Theory of Accounts Reviewers / Test banks

1. Which of the following statements is false?

(a) Financial reporting should provide information which is relevant to investment, credit and
public policy decisions.
(b) Generally speaking, GAAP are those accounting principles with substantial authoritative
support.
(c) GAAP are established to ensure the relevancy of the general-purpose financial
statements to the widespread uses of the information by external decision makers.
(d) Once established, GAAP should never be changed.

2. A firm signs a major contract in December to construct custom machinery for a client. No
work is begun the current year yet the footnotes to the firm’s financial statements discuss the
nature and peso amount of the contract. This is an example of
(a) reliability (c) historical cost
(b) full disclosure (d) conservatism

3. A corporation needed a new warehouse; a contractor quoted a P250,000 prices to

construct it. The corporation believed that it could build the warehouse for P215,000 and
decided to use company employees to construct the warehouse. The final construction cost
incurred by the corporation was P240,000 but the asset was recorded at P250,000. This is in
violation of the:
(a) time period assumption (c) cost principle
(b) matching principle (d) revenue principle

4. Which of the following accounting concepts best justifies the use of accruals and
deferrals?
(a) Cost/benefit constraint (c) Continuity assumption
(b) Unit-measure assumption (d) Materiality constraint

5. Which of the following most clearly states the most important quality which an
expenditure must have to be recognized as an asset on the balance sheet?
(a) It must be both material and relevant
(b) It must have reasonably certain future benefit to the business.
(c) It must be a physical object
(d) It must be used in operation of the business.

6. Which of the following is a current asset?

(a) cash surrender value of a life insurance policy, where the company is the beneficiary
(b) investment in marketable securities for the purpose of controlling the issuing company
(c) cash designated for the purchase of tangible fixed assets
(d) trade installments receivable normally collectible in 24 months

7. The basic components of financial statements include (choose the incorrect one):
(a) statement of changes in equity (c) statement of retained earnings
(b) profit (loss) statement (d) statement of cash flow

8. Which of the following reconciling items would require an adjusting journal entry on the
company’s books?
(a) outstanding checks (c) deposits in transit
 (b) non-sufficient funds checks (d) cash on hand

9. In recording the bank balance with the book cash balance, which of the following would not
cause the bank balance shown on the bank statement to be lower than the unadjusted book
balance?
(a) cash on hand at the company
(b) NSF checks from a customer, as reported on the bank statement
(c) interest credited to the account by the bank
(d) deposits in transit

10. In determining the cost of goods sold:

(a) purchase discounts are deducted net purchases
(b) freight out is added to net purchases
(c) purchase returns and allowances are deducted from net purchases
(d) freight in is added to net purchases

11. Which of these would cause the inventory turnover ratio to increase the most?
(a) increasing the amount of inventory on hand
(b) keeping the amount of inventory on hand constant but increasing sales
(c) keeping the amount of inventory on hand constant but decreasing sales
(d) decreasing the amount of inventory on hand and increasing sales

12. An entity is a large manufacturer of machines. A major customer has placed an order for a
special machine for which it has given a deposit to the entity. The parties have agreed on a
price for the machine. As per the terms of the sale agreement, it is FOB (free on board)
contract and the title passes to the buyer when goods are loaded into the ship at the port.
When should the revenue be recognized by the entity?
(a) When the customer orders the machine
(b) When the deposit is received
(c) When the machine is loaded at the port
(d) When the machine has been received by the customer

13. A large manufacturer of cosmetics sells merchandise to a retailer, which in turn sells the
goods to the public at large through its chain of retail outlets. The retailer purchases
merchandise from the manufacturer under a consignment contract. When should revenue
from the sale of merchandise to the retailer be recognized by the manufacturer?
(a) When goods are delivered to the retailer
(b) When goods are sold by the retailer
(c) It will depend on the terms of delivery of the merchandise (i.e., CIF cost, insurance, and
freight or FOB)
(d) It will depend on the terms of payment (i.e., cash or credit)

14. When the allowance method of recognizing bad debt expense is used, the typical write off of
a specific customer’s account:
(a) has no effect on net income (c) decreases current asset
(b) decrease net income (d) decreases working capital

15. Which of the following is the incorrect statement?

(a) The fair value method of accounting is the most appropriate method of accounting for
short-term investments in marketable debt securities.
(b) Unrealized holding gains and losses on investments in trading securities are recognized
in income.
(c) All investments in available for sale securities are reported at fair value.
(d) Only investments in bonds are accounted for by the fair value method.
16. Which of the following is false?
(a) A debit valuation allowance balance for an investment in available for sale securities
implies a corresponding owners’ equity account with a credit balance of the same
amount.
(b) Unrealized holding gains on investments in available for sale securities may be
recognized as a direct increase to owners’ equity.
(c) Investments in trading securities may be classified as current or long-term.
(d) Investments in available for sale securities may be classified as current or long-term.

17. Which of the following is incorrect?

(a) Investments classified as long-term are reclassified as short-term investments only if it is
the intention of the management to dispose of them in the short term.
(b) If an investor company does not have significant influence in another company, it must
use either the fair value method or the cost method to account for that investment in
equity securities.
(c) If an investor company has a controlling interest in another company, it must use either
the cost method or the equity method to account for that investment in equity securities.
(d) The cost method is sometimes applied to investments in equity securities.

18. Select the incorrect statement.

(a) The cost method of accounting for an investment in a subsidiary recognizes the legal fact
that the parent and subsidiary are one economic unit.
(b) Realized gains and losses on investments in equity securities accounted for under the
cost method are usually measured by the difference between the cost and current selling
price.
(c) Under the equity method of accounting for long-term investments in equity securities, the
investor’ investment account is decreased by all dividends received from the investee.
(d) The equity method of accounting for long-term investments in equity securities is based
on the presumption that the investor owns a sufficient number of the outstanding voting
shares of another company to exercise significant influence over the operating and
financing policies of the other company.

19. Which of the following is the incorrect statement?

(a) For a long-term equity investment, the investor accounts for a stock split in the same
manner as for a stock dividend.
(b) The relative sales value method is usually used to apportion the book or carrying value of
a long-term equity investment between the old shares still owned and newly received
stock rights related to those shares.
(c) A stock dividend received on an investment reduces the per share cost to the investor.
(d) For the equity method to be applicable to equity investments, it is presumed that the
investor owns enough voting shares of the investee to exercise managing control.

20. An entity shall classify a noncurrent asset or disposal group as “held for sale” when:
(a) The carrying amount of the asset or disposal group will be recovered through continuing
use.
(b) The carrying amount of the asset or disposal group will be recovered through a sale
transaction.
(c) The noncurrent asset or disposal group is to be abandoned.
(d) The noncurrent asset or disposal group is idle or retired from active use.
21. Noncurrent asset or disposal group is classified as “held for sale” when the asset is available
for immediate sale and the sale is highly probable. For the sale to be highly probable,
(choose the incorrect one)
(a) Management must be committed to a plan to sell the asset.
(b) An active program to locate a buyer and complete the plan must have been initiated.
(c) The asset must be actively marketed for sale at a reasonable price in relation to its
carrying value.
(d) The sale is expected to qualify for recognition as a completed sale within one year from
the date of classification of the asset as “held for sale”.

22. Which statement is incorrect concerning presentation of noncurrent asset or disposal group
classified as held for sale?
(a) An entity shall present a noncurrent asset held for sale and the assets of a disposal
group classified as held for sale separately from other assets.
(b) The liabilities of a disposal group classified as held for sale shall be presented separately
from other liabilities.
(c) The assets and liabilities a disposal group classified as held for sale shall be offset as a
single amount.
(d) An entity shall not depreciate a noncurrent asset classified as held for sale or while it is
part of a disposal group classified as held for sale.

23. What is the treatment of gain on an initial increase in the fair value less cost to sell of a
noncurrent asset classified as held for sale?
(a) The gain shall be recognized in full.
(b) The gain shall not be recognized.
(c) The gain shall be recognized but not in excess of the cumulative impairment loss
previously recognized.
(d) The gain shall be recognized but only in retained earnings.

24. Noncurrent asset classified as for rental to others shall be presented in the statement of
financial position as:
(a) Current asset
(b) Other noncurrent asset
(c) Noncurrent investment
(d) Property, plant and equipment

25. How should the assets and liabilities of a disposal group classified as held for sale be shown
in the statement of financial position?
(a) The assets and liabilities shall be offset and presented as a single amount.
(b) The assets of the disposal group shall be shown separately from other assets in the
statement of financial position, and the liabilities of the disposal group shall be shown
separately from other liabilities in the statement of financial position.
(c) The assets and liabilities shall be presented as a single amount and as a deduction from
equity.
 (d) There should be no separate disclosure of assets and liabilities that form part of a
disposal group.

26. An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary meets the
criteria to be classified as held for sale. At the end of the reporting period, the subsidiary has
not yet been sold, and six months have passed since its acquisition. How will the subsidiary
be valued in the statement of financial position at the date of the first financial statements
after acquisition?
(a) At fair value
(b) At the lower of its cost and fair value less cost to sell
(c) At carrying amount
(d) In accordance with applicable PFRS

27. An entity classified a noncurrent asset accounted for under the cost model as held for sale on
December 31, 2009. Because no offers were received at an acceptable price, the entity
decided on July 1, 2010 not to sell the asset but to continue to use it. In accordance with
PFRS 5, the asset shall be measured on July 1, 2010 at:
(a) The lower of its carrying amount and its recoverable amount
(b) The higher of its carrying amount and its recoverable amount
(c) The higher of its carrying amount on the basis that is had never been classified as held
for sale and its recoverable amount
(d) The lower of its carrying amount on the basis that it had never been classified as held for
sale and its recoverable amount

28. The following statements relate to the term “profit”.

Statement 1: Profit is any amount over and above that required to maintain the capital at the
beginning of the period.
Statement 2: Profit is the residual amount that remains after expenses have been deducted
from income.
(a) Both statements are false.
(b) Statement 1 is false.
(c) Statement 2 is false.
(d) Both statements are true.

29. Which of the following is not true of a subsidiary ledger?

(a) The purpose of a subsidiary ledger is to store details of certain general ledger accounts.
(b) The sum of the individual balances in a subsidiary ledger should equal the balance in the
general ledger control accounts.
(c) Journal entries posted to a subsidiary ledger need not be posted to the general ledger.
(d) One benefit of a subsidiary ledger is that the number of general ledger accounts
necessary is reduced.

30. The purpose of trial balance is to:

(a) indicate whether total debits equal total credits.
(b) ensure that all transactions have been recorded.
(c) speed the collection of cash receipts from customers.
(d) increase assets and owner’s equity.

31. The closing entry for sales discounts is:

(a) debit sales discounts and credit income summary.
(b) debit sales discounts and credit sales revenue.
(c) debit income summary and credit sales discounts.
 (d) not used because sales discount is a real account which is not closed.

32. Which of the following is not reversed at the start of the new accounting period?
(a) expense paid in advance that is debited to the expense account at the time of payment
(b) doubtful accounts computed using the aging schedule
(c) income earned but not yet recorded because was not yet received
(d) rent collected in advance and credited to a nominal account

33. In the equation, “Assets + Expenses = Liabilities + Revenue + Capital”, the expenses and
revenues are:
(a) contra asset and contra liability accounts, respectively, that assist analysis of the financial
progress of the firm
(b) incorrectly stated because their signs are reversed, i.e., both are contra items that should
have negative signs in the formula
(c) adjustments to capital that are postponed until the end of a specific accounting period to
determine their net effect on capital for that period
(d) incorrectly included in the formula because “Assets = Liabilities + Capital”

34. Which of the following statements is true?

(a) Service companies do not need to prepare financial statements.
(b) Manufacturing companies maintain the simplest accounting records.
(c) Merchandising companies purchase goods that are ready for sale and then sell them to
customers.
(d) A drugstore is an example of a service company.

35. Which of the following is not an accurate statement regarding the rules of debit and credit in
recording revenue and expense transactions?
(a) revenue increases owner’s equity; since increases in owner’s equity are recorded by
credits, revenue is recorded by a credit
(b) expenses decreases owner’s equity; since decreases in owner’s equity are recorded by
debits, expenses are recorded by debits
(c) in recording revenue transactions, we debit the assets received and credit the revenue
account
(d) expenses used up assets; since decreases in assets are recorded by credits, expenses
are recorded by credits to the expense account

36. Consider the following:

I. increase an asset VI. decrease owner’s equity
II. decrease an asset VII. increase a revenue
III. increase a liability VIII. decrease a revenue
IV. decrease a liability IX. increase an expense
V. increase owner’s equity X. decrease an expense
Using the above, if an asset account is debited, what are the five possible corresponding
credits?
(a) I, IV, VI, VIII, IX (c) I, III, V, VII, IX
(b) II, IV, VI, VIII, X (d) II, III, V, VII, X

37. The historical cost concept measures assets on the basis of:
(a) the replacement cost of assets on the balance sheet
(b) the amount of cash for which the assets could be sold
(c) an appraisal by the auditors
(d) the fair market value of assets on the day they were acquired

38. In financial accounting, gains may be defined as:

(a) total receipts of cash
(b) total receipts of cash in excess of the historical costs of the assets being sold
 (c) total revenues
(d) total increases in net assets other than revenues

39. Under the accrual basis of accounting, if cash is received prior to the sale, then:
(a) revenue is recognized when the cash is received
(b) a liability is recognized when cash is received
(c) a liability is removed from the system when the cash is received
(d) revenue is removed from the system when the services have been performed or the
goods have been delivered

40. If there is an objective evidence that AFS is impaired, the cumulative loss that had been
recognized in other comprehensive income:
(a) Shall be amortized over a reasonable period
(b) Shall remain unpaid until the financial asset is disposed of
(c) Shall be recognized in profit or loss
(d) Shall be recognized as an adjustment of the beginning balance of retained earnings

41. A net unrealized loss on an entity’s portfolio of AFS equity securities shall be reflected in
the current financial statements as:
(a) Direct reduction of retained earnings
(b) Current loss resulting from holding equity securities
(c) Footnote or parenthetical disclosure only
(d) Component of other comprehensive income

42. What should happen when the financial statements of an associate are not prepared as
of the same date as of the financial statements of the investor?
(a) The associate shall prepare financial statements for the use of the investor at the same
date as that of the investor.
(b) The financial statements of the associate prepared up to a different date shall be used as
normal.
(c) Any major transactions between the date of the financial statements of the investor and
that of the associate shall be accounted for.
(d) As long as the gap is not greater than 3 months, there is no problem.

43. When an investor purchases sufficient ordinary shares to gain significant influence over
the investee, what is the proper accounting treatment of any excess of cost over book value
acquired?
(a) The excess remains in the investment account until it is sold.
(b) The excess is immediately expensed in the period in which the investment is made.
(c) The excess is amortized over the time period that is reasonable in the light of the
underlying cause of the excess.
(d) The excess is charged to retained earnings at the time the investor resells the
investment.

44. Land, building and equipment should be reported on the balance sheet at their cost, less
accumulated depreciation, unless:
(a) some obsolescence is known to have occurred
(b) some of the property still on hand were written down pursuant to a quasi-organization
(c) the amount of insurance carried on the property is well in excess of its book value
(d) not given

45. Dave started his own cheese factory on March 16, 2003. Which of the following
transactions would not be admissible in Dave’s accounting system for the month of March?
(a) On March 18, Dave purchased a cow on account for P3,000.
(b) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
 (c) On March 21, Dave contracted with a local radio station to run several one-minute
advertising spots during the month of April.
(d) All of the above transactions would be admissible for Dave’s accounting system in the
month of March.

46. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and
issuing a P6,000 note payable for the balance owed. As a result of this transaction, Jeff’s
balance sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity

47. The double-entry system of accounting means that every transaction:

(a) is recorded initially on both the journal and the general ledger
(b) increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by an equal amount of debits
and credits
(d) results in changes in accounts on both sides of the balance sheet

48. Which of the following statements is not correct?

(a) debits may increase assets
(b) credits may increase liabilities
(c) debits may increase liabilities
(d) credits may increase owner’s equity

49. Tony owns a store specializing in bags. Tony has just completed a transaction that
caused a P12,000 increase in total assets and a P12,000 increase in liabilities. This
transaction could have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note
payable for the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note
payable for the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by
P12,000

50. Dean has completed the posting process for the month of June and has prepared a trial
balance in which the debits total P11,000 and the credits total P11,100. Which of the
following errors would be the most likely candidate in causing the trial balance not to balance
by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger

51. Which of the following is the correct statement?

(a) The best way to ascertain whether a marketable security is short-term or a long-term
investment is to check with a securities dealer.
(b) For balance sheet classification, a security is classified as a short-term investment if it is
readily marketable.
(c) For balance sheet classification, a security is classified as a short-term investment based
on the intended holding period.
(d) All investments in trading securities are reported at book values. C
53. Which of the following is the incorrect statement?
(a) The fair value method of accounting is the most appropriate method of accounting for
short-term investments in marketable debt securities.
(b) Unrealized holding gains and losses on investments in trading securities are recognized
in income.
(c) All investments in available for sale securities are reported at fair value.
(d) Only investments in bonds are accounted for by the fair value method. D

54. Which of the following is true?

(a) The fair value method of accounting is the most appropriate method of accounting for
short-term investments in marketable equity securities.
(b) All bond investments are accounted for by the amortized cost method.
(c) The carrying value of an investment in trading securities or available for sale securities is
limited to market value at the date of acquisition.
(d) The realized gain or loss on a short-term investment in an equity security is usually equal
to the difference between its cost and its sale price. A

55. Which of the following is false?

(a) A debit valuation allowance balance for an investment in available for sale securities
implies a corresponding owners’ equity account with a credit balance of the same
amount.
(b) Unrealized holding gains on investments in available for sale securities may be
recognized as a direct increase to owners’ equity.
(c) Investments in trading securities may be classified as current or long-term.
(d) Investments in available for sale securities may be classified as current or long-term. C

56. Which of the following is the correct statement?

(a) Investments in available for sale securities and trading securities are classified separately
in a balance sheet.
(b) Investments in available for sale securities include only equity securities.
(c) Investments in trading securities include only debt securities.
(d) Increases in the market value of trading securities and available for sale securities
investments always cause the valuation account to decrease. A

57. Tangible goods used in the productive process and directly related to the products being
manufactured are called:
(a) factory supplies. (c) raw materials.
(b) finished goods. (d) goods in process. C

58. When a portion of inventories has been pledged as security on a loan:

(a) the value of the portion pledged should be subtracted form the debt.
(b) an equal amount of retained earnings should be appropriated.
(c) the fact should be disclosed but the amount of current assets should not be affected.
(d) the cost of the pledged inventories should be transferred from current assets to
noncurrent assets. C

59. Slow-moving and obsolete inventory items should be priced for balance sheet purposes at:
(a) retail inventory price.
(b) cost or market, whichever is lower.
(c) moving average.
(d) at an amount not in excess of possible realizable value. D

60. Subnormal or obsolete goods, either under the cost or the lower of cost or market basis:
 (a) should be taken up an unrealized inventory loss.
(b) should be valued at bona-fide selling price less direct cost of disposition.
(c) should be valued by applying an inventory method that uses a constant or nominal value
for the normal inventory level.
(d) should be adjusted in the cost of goods sold. B

61. Merchandise which a trader contracted to purchase but which was not delivered or identified
in the year should:
(a) not be included in the inventory.
(b) be included in the inventory at cost.
(c) be included in the inventory at its probable retail value.
(d) be included in the inventory at a normal price. A

62. The appropriate valuation of an operating lease on the statement of financial position of a
lessee is:
(a) zero
(b) the absolute sum of the lease payments
(c) the present value of the sum of the lease payments discounted at an appropriate rate
(d) the market value of the asset at the date of the inception of the lease A

63. When equipment held under an operating lease is subleased by the original lessee, the
original lessee would account for the sublease as:
(a) operating lease (c) direct financing lease
(b) sales-type lease (d) capital lease A

64. Equal monthly rental payments for a particular lease should be charged to rental expense by
the lessee for which of the following?
Capital Operating Capital Operating
lease lease lease lease
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes D

65. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental
payments should be:
(a) allocated between a reduction in the liability for leased asset and depreciation expense
(b) allocated between a reduction in the liability for leased asset and interest expense
(c) recorded as a reduction in the liability for leased asset
(d) recorded as rental expense D

66. Where the balance sheet indicates that a portion of property, plant and equipment the related
accumulated depreciation pertains to equipment leased to customers, it is evident that the:
(a) operating method of accounting is used for the lease
(b) financing method of accounting is used for the lease
(c) lessor has violated GAAP
(d) lessor is using the income tax method of accounting for the lease A

67. A 20-year property lease, classified as an operating lease, provides for a 10% increase in
annual payments every five years. In the 6 th year compared to the 5th year, the lease will
cause the following expenses to increase:
Rent Interest Rent Interest
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes C

68. Which is not an essential characteristic of an accounting liability?

(a) The liability is the present obligation of a particular enterprise.
(b) The liability arises from past transaction or event.
 (c) The settlement of the liability requires an outflow of resources embodying economic
benefits.
(d) The liability is payable to a specifically identified payee. D

69. Current liabilities include:

(a) only obligations which are expected to be settled within the normal operating cycle.
(b) only obligations which are due to be settled within one year from balance sheet date.
(c) obligations which are expected to be settled within the normal operating cycle and
obligations which are due to be settled within one year from balance sheet date.
(d) refinanced long-term debt falling due within one year from balance sheet. C

70. A long-term debt falling due within one year should be reported as noncurrent liability should
be reported as noncurrent liability if the following conditions are met (choose the incorrect
one):
(a) The original term is for a period of more than one year.
(b) The enterprise intends to refinance the obligation on a long-term basis.
(c) The intent to refinance is supported by an agreement to refinance which is completed
before the issuance of the financial statements.
(d) The intent to refinance is supported by an agreement to refinance which is completed
after the issuance of the financial statements. D

71. Which will demonstrate an agreement to refinance (choose the incorrect one)?
(a) Long-term obligation has in fact been issued before the issuance of the financial
statements for the purpose of refinancing.
(b) Equity security has in fact been issued before the issuance of the financial statements for
the purpose of refinancing.
(c) Before the issuance of the financial statements, the enterprise has in fact entered into a
financing agreement that clearly permits the enterprise to refinance the currently maturing
long-term debt on a long-term basis.
(d) Preferred stock has in fact been issued before the issuance of financial statements for
the purpose of obtaining working capital. D

72. Some obligations that are due to be repaid within the next operating cycle and expected to be
refinanced or “rolled over” should be classified as noncurrent:
(a) If the refinancing or “rolling over” is at the discretion of the enterprise and the refinancing
agreement has been reached before the issuance of the statements.
(b) If the refinancing or “rolling over” is at the discretion of the enterprise regardless of
whether a refinancing agreement has been reached or not before the issuance of the
statements.
(c) If the refinancing or “rolling over” is not at the discretion of the enterprise.
(d) Subject to no conditions. A

73. Which is not a characteristic of an intangible asset?

(e) the asset lacks physical substance
(f) the asset is used in production or supply of goods and services, for rental to others or for
administrative purposes
(g) the asset provides future economic benefits
(h) the asset has indeterminate useful life D

74. Which is not unidentifiable intangible asset?

(a) patent (c) copyright
(b) franchise (d) goodwill D
75. If the pattern in which the economic benefits from the asset are consumed cannot be
predicted reliably, the method of amortization for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years’ digits A

76. Intangible assets should be carried (benchmark treatment):

(a) gross cost
(b) fair value on balance sheet date
(c) revalued amount minus accumulated amortization and accumulated impairment losses
(d) cost minus accumulated impairment losses and accumulated amortization D

77. Which of the following is not considered in estimating the useful life of intangible assets?
(a) expected usage of the asset by the enterprise
(b) stability of the industry in which the intangible asset operates
(c) salvage value of the asset
(d) level of maintenance expenditure required to obtain the future economic benefit from the
asset
C

78. Choose the correct statement.

(a) Financial accounting is a social science and cannot be influenced by changes in legal,
political, business and social environments.
(b) Financial accounting is an information system designed to provide information primarily to
the internal users.
(c) General-purpose financial statements must be prepared by a certified public accountant.
(d) The preparation of general-purpose financial statements is usually based on the
assumption that the primary users of the information are external decision makers. D

79. Which of the following statements is false?

(e) Financial reporting should provide information which is relevant to investment, credit and
public policy decisions.
(f) Generally speaking, GAAP are those accounting principles with substantial authoritative
support.
(g) GAAP are established to ensure the relevancy of the general-purpose financial
statements to the widespread uses of the information by external decision makers.
(h) Once established, GAAP should never be changed. D

80. Which of the following statement is true?

(a) Managers of an entity are considered to be internal decision makers.
(b) External decision makers can be obtained whatever financial data they need whenever
they need it.
(c) Accounting information is prepared for and useful to only outside decision makers.
(d) The members of the Board of Directors are not “internal users” only. D

81. Choose the incorrect statement.

(a) The objective of the external financial statements is to communicate the economic effects
of completed transactions and other events on the entity.
(b) The practice of accounting requires considerable professional judgment.
(c) Security analysis use information from financial statements and other sources to project
future earnings.
(d) The assessment of earnings quality has become an exact science. D

82. Which of the following statement is correct?

(a) Certified Public Accountants are not independent for the benefit of the users of the
financial statements, because they are paid by the client.
 (b) Accounting concepts, principles and standards are just as broad and general today as
they were sixty years old.
(c) Due the excellent work of the ASC, there are very few choices among alternative
accounting policies today.
(d) Disclosure notes are an integral part of the financial statements. D

83. Which of the following equations is not true?

(a) Assets + Liabilities = Owner’s Equity
(b) Assets = Liabilities + Owner’s Equity
(c) Assets – Owner’s Equity = Liabilities
(d) Assets – Liabilities = Owner’s Equity A

84. Dave started his own cheese factory on March 16, 2003. Which of the following transactions
would not be admissible in Dave’s accounting system for the month of March?
(e) On March 18, Dave purchased a cow on account for P3,000.
(f) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
(g) On March 21, Dave contracted with a local radio station to run several one-minute
advertising spots during the month of April.
(h) All of the above transactions would be admissible for Dave’s accounting system in the
month of March. C

85. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and issuing
a P6,000 note payable for the balance owed. As a result of this transaction, Jeff’s balance
sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity A

86. The double-entry system of accounting means that every transaction:

(a) is recorded initially on both the journal and the general ledger
(b) increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by an equal amount of debits
and credits
(d) results in changes in accounts on both sides of the balance sheet
C

87. Which of the following statements is not correct?

(a) debits may increase assets
(b) credits may increase liabilities
(c) debits may increase liabilities
(d) credits may increase owner’s equity C

88. Tony owns a store specializing in bags. Tony has just completed a transaction that caused a
P12,000 increase in total assets and a P12,000 increase in liabilities. This transaction could
have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note
payable for the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note
payable for the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by
P12,000
B
89. Dean has completed the posting process for the month of June and has prepared a trial
balance in which the debits total P11,000 and the credits total P11,100. Which of the
following errors would be the most likely candidate in causing the trial balance not to balance
by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a
P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger
C

90. Increase in net assets may result from:

(a) revenues
(b) expenses
(c) withdrawals
(d) all of the above are correct A

91. Which of the following statements is false?

(a) Increases to owner’s capital are recorded with credits.
(b) Sales are recorded as debits.
(c) Expenses reduce owner’s capital.
(d) Expenses and dividends are both recorded as debits.
B

92. Zinc Company recorded office supplies as an asset account when the supplies were
purchased. Failure to make an adjusting entry reflecting the use of these supplies will result
in:
(a) an understatement of assets
(b) an overstatement of owner’s equity
(c) an understatement of liabilities
(d) an understatement of owner’s equity B

BPS/EPS
93) Under PAS 33, EPS disclosures are required for
I. Entities whose ordinary shares or potential ordinary shares are publicly traded.
II. Entities that are in the process of issuing ordinary shares in the public market.
a. I only b. II only c. Both I and II
d. Neither I nor II

94) Under PAS 33, which of the following statements about an ordinary share is
true?
I. An ordinary share is an equity instrument that is superior to all other classes of equity
instrument.
II. A potential ordinary share is a financial instrument or other contract that may entitle its
holder to ordinary shares.
a. I only b. II only c. Both I and II
d. Neither I nor II
subordinate
95) Which of the following statements is true?
I. Earnings per share amounts should not be presented if they are negative, i.e. loss per
share.
II. Earnings per share amounts calculated for discontinued operations should be presented.
a. I only b. II only c. Both I and II
d. Neither I nor II
96) When computing diluted EPS for an entity with a complex capital structure, what
is the denominator in the computation?
a.Number of ordinary shares outstanding at year-end
b.Weighted average number of ordinary shares outstanding
c. Weighted number of ordinary shares outstanding plus all other potentially antidilutive
securities.
d.Weighted average number of ordinary shares outstanding plus all other potentially dilutive
securities

97) For purpose of computing the weighted average number of shares outstanding in
EPS calculation, a mid-year that must be treated as occurring at the beginning oif the year is
the
a.Issuance of the share warrants
b.Purchase of treasury shares
c. Issuance of share certificates
d.Issuance of new shares from share split

98) When EPS is computed, dividends on preferred stock are

a.Added because they represent earnings to preferred share holders
b.Reported separately on the income statement
c. Subtracted they represent earnings to preferred shareholders
d.Ignored because so they do not pertain to the common stock

99) It is reduction in earnings per share or an increase in loss per share resulting
from the assumption that convertible instruments are converted, that options or warrants are
exercised, or that ordinary shares are issued upon the satisfaction of specified conditions.
a. Dilution

c. Either dilution or antidilution

b. Antidilution

d. Neither dilution nor antidilution

100) What is the inherent justification underlying the concept of potential diluters in an
earnings per share computation?
a. form over substance
b. substance over form
c. form and substance considered equally
d. substance over form or form over substance depending on the circumstances

101) In determining earnings per share, interest expense, net of applicable income
taxes, on convertible debt which is dilutive should be
a. Added back to net income for diluted earnings per share.
b. Deducted from net income for basic earnings per share and ignored for diluted earnings
per share.
c. Deducted from net income for both basic earnings per share and diluted earnings per
share.
d. Added back to net income for basic earnings per share, and ignored for diluted earnings
per share.

102) Potential ordinary shares do not include

a. Share warrants
b. Employee share options
 c. Financial liabilities or equity instruments, including preference shares, that are not
convertible into ordinary
shares.
d. Shares which would be issued upon the satsfaction of certain conditions resulting from
contractual arrangements, such as the purchase of a business or other assets.

103) For a company that has only ordinary share outstanding , total shareholder’s
equity divided by the number of shares outstanding represents the:
a. return on equity
c. stated value per share
b. book value per share
d. price-earnings ratio

104) A company with a simple capital structure for purposes of computing earnings
per share would include which of the following in the computation of earnings per share?
a. potentially dilutive securities
b. dividends on ordinary share
c. dividends on nonconvertible cumulative preferred stock
d. number of shares of nonconvertible cumulative preferred stock

Sharebased
105) The entity has issued a range of share options to employees. In accordance with
PFRS 2, what type of share-based payment transaction does this represent?
a.Equity-settled share-based payment transaction
b.Asset-settled share-based payment transaction
c. Cash-settled share-based payment transaction
d.Liability-settled share-based payment transaction

106) In accordance with PFRS2, how should an entity recognize the change in the
fair value of the liability in respect of a cash-settled share-based payment transaction?
a.Should not recognize in the financial statements but disclose in the notes thereto
b.Should recognize in the statement of changes in equity
c. Should recognize in profit or loss
d.Should recognize in other comprehensive income

107) A cash-settled share-based payment shall give rise to an increase in which of

the following?
a.A current asset

c. Equity
b.A noncurrent asset
d. A liability

108) An entity has entered into a contract with another entity. The latter will supply the
former with a range of services. The payment for those services will be in cash and based
upon the price of former’s ordinary shares on completion of the contract. In accordance with
PFRS 2, what type of share-based payment transaction does this represent?
a.Asset-settled share-based payment transaction
b.Cash-settles share-based payment transaction
c. Liability-settled share-based payment transaction
d.Equity-settled share-based payment transaction

109) If share-based payment transaction provides that employees have the right to
choose the settlement whether in cash or shares, the entity is deemed to have issued
a.An equity instrument
b.A liability instrument
 c. A compound financial instrument
d.Either an equity instrument or liability instrument but not both

110) Under PFRS 2 share – based Payment, the method that must be used to
measure employee stock options and other payments given to employees in the form of equity
securities, is:
a. Initial cost
c. Fair value
b. Discounted cash flows
d. Selling price

111) Many shares and most share options are not traded in an active market.
Therefore, it is often difficult to arrive at a fair value of the equity instruments being issued.
Which of the following option valuation techniques should not be used as a measure of fair
value in the first instance?
a. Black – Scholes model
c. Monte – Carlo model
b. Binomial model
d. Intrinsic value

112) It is the difference between the fair value of the shares to which the counterparty
has the right to subscribe and the price the counterparty is required to pay for those shares.
a. fair value

c. Market value
b. Intrinsic value
d. Book
value

113) These are transactions in which the entity receives goods or services as
consideration for equity instruments of the entity including shares and share options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions

114) Compensatory stock options were granted to executives on January 1, 2008, for
services to be rendered during 2008, 2009, and 2010. The fair value of the option was
measured at the grant-date fair value using the observable market price of an option with
similar terms. The fair value of the options was in excess of the amount the executives must
pay for the stock. The stock options were exercised on December 30, 2010 Compensation
expense should be recognized in the income statement in which of the following years?
2008 2009 2010 2008 2009 2010
a. No No Yes c. Yes Yes
Yes
b. No Yes Yes d. Yes No
No

115) For cash settled share-based payment transactions, an entity shall measure the
goods or services received and the liability incurred at the
a. Fair value of the liability
b. Fair value of the goods and services received
c. Either the fair value of the goods or services received or the fair value of the liability
d. Neither the fair value of the goods or services received nor the fair value of the liability
116) Sydney Corporation granted 1,000 stock options to its employees on January 1,
2006, for services performed during 2006 and 2007. At the date of the grant, the fair value of
the stock options is P6,000. The options are exercisable on January 1, 2008, and expire on
June 30, 2008. On July 1, 2008, it was determined that none of the options were exercised. On
December 31, 2008, Sydney Corporation should
a. Restate its financial statements for 2006 and 2007 and reduce compensation expense for
each year.
b. Make a prior period adjustment to retained earnings for compensation expense
recognized in 2006 and 2007.
c. Not adjust or reverse compensation expense.
d. Record P6,000 of compensation expense in 2008.

SHE
117) Under IFRIC 17, a property dividend declared before the end of the reporting
period should be recognized as liability at the end of the reporting period at
a.Carrying amount of the asset to be distributed
b.Fair value of the asset on the date of declaration
c. Fair value of the asset at the end of reporting period
d.Fair value of the asset at the date of distribution

118) Which of the following should be reported as a stockholder equity account?

a.Discount on convertible bonds
b.Premium on convertible bonds
c. Cumulative foreign exchange translation loss
d.Organization costs

119) Gains and losses on the purchase and resale of treasury stock may be only be
reflected in
a.Paid-in capital accounts
b.Paid-in capital and retained earnings accounts
c. Income, paid-in capital and retained earnings
d.Income and paid-in capital accounts

120) Deposits on subscriptions to a proposed increase in capital stock are reported on

the balance sheet as
a. Unearned revenue
b. Advances from subscribers
c. A separate item in the capital stock section
d. An addition to retained earnings

121) Which of the following statements best describes the net effect on retained
earnings of the purchase and subsequent sale of treasury stock?
a. retained earnings may never be increased , but sometimes decreased.
b. Retained earnings may never be increased or decreased
c. Retained earnings may be increased but never be decreased.
d. Retained earnings account is always affected unless the selling price is exactly equal to cost

122) When stock rights are exercised, how much should be treated as total proceeds
from the issuance of shares?
a. only the consideration received
b. The total of the consideration received and the amount previously recorded for the stock
rights
c. the amount previously recorded for the stock rights
d. The total par value of the shares

123) Liabilities and stockholders’ equity are similar in that

 a. Both provide certain amount of payments in the form of interest and dividends
respectively based upon written agreements.
b. Both provide specific timing of payments as a result of specific maturity dates.
c. Both creditors and stockholders are equity holders although they have different rights with
respect to income, risk, control and liquidation.
d. Both liabilities and owners equity are ranked equally when the enterprise’s assets are
distributed.

124) The declaration of a 10% stock dividend

a. Would decrease both accumulated profits and total shareholders’ equity
b. Would decrease accumulated profits but would have no effect on total shareholders’
total
c. Would have no effect on accumulated profits but would decrease total shareholders’
equity
d. Would have no effect both on accumulated profits and total shareholders’ equity

125) What is the most likely effect of a share split down?

Par value PER SHARE Numbers of shares
a. Decrease No effect
b. Decrease Increase
c. Increase Decrease
d. No effect No effect

126) How would the declaration of a liquidating dividend by a corporation affect each
of the following?
Contributed capital Total shareholders’ equity
a. Decrease No effect
b. No effect Decrease
c. No effect No effect
d. Decrease Decrease

127) An entity issued what is called a “12% stock dividend” on its share capital. At
what amount per share, if any, should retained earnings be reduced for this transaction?
a. Zero because no entry is made
b. Par value
c. Market value at the declaration
d. Market value at the date of issuance

128) The peso amount of total shareholders’ equity remains the same when there is
a.Issuance of preference share in exchange for convertible debentures
b.Issuance of nonconvertible bonds with share warrants
c. Declaration of a stock dividend
d.Declaration of a cash dividend

Income taxes

129) Justification for the method of determining periodic deferred tax expense is
based on the concept of
a. Matching of periodic expense to periodic revenue
b. Objectivity in the calculation of periodic expense
c. Recognition of asset and liability
d. Consistency of tax expense measurement with the actual tax planning strategies.
130) The deferred tax expense is the
a.Increase in balance of deferred tax asset minus the increase in balance of deferred tax
liability
b.Increase in balance of deferred tax liability minus the increase in balance of deferred tax
asset
c. Increase in balance of deferred tax asset plus the increase in balance of deferred tax liability
d.Decrease in balance of deferred tax asset minus the increase in balance of deferred tax
liability

131) Where a business transaction requires a direct adjustment to an equity account,

the tax effect is adjusted against
a.Income

c. Equity
b.Tax expense
d. Cash

132) Under PAS 12 Income Taxes, deferred tax assets and liabilities are measured at
the tax rates that:
a.Applied at the beginning of the reporting period
b.At the end of the reporting period
c. At the rates that prevail at the reporting date
d.Are expected to apply when the asset or liability is settled

133) Which of the following could never be subject to interperiod tax allocation?
a.Interest revenue on government bonds.
a.Depreciation expense on operational assets.
b.Estimated warranty expense.
c. Rent revenue

134) A temporary difference which would result in deferred tax asset is

a.Tax, penalty or surcharge
b.Dividend received on stock investment
c. Excess tax depreciation over accounting depreciation
d.Rent received in advance included in taxable income at the time of receipt but deferred for
accounting purposes

135) Differences between taxable income and pretax accounting income arising from
transactions that, under applicable tax laws and regulations, will not be offset by
corresponding differences or turn around in future periods is a definition of
a.Temporary differences
c. Deductible differences
b.Permanent differences
d. Taxable differences

136) When a temporary difference will result in taxable amounts in 5 years

a.A deferred tax liability is recognized in the current year.
b.A deferred tax asset is recognized in the current year.
c. A deferred tax liability may be recognized in the current year if certain conditions are met.
d.A deferred tax asset may be recognized in the current year if certain conditions are met.

137) As a result of differences between depreciation for financial reporting purposes

and tax purposes, the financial reporting basis of a company's plant assets falls below the tax
basis. Assuming the company had no other temporary differences, the company should
report a
 a. Current tax receivable.
c. Deferred tax asset.
b. Current tax payable.
d. Deferred tax liability.

138) Income tax expense is computed based on

a. Taxable income
b. Total-pretax financial income
c. Accounting income subject to income tax
d. The temporary difference

139) These are differences between carrying amount of an asset or liability in the
statement of financial position and its tax base.
a. Temporary differences
c. Permanent differences
b. Timing differences
d. Accounting differences

140) Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are deductible after they are recognized in financial income.
b. Revenue or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in
taxable income.
d. Expenses and losses that are deductible before they are recognized in financial income.

Benefits
141) Which of the following is not one of the six components of pension expense (or
part of a component)?
a.Initial transition asset
b.Amortization of unrecognized gain or loss
c. Expected return on plan assets
d.Growth (interest cost) in PBO/ABO since the beginning of the period

142) What is measured by the accumulated benefit obligation?

a.The pension expense, computed by the plan formula applied to years of service to date,
assuming future salary levels
b.The pension expense, computed by the plan formula applied to years of service to date,
using existing salary levels
c.The pension obligation, computed by the plan formula applied to years of service to date,
using existing salary levels.
d.The pension obligation, computed by the plan formula applied to year of service to date,
assuming future salary levels.

143) Under which category should lump sum benefit of 1% of the final salary for each
year of service and actuarial gains be accounted for?
a.Lump sum benefits should be accounted for under defined benefit plans.
Actuarial gains should be accounted for under defined benefit plans.
b.Lump sum benefit should be accounted for under short term employee benefits
Actuarial gains should be accounted for under defined benefit plans.
c. Lump sum benefit should be accounted for under defined benefit plans
Actuarial gains should be accounted for under defined contribution plans
d.Lump sum benefit should be accounted for under short term employee benefits
 Actuarial gains should be accounted for under defined contribution plans

144) Investments held by retirement benefit plans should be stated in the statement of
net assets at
a.Net realizable value
c. Original cost less impairment
b.Fair value

d. Value in use

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

146) Which is incorrect concerning the recognition and measurement of a defined

benefit plan?
a. actuarial assumptions are required to measure the obligation and expense and there is a
possibility of actuarial gains and losses.
b. the obligation is measured at a discounted basis.
c. the defined benefit plan must be fully funded
d. the expense recognized for a defined benefit plan is not necessarily the amount of
contribution due for the period

147) The vested benefits:

a. are employee benefits that are not conditional of future employment
b. are benefits to be paid to the retired employees in the current period.
c. are benefits to be paid to the retired employees in the subsequent period.
d. are benefits accumulated in the hands of a trustee.

148) Any transition loss on first adopting PAS 19 shall be recognized:

I. as expense immediately
II. as expense over a maximum of 5 years
a. I only

c. Either I or II irrevocably
b. II only

d. Either I or II revocably

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

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

151) The present value of pension benefits accrued to date using assumptions as to
future compensation levels is the
a. Prior service cost.
c. Projected
benefit obligation.
b. Accumulated benefit obligation.
d. Accrued pension cost.

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