Fund

34. This is sometimes called Post-Closing Trial Balance

a. Final Trial Balance c. Pre-closing trial balance
b. Preliminary Trial Balance d. Trial balance

35. The following statements are constitutional provisions. Which statement is INCORRECT?
a. The President shall submit to Congress within thirty days from the opening of every regular
session, as the basis of the General Appropriation Bill, a budget of expenditures and sources of
financing including receipts from existing and proposed revenue measures.
b. The Congress may contract or guarantee foreign loans on behalf of the Republic of the
Philippines with the prior concurrence of the Monetary Board and subject to such
limitations are may be provided by law.
c. No law shall be passed authorizing ant transfer of appropriation.
d. All appropriation, revenue or tariff bills, bills authorizing increase of public debt, bills of local
application and private bills shall originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments.

END

Luck is what happens when preparation meets opportunity.