(Test Bank) Intermediate Financial Accounting Part 1A

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TEST BANK Intermediate Financial Accounting Part 1A ZEUS VERNON B. MILLANALL RIGHTS RESERVED 2015 No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means - electronic or mechanical, including photocopying – without the written permission of the author. ISBN 978-621-95096-0-2 Published by: BANDOLIN ENTERPRISE No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, PhilippinesTABLE OF CONTENTS CHAPTER 1 OVERVIEW OF ACCOUNTING ................................................................. 1 CHAPTER 1: THEORY OF ACCOUNTS REVIEWER............................................... 1 CHAPTER 1 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS......27 CHAPTER 2 THE ACCOUNTING PROCESS ................................................................ 28 CHAPTER 2: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) ................................................................................................................ 28 CHAPTER 2: THEORY OF ACCOUNTS REVIEWER............................................ 31 CHAPTER 2 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS......45 CHAPTER 3 THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING .......46 CHAPTER 3: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) ................................................................................................................ 46 CHAPTER 3: THEORY OF ACCOUNTS REVIEWER............................................ 47 CHAPTER 3 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS...............71 CHAPTER 4 CASH & CASH EQUIVALENTS ............................................................... 72 CHAPTER 4: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) ................................................................................................................ 72 CHAPTER 4: THEORY OF ACCOUNTS REVIEWER............................................ 76 CHAPTER 4 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS......87 CHAPTER 5 RECEIVABLES (PART 1) ....................................................................... 88 CHAPTER 5: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) ................................................................................................................ 88 CHAPTER 5: THEORY OF ACCOUNTS REVIEWER............................................ 92 CHAPTER 5 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS....100 CHAPTER 6 RECEIVABLES (PART 2) ..................................................................... 101 CHAPTER 6: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) .............................................................................................................. 101 CHAPTER 6: THEORY OF ACCOUNTS REVIEWER.......................................... 105 CHAPTER 6 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS....110 CHAPTER 7 RECEIVABLES (PART 3) ..................................................................... 111 CHAPTER 7: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) .............................................................................................................. 111 CHAPTER 7: THEORY OF ACCOUNTS REVIEWER.......................................... 114 CHAPTER 7 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS....125 CHAPTER 8 INVENTORIES..................................................................................... 126 CHAPTER 8: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) .............................................................................................................. 126 CHAPTER 8: THEORY OF ACCOUNTS REVIEWER.......................................... 132 CHAPTER 8 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS....149 CHAPTER 9 INVESTMENTS (PART 1) .................................................................... 150 CHAPTER 9: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) .............................................................................................................. 150 3CHAPTER 9: THEORY OF ACCOUNTS REVIEWER........................................... 153 CHAPTER 9 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS....168 CHAPTER 10 INVESTMENTS (PART 2) .................................................................... 169 CHAPTER 10: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) .............................................................................................................. 169 CHAPTER 10: THEORY OF ACCOUNTS REVIEWER........................................ 175 CHAPTER 10 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS. .185 CHAPTER 11 INVESTMENTS (PART 3) .................................................................... 186 CHAPTER 11: MULTIPLE CHOICE – COMPUTATIONAL (SET B) – (FOR CLASSROOM INSTRUCTION PURPOSES) .............................................................................................................. 186 CHAPTER 11: THEORY OF ACCOUNTS REVIEWER........................................ 187 CHAPTER 11 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS. .188 4Chapter 1 Overview of Accounting Chapter 1: Theory of Accounts Reviewer Definition of Accounting 1.Accounting has been given various definitions, which of the following is not one of those definitions a.Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. b.Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part of at least, of a financial character and interpreting the results thereof. c.Accounting is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users. d.Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by users of information. 2.It is the first process used in accounting. It refers to the identification of events as to whether they are recognized or not in the financial statements. a. Identifying b. Measuring c. Communicating d. Auditing 3.The following statements correctly refer to the accounting process. I.Measuring is the accounting process of analyzing business activities as to whether or not they will be recognized in the books. II.Recognition refers to the process of including the effects of an event in the totals of the statement of financial position or the statement of profit or loss and other comprehensive income through memo entries. III.Disclosure of events in the notes to financial statement without including in the totals of the statement of financial position or statement of profit or loss and other comprehensive income is not an application of the recognition principle. IV .An accountable event is an event that has an effect on the assets, liabilities or equity of an entity and its effect can be measured reliably. V.Sociological and psychological matters are within the scope of accounting. a. I, II, III, IV , V b. I, II, III, IV c. IV d. III, IV Types of Events 4.These events involve changes in the economic resources or obligations of entities involving other entities but do not involve transfers of resources or obligations a. External events c. External events other than transfers b. Non-reciprocal transfers d. Internal events 5.Events involving an entity and an external party. a. External events c. External events other than transfers b. Non-reciprocal transfers d. Internal events 6.Events in which an entity transfers (or receives) economic resources to (from) another entity without directly receiving (or giving) value in exchange. 1a. External events c. External events other than transfers b. Non-reciprocal transfers d. Internal events 7.These events result to a sudden or unanticipated loss from fortuitous events. a. Internal events c. External events other than transfers b. Non-reciprocal transfers d. Casualty 8.Which of the following statements is true? I.Loss from theft should be classified as a nonreciprocal transfer II.Internal events are changes in economic resources by actions of other entities that do not involve transfers of enterprise resources and obligations III.Nonreciprocal transfers involve the transfer of resources in only one direction, either from an entity to other entities or from other entities to the entity. IV .Internal events are sudden, substantial, unanticipated reductions in enterprise resources not caused by other entities V.Fire, earthquake and flood are examples of accountable events classified as internal events. a. I, II, III, V b. I, III, Vc. II, III, IV , Vd. I, III, IV , V 9.All of the following are events considered as exchange or reciprocal transfer, except a.purchase of investment in equity securities b.sale of equipment for non-interest bearing note c.subscription on the entity’s own equity instrument d.exchange of a note payable for an account payable e.borrowing of money from a bank 10.All of the following are events considered as nonreciprocal transfer, except a. declaration of cash dividends c. payment of accounts payable b. declaration of stock dividends d. imposition of fines 11.All of the following are events considered as external events other than transfers, except a. obsolescence c. imposition of fines b. inflation d. vandalism 12.All of the following are events considered as internal events, except a.Transfer of goods from work-in-process to finished goods inventory b.flood, earthquake, fire and other “ Acts of God” c.transformation of biological assets from immature to mature d.vandalism committed by the entity’s employees 13.Which of the following events is considered an internal event? a.sale of inventory on account b.provision of capital by owners c.borrowing of money d.conversion of raw materials into finished goods 14.Which of the following events is considered an external event? a. production c. payment of taxes b. casualty loss d. growth of biological assets 15.Which of the following events is considered an internal event? a. theft c. vandalism 2b. contributions by owners d. degeneration of biological assets 16.Which of the following correctly relates to accountable events? I.An obsolete asset which has no use was received in exchange of an existing asset. This transaction may be classified as an exchange. II.An entity exchanges a non-cash asset for another non-cash asset in an exchange transaction with commercial substance. This is a reciprocal transfer. III.An entity issues its shares of stocks in exchange for a non-cash asset. This is a reciprocal transfer. a. I b. II c. II, IIId. I, II, III 17.An example of income derived from a nonreciprocal transfer is a.compensation received as damages in a successful lawsuit b.appreciation of property c.land acquired from a stockholder as donation d.settlement of a liability at less than its book value (RPCPA) Measuring 18.Asset measurements in conventional financial statements a.are confined to historical cost b.are confined to historical cost and current cost c.reflect several financial attributes d.do not reflect output values (RPCPA) 19.Financial statements are said to be a mixture of fact and opinion. Which of the following items is factual? a. cost of goods sold c. discount on capital stock b. retained earnings d. patent amortization expense (Adapted) 20.On December 31, 200A, Annod Co. decided to end its operations and dispose its assets within three months. At December 31, 200A, the carrying amount of an investment property was less than both its fair value and net realizable value. The fair value is greater than the net realizable value. What is the appropriate measurement basis for the investment property in Annod’s December 31, 200A statement of financial position? a. Historical cost c. Net realizable value b. Fair value d. Current replacement cost Communicating 21.These are the principal means through which an entity communicates its financial information to those outside it. a. managerial reports c. segment reports b. financial statements d. directors’ statements 22.The analytical phase of accounting which significantly portrays the liquidity, solvency, profitability of a business a. interpreting c. summarizing b. recording d. classification (RPCPA) Basic purpose 23.The basic purpose of accounting is 3a.to provide information useful in making economic decisions b.to provide information useful only for investors c.to provide information regarding the economic resources controlled by an entity d.to provide business owners, politicians, and other government officials an opportunity to evade taxes 24.One objective of financial reporting is to provide information useful in assessing the amounts , timing, and uncertainty of future cash flows. In regards to this objective, which of the following is (are) correct? I.The emphasis on “assessing cash flow prospects” means that the cash basis is preferred over the accrual basis of accounting. II.Information based on accrual accounting generally better indicates an entity’s present and continuing ability to generate favorable cash flows than does information limited to the financial effects of cash receipts and payments. a. I only b. II only c. I and IId. neither I nor II 25.The primary objective of financial reporting is to provide information: a.About a firm's financing and investing activities b.About a firm's economic resources and obligations c.About a firm's products and services d.Useful in predicting cash flows (Adapted) 26.Financial accounting applies to which of the following: a. Businesses c. Governments b. Non-profit organizations d. All of these (Adapted) 27.Stewardship reporting focuses on: a.Showing investors what sales revenues were b.Showing the financial statement reader just how the resources entrusted to the management's care were managed c.Showing employees how high their raises will be d.Showing the financial statement reader how many shop stewards are employed (AICPA) 28.The function of measuring and reporting information to absentee investors is called the: a. Accounting function c. Auditing function b. Stewardship function d. Management function (AICPA) 29.The following relate to financial reporting. Choose the correct statement(s). I.Since financial statements are historical, they are of little use in making decisions about the future. II.Financial accounting is based on the presumption that all statement users need the same information. III.Financial accounting is expressly designed to measure directly the value of a business enterprise. a. I, IIIb. II, III c. II only d. None (RPCPA) 30.Financial reporting should provide all of the following information, except 4a.Information that is useful to present and potential investors and creditors and other users in making rational investment , credit, and similar decisions. b.Information that helps present and potential investors, creditors, and other users assess the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. c.Information that is comprehensible only to accountants and auditors who have reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. d.Information that clearly portrays the economic resources of an enterprise, the claims to those resources and the effects of transactions, events, and circumstances that change its resources and claims to those resources. 31.Apart from the monetary impact, factors of decision making include: a. personal taste c. environmental factors b. social factors d. all of these (Adapted) 32.For the purpose of decision making: a.accounting information provides information about future events b.accounting information provides information about the outcomes of past decisions c.the future is used as a guide to past estimates d.the accountant never becomes involved in the budgeting process. (Adapted) Economic entities and activities 33.A business that operates to support a cause or interest is known as a a. not-for-profit organization c. career goal b. sports franchise d. private entity 34.The most common form of business organization is a a. corporation c. sole proprietorship b. partnership d. cell phone stand (Adapted) 35.Which of the following statements are correct? I.The economic activities of a business enterprise increase or decrease its assets and liabilities but never its equity. II.An internal event involves a transfer or exchange between two or more entities. III.Exchange is an economic activity which involves trading resources and obligations for other resources or obligations. IV .Income recognition is a basic economic activity which involves the process of allocating rights to the use of outputs among individuals and groups in society. V.An event generally is the source or cause of changes in assets, liabilities, and equity. VI.Investment is the process of using current inputs to increase the stock of resources available for future output as opposed to immediately consumable output. a. III, IV , Vb. I, II, III, V , VI c. III, V, VI d. II, III, VI (RPCPA) 536.Which of the following statements correctly refer to the basic economic activities? I.Production is the process of converting economic resources into outputs of goods and services that are intended to have greater utility than the required inputs. II.Exchange is the process of trading resources or obligations for other resources or obligations. III.Consumption is the process of allocating rights to the use of output among individuals and groups in society. IV .Income distribution is the process of using the final output of the production process. V.Savings is the process of using current inputs to increase the stock of resources available for output as opposed to immediately consumable output. VI.Investment is the process by which individuals and groups set aside rights to present consumption in exchange for rights to future consumption. a. I, II c. I, II, V , VI b. I, II, III, IV d. I, II, III, IV , V , VI (RPCPA) 37.Whether a business is successful and thrives is determined by a. markets. b. free enterprise. c. competition d. all of these (AICPA) 38.An effective capital allocation process a.promotes productivity. b.encourages innovation. c.provides an efficient market for buying and selling securities. d.all of these. (AICPA) 39.A business that operates to earn money for its owners is called a(n) a. economic entity c. professional organization b. for-profit business d. owner financed business (Adapted) 40.A free enterprise system allows businesses to a.have their government choose their products b.produce the goods and services they choose c.buy goods at a discount d.operate at a profit (Adapted) 41. One of the disadvantages of a sole proprietorship is a. all the profits go to the owner c. the owner has all the risks b. there are no lunch breaks d. there are few regulations to follow (Adapted) 42.A corporation is a business organization that is recognized by law to a. pay no tax c. have an active social life b. have a life of its own d. have at least 3 owners (Adapted) 43.Those who transform ideas for products or services into real-world businesses are known as a. profit takers b. accountants c. entrepreneurs d. organizers 6(Adapted) 44.A business owned by two or more people is called a. a corporation c. a partnership b. looking for trouble d. venture capital (Adapted) 45.A merchandising business a. b. c. d.buys raw materials and transforms them into finished products buys finished products and resells them provides a service for a fee all of the above (Adapted) 46.Economic resources are the scarce means available for carrying on economic activities. The economic resources of a business enterprises are: a. productive resources b. products c. money d. all of these (RPCPA) 47.Which of the following is not among the economic resources of a business enterprise? a.money b.products or output of the enterprise c.obligations to pay money d.ownership interest in other enterprises (RPCPA) 48.It does not truly describe “economic value” as an element of economic resources a. value in exchange c. utility b. over supply of resources d. scarcity (RPCPA) Accounting information 49.Which of the following statements is correct? I.Accounting provides qualitative information, financial information, and quantitative information. II.Qualitative information is found in the notes to the financial statements only. III.Accounting is considered an art because it is supported by an organized body of knowledge IV .Accounting is considered a science because it involves the exercise of skill and judgment. V.Measurement is the process of assigning numbers to objects such inventories or plant assets and to events such as purchases or sales. VI.All quantitative information are also financial in nature. VII.The accounting process of assigning peso amounts or numbers to relevant objects and events is known as Identification. a. I, V b. I, II, VI, V c. I, II, III, IV , V d. II, VI, V (RPCPA) 50.Which of the following statements is incorrect? I.The information contained in the financial statements is obtained exclusively from the firm’s accounting records. II.Financial accounting is a science rather than an art while management accounting is an art rather than a science. 7III.Management decisions are oriented to the future whereas the decisions of external users are oriented to the past. IV .Financial accounting is a branch of accounting which deals primarily with the common needs of users while management accounting is a branch of accounting which deals primarily with the specific needs of users. V.Quantitative information is always more useful than non-quantitative information for the purpose of making economic decisions. VI.Financial statements are only one source of information needed by users to make rational economic decisions. VII.Financial statements have the same basic purpose as financial accounting. VIII.Financial statements are the only source of information needed by users to make rational economic decisions. a. IV , VII, VIII b. I, II, III, V , VIII c. IV , VI, VIId. I, II, III, V , VI, VII (RPCPA) 51.The manner in which the accounting records are organized and employed within a business is referred to as a. Accounting system c. Voucher system b. Business document d. Special journals (RPCPA) 52.Accounting is often called the "language of business" because a.it is easy to understand b.it is fundamental to the communication of financial information c.all business owners have a good understanding of accounting principles d.accountants in many companies share financial information (RPCPA) 53.Accounting as an art involves the considerable use of judgment. Accountants should exercise creative and critical thinking in solving accounting problems. In solving accounting problems, this involves the use of imagination and insight by finding new relationships (ideas) among items of information. It is most important in identifying alternative solutions. a.Creative thinking c.Professional Skepticism b.Critical thinking d.Wishful thinking 54.Creative skills and judgment is usually exercised in problem solving. State the correct order of the following steps in problem solving. I.Selecting a solution from among the alternatives II.Identifying alternative solutions III.Recognizing a problem IV .Implementing the solution V.Evaluating the alternatives a. III, II, IV , V , I b. I, II, III, V, IV c. III, II, V , I, IV d. I, II, III, VI, V (RPCPA) 55.Critical thinking is most important in which of the following problem-solving steps? a.Recognizing a problem b.Identifying alternative solutions c.Evaluating the alternatives d.Selecting a solution from among the alternatives (Adapted) 8Basic Accounting Concepts 56.Which of the following statements is incorrect regarding accounting concepts? a.Under the Accrual Basis of accounting, revenues are recognized when earned and expenses are recognized when incurred, not when cash is received and disbursed. b.Under the Going concern concept, the business entity is assumed to carry on its operations for an indefinite period of time. c.Under the Business entity/ Separate entity/ Entity/ Accounting entity Concept, the business is treated separately from its owners. d.Under the Time Period/ Periodicity/ Accounting Period concept, the life of the business is divided into series of reporting periods. e.Under the Cost-benefit concept, the cost of processing and communicating information should exceed the benefits derived from it. 57.Which of the following statements is incorrect regarding accounting concepts? a.Under the Materiality concept, items deemed material and affect decision making should be separately disclosed. b.Underlying assumptions are those that are mentioned in the Conceptual Framework; Implicit assumptions are those that are not mentioned in the Conceptual Framework; Pervasive concepts are those that affect virtually all financial statement elements and all aspects of accounting. c.Under the Cost/ Historical cost concept, the value of an asset is to be determined on the basis of acquisition cost. d.The Concept of Articulation states that all the components of a complete set of financial statement are interrelated. e.Under the Matching concept, revenues are matched with expenses in order to properly determine the profit for a period. 58.Accrual accounting techniques are used to: a.assign revenues and expenses to the appropriate accounting period. b.record the anticipated effects of actions that may occur at a future date. c.report the results of actions whose monetary effects are difficult to estimate. d.allocate nonoperating revenues and expenses to the appropriate business unit. (Adapted) 59.Accrual accounting is used because a.cash flows are considered less important. b.it provides a better indication of ability to generate cash flows than the cash basis. c.it recognizes revenues when cash is received and expenses when cash is paid. d.none of the above. (Adapted) 60.The going concern assumption is also called a. Periodicity b. Entity c. Business continuity d. Entity 61.The valuation of an assurance to receive cash in the future at present value on a business entity’s financial statements is well-founded because of the accounting concept of: a. Entity b. Going concern c. Materiality d. Neutrality (RPCPA) 962.Business entity produces financial statements at arbitrary points in time in accordance with which basic accounting concept? a. objectivity b. periodicity c. conservatism d. matching (RPCPA) 63.Treating partners’ salaries as an expense rather than as a means of allocating partnership profits is an application of what theory? a. proprietary theory c. residual equity theory b. entity theory d. funds theory (RPCPA) 64.Mr. Van owns a butcher shop, a restaurant, and a catering business. Separate financial statements are prepared for each business independent of the other businesses. What accounting principle or assumption is being applied in this situation? a. Time period assumption c. Full-disclosure principle b. Separate entity assumption d. Unit-of-measure assumption (CGA) 65.Which of the following correctly relate to the Monetary/ Stable monetary/ Monetary Unit concept? I.Assets, liabilities, equity, revenues and expenses should be stated in terms of a unit of measure which is the peso in the Philippines II.The purchasing power of the peso is stable or constant and that its instability is insignificant and therefore ignored. a. Ib. IIc. I and II d. None 66.An accounting (financial reporting) period may be a. One month b. One quarter c. One year d. a, b or c 67.Which of the following statements best reflects the accounting assumption of periodicity or time period? I.A fiscal year begins in any month and ends in any month but covers a period of 12 months II.A calendar year begins on any month and ends on any month but covers a period of 12 months III.Technically, an accounting year is synonymous with an accounting period. IV .Accounting periods are usually equal in length. a. I, II, III, IV b. I, IVc. I, III, IV d. II, III, IV 68.Which of the following best reflect(s) the reason(s) why companies select accounting periods other than a calendar year? a.to avoid closing books during peak sales period b.to close the books at a time when inventories and business activity are lowest c.to conform to auditors’ request in order to reduce audit efforts and cost of counting inventories d.a and b 69.Most listed corporations in the Philippines have which type of accounting year? a. fiscal year b. calendar year c. quarterly d. indeterminate 70.For a fiscal year ending April 30, 20x2, the period covered by the statement of profit or loss and other comprehensive income is a. April 1, 20x2 to April 30, 20x2 c. May 1, 20x1 to April 30, 20x2 10b. April 1, 20x1 to April 30, 20x2 d. April 30, 20x1 to April 30, 20x2 71.An entity uses calendar year as its accounting period. The statement of financial position prepared on December 31, 20x2 covers the period a.December 31, 20x1 to December 31, 20x2 b.January 1, 20x1 to December 31, 20x2 c.January 1, 20x2 to December 31, 20x2 d.From business’ inception up to December 31, 20x2 72.Which of the following statements is incorrect regarding the basic accounting concepts? a.Under the Consistency concept, the financial statements should be prepared on the basis of accounting principles which are followed consistently. b.Under the Entity theory, the accounting objective is geared toward proper income determination. Proper matching of cost against revenue is the ultimate end. Entity theory emphasizes the income statement. This is explained by the equation Assets = Liabilities + Capital. c.Under the Proprietary theory the accounting objective is directed toward proper valuation of assets. This theory emphasizes the importance of the balance sheet. It is exemplified by the equation Assets – Liabilities = Capital. d.Under the Fund theory, the accounting objective is neither proper income determination nor proper valuation of assets but the custody and administration of funds. The objective is directed toward cash flows exemplified by the formula “cash inflows minus cash outflows equals fund.” Government accounting and fiduciary accounting are examples of the application of this concept. e.Under the Residual equity theory, the accounting objective is proper valuation of assets. This is applicable when there are two classes of stockholders, common and preferred. Thus, the equation is Assets – Liabilities + Preference Shareholders’ Equity = Ordinary Shareholders’ Equity. 73.Which of the following statements correctly relate to the basic features of financial accounting? I.The going concern assumption is necessary for asset valuation at historical cost to have meaning. II.Inexact information always makes financial statements useless for decision making. III.Under the residual equity theory, preference share equity is deducted from total equity to arrive at ordinary share equity. IV .Materiality is always a quantitative as opposed to a qualitative concept. a.I, III, IVb.I, II, IVc.I, IIId.I, II 74.The Full Disclosure Principle recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade- offs. The trade-offs strive for I.Sufficient detail to disclose matters that make a difference to users II.Sufficient condensation to make the information understandable, keeping in mind costs of preparing and using it a. I b. II c. I and II d. None 75.A concept that states that all the components of a complete set of financial statement are interrelated a. entity c. concept of articulation 11b. accounting process d. principle of fair presentation 76.Which of the following statements are correctly stated? I.Under the entity theory, the major accounting effort is accounting effort is directed toward proper valuation of assets rather income determination. What is more important is the valuation of assets because owners are interested in the real worth of their investment. This is expressed in accounting equation “assets - liabilities = capital”. II.One of the basic features of financial accounting is the direct measurement of economic resources and obligations and changes in them in terms of money and sociological and psychological impact. III.The accounting process consists of two inter-related parts – the recording phase and the summarizing phase. The preparation of a trial balance is a step under the recording phase. IV .Financial accounting measurements are primarily based on prices at which economic resources and obligations are exchanged. V.Owners’ equity is the excess of an enterprise’s assets over its liabilities. VI.The financial position and results of operations of an entity are not fundamentally related. a. I, IV , Vb. IV , Vc. I, III, IV , V d. III, IV , V , VI 77.Application of the full disclosure principle a.Is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits. b.Is violated when important financial information is buried in the notes to the financial statements. c.Is demonstrated by providing additional information whenever this information is deemed relevant to the understanding of the financial statements. d.Requires that the financial statements be consistent and comparable. 78.While making a delivery, the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury. The party sued Fastrac for damages which could exceed Fastrac's insurance coverage. Existence of the lawsuit was reported in the notes to Fastrac's financial statements. What accounting principle, assumption or constraint is being applied in this situation? a. Full-disclosure principle c. Matching principle b. Conservatism constraint d. Unit-of-measure assumption (CGA) 79.What does the full disclosure principle require? a.All relevant information to be disclosed in the financial statements b.All relevant information to be disclosed in the financial statements and the notes accompanying the financial statements c.Sufficient information to be disclosed so that the financial statements are not misleading d.Sufficient information to be disclosed so that the financial statements may be used for investment and credit granting decisions (CGA) 80.Which accounting principle charges low-cost capital items such as waste baskets directly to an expense? a. historical cost b. materiality c. expense recognition d. matching (CGA) 1281.The process of converting non-cash resources and rights into cash or equivalent claims to cash is called a. Realization b. Allocation c. Recognition d. Disposition (RPCPA) 82.The body of rules that dictates that the entire profit must be recognized at the moment and in the period of sale is called: a. cost convention c. realization convention b. going concern convent d. conservatism (RPCPA) 83.Which statements correctly refer to the basic principles used in accounting? a.The personal assets of the owner of a company will not appear on the company's balance sheet because of the principle of conservatism. b.The growing concern principle/guideline is associated with the assumption that the company will continue on long enough to carry out its objectives. c.An instance of application of the conservatism principle is when a very large corporation's financial statements have the peso amounts rounded to the nearest P1,000. d.In applying the matching principle, income is not recognized if the related expense cannot be determined reliably. 84.Which principle/guideline requires a company's balance sheet to report its land at the amount the company paid to acquire the land, even if the land could be sold today at a significantly higher amount? a. Conservatism b. Economic entity c. Monetary unit d. Cost (RPCPA) 85.During the lifetime of an entity accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? a. Objectivity b. Periodicity c. Conservatism d. Matching (RPCPA) 86.Which principle/guideline allows a company to ignore the change in the purchasing power of the peso over time? a. Costb. Economic entity c. Monetary unit d. Timeliness 87.Which principle/guideline requires the company's financial statements to have footnotes containing information that is important to users of the financial statements? a. Conservatism b. Economic entity c. Full disclosure d. Neutrality (RPCPA) 88.Public utilities' balance sheets list the plant assets before the current assets. This is acceptable under which accounting principle/guideline? a. Conservatism c. Industry practices b. Cost d. This is not acceptable (RPCPA) 89.A large company purchases a P2,000 digital camera and expenses it immediately instead of recording it as an asset and depreciating it over its useful life. This practice may be acceptable because of which principle/guideline? a. Costb. Matching c. Materiality d. Conservatism 1390.Uncertainty and risk inherent in business situations should be adequately considered in financial reporting. This statement is an example of the concept of a. disclosure b. conservatism c. completeness d. neutrality (RPCPA) 91.Revenue generally may be recognized when: (Item #1) The earning process is complete; (Item #2) An exchange has taken place a. yes, no b. no, yes c. no, nod. yes, yes (RPCPA) 92.Which of the following statements is correctly stated? I.Effects of the events on the financial position of the enterprise are measured and represented by money amounts. II.The consistency principles refer to the use of original historical cost in the matching process. III.An accrued expense can best be described as an amount not paid but currently matched with earnings. IV .Generally, revenues should be recognized at a point when an order for a definite amount of merchandise has been received for shipment. V.Accounting process is governed by generally accepted principles which reflect the objectives and the basic features of financial accounting. a. I, III, V b. I, II, III, IV , V c. I, III, IV , V d. I, II, III, V (RPCPA) 93.Under what principle when revenue is generally recognized and when the earning process is virtually complete and an exchange has taken place a. consistency b. maturingc. realizationd. conservatism (RPCPA) 94.The accounting objective or theory that is directed towards proper valuation of assets a. Entity theory c. Funds theory b. Residual equity theory d. Proprietary theory (RPCPA) 95.A theory in financial accounting which is exemplified in the equation “Assets - Liabilities = Capital.” a. proprietary theory c. residual equity theory b. entity theory d. fund theory (RPCPA) 96.The following statements relate to the standard of adequate disclosure: I.In complying with the standard of adequate disclosure, accountants are guided by the doctrine that more information is always better than less. II.Financial accounting information that meets the qualitative objectives of financial accounting also meets the reporting standard of adequate disclosure. III.Adequate disclosure is concerned not only with the kind of information contained in financial statements but also with the manner in which that information is presented. IV .The disclosure standard calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader of the statements. 14State whether the foregoing statements are false: a. all of the statements are false c. only two statements are false b. only one statement is false d. three statements are false (RPCPA) 97.It is the exercise of care and caution in dealing with uncertainties in measurement so as not to overstate assets and income and not understate liabilities and expenses. a. Completeness b. Prudence c. Faithful representation d. Neutrality 98.The general tendency toward early recognition of unfavorable events and minimization of the amount of net assets and net income is called: a. conservatism b. consistency c. neutralityd. verifiability 99.When uncertainty exists, the convention of conservatism uses estimates of a conservative nature in an attempt to ensure which of the following? a.Assets, revenues, liabilities, and expenses are not overstated b.Assets, revenues, liabilities, and expenses are not understated c.Assets and revenues are not understated; liabilities and expenses are not overstated d.Assets and revenues are not overstated; liabilities and expenses are not understated (CGA) Branches of Accounting 100.The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called a. financial accounting c. tax accounting b. managerial accounting d. auditing (AICPA) 101.A city taxes merchants for various central district improvements. Which of the following accounting methods assist(s) in assuring that these revenues are expended legally? (Item #1) Fund accounting; (Item #2) Budgetary accounting a. Yes, No b. No, Yes c. No, No d. Yes, Yes (AICPA) 102.Which of the following correctly refer to the various branches of accounting? I.Government accounting deals with accounting for the national government and its instrumentalities, focusing attention on the custody of public funds and the purpose or purposes to which such funds are committed. II.Institutional accounting deals with handling of accounts managed by a person entrusted with the custody and management of property for the benefit of another. III.Estate accounting deals with the handling of accounts for fiduciaries who wind up the affairs of a deceased person. IV .Social responsibility accounting is the process of measuring and disclosing the performance of firm in terms of community involvement and related criteria. V.Accounting Systems deals with the installation of accounting procedures for the accumulation of financial data; includes designing of accounting forms to be used in data gathering. 15VI.Cost accounting is the systematic recording and analysis of the costs of material, labor, and overhead incident to production. VII.Fiduciary accounting is the accounting for not-for-profit entities other than the government. a. I, II, III, IV , V , VI, VII c. I, III, IV , V , VI, VII b. I, II, IV , V , VI, VII d. I, III, IV , V , VI 103.Which of the following is not a characteristic of management accounting ? a.The level of detail is greater than financial accounting. b.It must be in compliance with the IFRSs. c.There is one primary user group. d.It deals primarily with segments of an organization. (AICPA) 104.Which of the following statements correctly refer to financial reporting and accounting? I.Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization's operations. II.Financial statements are the principal means through which financial information is communicated to those inside an enterprise. III.Users of the financial information provided by an entity use that information to make capital allocation decisions. IV .While objectives for financial reporting exist on an informal basis, no formal objectives have been adopted. V.Financial reports in the early 21st century did not provide any information about a company’s soft assets. a. I, II, III, IV , V b. II, III, IV , V c. III, IV , V d. III 105.General-purpose financial statements are the products of a.financial accounting b.managerial accounting. c.both financial and managerial accounting. d.neither financial nor managerial accounting. (Adapted) 106.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 members of society as consumers. d.an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries. (AICPA) 107.Financial statements in the early 2000s provide information related to a.non-financial measurements. b.forward-looking data. c.hard assets (inventory and plant assets). d.none of these. (Adapted) 108.Which of the following statements is not an objective of financial reporting? 16a.Provide information that is useful in investment and credit decisions. b.Provide information about enterprise resources, claims to those resources, and changes to them. c.Provide information on the liquidation value of an enterprise. d.Provide information that is useful in assessing cash flow prospects. (Adapted) 109.One objective of financial reporting is to provide a.information about the investors in the business entity. b.information about the liquidation values of the resources held by the enterprise. c.information that is useful in assessing cash flow prospects. d.information that will attract new investors. (Adapted) 110.Which of the following is true regarding the comparison of managerial to financial accounting? a.Managerial accounting is generally more precise. b.Managerial accounting has a past focus and financial accounting has a future focus. c.The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness. d.Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them. (AICPA) 111.Which of the following statements correctly relates to financial reporting? a.Accounting standards are now less likely to require the recording or disclosure of fair value information due to its inherent subjectivity. b.One weakness of accrual accounting is that it does not provide a good indication of the enterprise's present and continuing ability to generate favorable cash flows. c.Some generally accepted accounting principles have simply been accepted as appropriate because of their universal application rather than due to the action of an authoritative accounting rule-making body. d.Accounting standards are a product of careful logic or empirical findings and are not influenced by political action. (Adapted) 112.Which of the following incorrectly relates to financial reporting? a.An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit. b.Users of financial accounting statements have both coinciding and conflicting needs for information of various types. c.The expectations gap is caused by what the public thinks accountants should be doing and what accountants think they can do. d.Ethical issues in financial accounting in the Philippines are governed by the FRSC. (Adapted) 113.Electronic data processing is a.act of preparing a program defined as the complete plan for the solution of a problem 17b.system of processing data performed by mechanical equipment such as general office machines to increase speed and accuracy of data processing operations c.the systematization of processing operations in a manner that will provide a rapid and uninterrupted flow of all information needed in the conduct of the business d.a system of accumulating, assembling and recasting transactions by the use of electronic devices with the object of recording, analyzing and reporting their output data (RPCPA) 114.The end product of the financial accounting process a. financial statement b. audit report c. ledger d. T-account (RPCPA) 115.Which of the following statements is correct? a.Accounting and bookkeeping are synonyms. b.The process of providing financial information to external decision makers is referred to as managerial accounting. c.Financial statements generally include all the balance sheet, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, notes, and the corporate income tax return. d.Financial accounting applies to both business and non-business organizations. Practice of Accounting 116.The law that regulates the practice of accounting in the Philippines is the Philippine Accountancy Act of 2004 also known as a. R.A. No. 9298 c. R.A. No. 8299 b. R.A. No. 9892 d. R.A. Blg. 69 117.The professional regulatory board created under Republic Act No. 9298 tasked with the supervision of the registration, licensure and practice of accountancy in the Philippines . a. PRC b. BOA c. PICPA d. FRSC 118.The Board of Accountancy (BOA) shall be composed of a.Six (6) members with a chairman for a total of six (6) individuals b.chairman and six (6) members for a total of seven (7) individuals c.chairman and fifteen (15) members d.chairman and seventeen (17) members 119.The Commission upon the recommendation of the Board shall within ninety (90) days from the effectivity of the IRR, create an accounting standard setting body to be known as the a.Financial Reporting Standards Council b.Financial Reporting Standards Committee c.Accounting Standards Committee d.Financial Reporting Standards Board 120.FRSC shall be composed of a.Fifteen members and a Chairman b.Fourteen members with a Chairman c.Fourteen members and a Chairman d.Eight members and a Chairman 18121.All of the following are represented in the FRSC, except a.Board of Accountancy (1) b.Securities an d Exchange Commission (1) c.Bangko Sentral ng Pilipinas (1) d.Bureau of Internal Revenue (1) e.An association or organization of CPAs in active public practice of accountancy (1) f.None, all of the above are represented in the FRSC 122.One of the following is not a member of the Financial Reporting Standards Council. a.Philippine Institute of Certified Auditors b.Commission on Audit c.Bangko Sentral ng Pilipinas d.Securities and Exchange Commission 123.The integrated national professional organization of Certified Public Accountants accredited by the Board and the Commission. a.Accredited National Professional Organization of Certified Public Accountants or APO b.Federation of Certified Public Accountants c.Philippine Institute of Certified Public Auditors d.Accredited National Professional Accountants 124.The Accredited National Professional Organization of Certified Public Accountants or APO in the Philippines is a.Philippine Institute of Certified Public Auditors b.Association of Certified Public Accountants in Commerce and Industry c.Philippine Institute of Certified Public Accountants d.Association of Certified Public Accountants in Education 125.An accountant employed in a government agency is considered to be in the a. Practice of Public Accountancy c. Practice in Education/Academe b. Practice in Commerce and Industry d. Practice in the Government 126.The role of the Securities 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. (Adapted) 127.Corporations are required to submit their financial statements to the a. FRSC b. BOA c. COA d. SEC 128.Which of the following is not among the Four Sectors in the practice of accountancy as enumerated in R.A. 9298 also known as the “Philippine Accountancy Act of 2004”? a. Practice in Commerce and Industry c. Practice in the Government b. Practice in Education/Academe d. Practice in Private Accounting 129.Most accounting positions within an organization have primarily a. line authority c. staff authority b. line and staff authority d. financial authority 19(RPCPA) 130.Which of the following statements are correct? I.The first step in problem solving in accounting is to analyze the consequences of different alternatives. II.Resources are traded in the marketplace at a price because they are in limited or scarce supply. III.An internal transaction is an economic event which occurs between one entity and another entity. IV .Public accountants in the Philippines are found in the public service serving local and national government bodies. V.Establishing goals, gathering information on alternatives, determining the consequences of alternatives, and choosing a course of action involve estimates of future events. VI.A major focus of accounting information is on actual, historical financial events. Therefore, recording financial transactions of an entity is of no use in establishing future relationships. a. I, II, V b. II, V c. II, V , VI d. I, II, IV , V , VI (Adapted) Accounting standards 131.Issuing of accounting standards is the responsibility of the a. PICPA b. FRSC c. AASC d. CPE Council 132.A common set of accounting standards and procedures are called a.financial account standards b.generally accepted accounting principles c.objectives of financial reporting d.statements of financial accounting concepts (RPCPA) 133.Accounting principles are "generally accepted" only when a.an authoritative accounting rule-making body has established it in an official pronouncement. b.it has been accepted as appropriate because of its universal application. c.both a and b. d.neither a nor b. (RPCPA) 134.Generally accepted accounting principles a.include detailed practices and procedures as well as broad guidelines of general application. b.are influenced by pronouncements of the SEC and Regulatory Accounting Principles c.change over time as the nature of the business environment changes. d.all of these. (Adapted) 135.Choose the correct statement about generally accepted accounting principles (GAAP) a.They are laws b.The Bureau of Internal Revenue enforces GAAP c.Firms that do not comply with GAAP may suffer negative economic consequences. d.GAAP in the Philippines is represented by PSAs 20(RPCPA) 136.Accounting concepts are not derived from a. Inductive reasoning c. Pragmatism b. Experience d. Laws of nature (Adapted) 137.Generally accepted accounting principles in the Philippines are represented by a. PASs b. PSAs c. PFRSs d. SFASs 138.Philippine Financial Reporting Standards (PFRSs) comprise: I.Philippine Financial Reporting Standards II.Philippine Accounting Standards III.Interpretations adopted by the Philippine Interpretations Committee (PIC) IV .Accounting Practice Statements and Implementation Guidance a. I, II, IIIb. I, II, III, IV c. I and II d. I and III 139.The Philippine Financial Reporting Standards (PFRSs) are standards adopted by the a.Accounting Standards Council (ASC) b.Financial Reporting Standards Committee (FRSC) c.Philippine Institute of Certified Public Accountants (PICPA) d.Financial Reporting Standards Council (FRSC) 140.Application and Implementation Guidance included in PFRSs a.forms part of the standards and are in themselves standards b.does not form part of the standards c.may or may not be integral part of the standards d.are useless if the accountant is a CPA 141.When resolving accounting problems not specifically addressed by current standards, an entity should be guided by the hierarchy of reporting standards. The correct sequence of the hierarchy of reporting standards in the Philippines is I.PASs, PFRSs and Interpretations II.Conceptual Framework III.Judgment a. I, III, IIb. I, II, III c. II, I, III d. I, II 142.In the absence of a GAAP addressing a particular transaction a.Management may use its judgment in developing a relevant and reliable accounting policy b.Management should consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices c.The entity should refer to the Conceptual Framework. d.The entity should refer to its External Auditor. 143.The argument that practicing accountants are familiar with the significance of various accounting problems and the feasibility of alternative solutions is an argument for establishing generally accepted accounting principles through a. a free-market approach c. government regulation 21