CRC-ACE REVIEW SCHOOL

The Professional CPA Review School

735-9031 / 735-8901
FINANCIAL ACCOUNTING THEORY OCTOBER 2007 BATCH
SECOND PRE-BOARD EXAMINATIONS AUG 18, 2007; 7:30
9:00AM
INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for
each item by writing a VERTICAL LINE corresponding to the letter of your choice on the answer sheet
provided. STRICTLY NO ERASURES ALLOWED. Use Pencil No. 1 or No. 2 only.
1. According PAS 1 2005, the overall principles of financial statements preparation include the
following except that
a. There should be an explicit statement that all the applicable PFRSs and PASs were
appropriately applied in the preparation of the financial statements.
b. Management should select and apply accounting policies that are in conformity with ASC
standards
c. There is no instance when offsetting is allowed in the presentation of financial information.
d. Financial statements should be prepared on a going concern basis.
2. External financial statements, according to FRSC Framework for the Preparation and Presentation
of Financial Statements, should provide all of the following information except:
a. Information that is useful to present and potential investors and creditors and other users in
making rational investment, credit and other decisions.
b. Information that is comprehensible to those who have a reasonable understanding of business
and economic activities and are willing to study information with reasonable diligence.
c. Information for planning the future of the entity, implementing those plans, and for controlling
daily operations.
d. Information to help present and potential investors and creditors and other users in assessing the
amounts, timing and uncertainty of prospective cash receipts.
3. Which is incorrect concerning financial statements?
a. The Board of Directors, in discharging its responsibilities, reviews and approves the financial
statements before these are submitted to the stockholders of the enterprise.
b. Comparative information should not be disclosed in respect of the previous period for all
numerical and non-quantitative information in the financial statements.
c. Additional line items, headings, and subtotals should be presented on the face of the balance
sheet when such is needed to present fairly the enterprises financial position
d. When financial statements are not presented on a going concern basis, such fact must be
disclosed.
4. Which information is normally not included in the notes to financial statements of a reporting entity?
a. A statement of compliance with PFRS and PAS
b. A statement of measurement basis for the financial statements and accounting policies applied
c. Supporting information for line items presented and aggregated
d. A statement of cash inflows and outflows from operating, financing and investing activities
5. Which of the following information is not a specifically required disclosure of PAS 1?
a.. Name of the reporting entity or other means of identification, and any change in that information
from the previous year.
b. Names of major / significant shareholders of the entity
c. Level of rounding used in presenting the financial statements
d. Whether the financial statements cover the individual entity or a going concern.
6. Which one of the following is not required to be presented as minimum line item information on the
face of the balance sheet, according to PAS 1?
a. Investment property c. Biological assets
b. Investment, accounted for under equity method d. Contingent liability
7. Which of the following is not a current asset?
a. A schools Petty cash (undeposited cash)
b. Cash surrender value of life insurance policy where the company is the beneficiary
c. Work in process which will take three years to age before becoming available for sale
d. Short-term investment expected to be realized within one year from the balance sheet date
8. According to PAS 1 (2005), Presentation of Financial Statements, which of the following is not
among the criteria in classifying a liability as current?
a . It is expected to be settled in the entitys normal operating cycle
b. It is due to be settled within twelve months after the balance sheet date
c. The entity has an unconditional right to defer settlement of the liability for at least twelve months
after the balance sheet date
d. It is held primarily for the purpose of being traded
9. When an entity opts to present the income statement classifying expenses by function, which of the
Following is not required to be disclosed as additional information?
a. Depreciation expense c. Directors remuneration
b. Employee benefits expense d. Amortization expense
CRC-ACE/FAT: Second pre-board exams (October 2007 batch) 2

10. As a minimum, PAS 1 (2005) the requires that the face of the balance sheet should include
certain line items. However, additional line items, headings and subtotals should be presented
on the face of the balance sheet
I. When a Statement of Financial Accounting Standards requires it.
II. When such presentation is necessary to present fairly the enterprises financial position
a. Both I and II b. Neither I nor II c. I only d. II only
11. Which of the following is true about the operating cycle concept?
a. It causes the distinction between current and non-current items to depend on whether they will
affect cash within one year.
b. It permits some assets to be classified as current even though they are more than one year removed
from becoming cash
c. It affects the income statement but not the statement of cash flows
d. With the requirement in PAS 1 for an annual reporting period, the operating cycle concept is
rendered obsolete.
12. Entity breaches an undertaking under a long-term loan agreement, on or before balance
sheet date, such liability continues to be classified as non-current if the lender has agreed
a. After balance sheet date, before the FS are authorized for issue, not to demand payment
b. Before balance sheet date, before the FS are authorized for issue, not to demand payment
c. By the balance sheet date, before the FS are authorized for issue, to provide a grace period of at
least twelve months after the balance sheet date
d. After the balance sheet date, after the FS are authorized for issue, to provide a grace period of at
least twelve months after the balance sheet date
13. MYOB Corp. owed the following notes payable, which will mature during the coming year, 2008.
The corporation plans to settle the notes as follows:
Note Payable to A - To be settled by delivery of merchandise to the holder
Note Payable to B - To be settled by giving the creditor their long-term investment in RC
Corporation ordinary shares.
Note Payable to C - Originally long-term, will be refinanced through an agreement signed
on March 31, 2008. MYOB has the discretion to refinance the liability. MYOBs 2007
financial statements were authorized for issue on March 20, 2008, and were submitted
to the audit committee on April 5, 2008.
How should these information be presented in the liabilities section of MYOBs December 31, 2007
balance sheet?
Note Payable to A Note Payable to B Note Payable to C
a. Current Current Current
b. Current Current Non-current
c. Current Non-current Current
d. Current Non-current Non-current
14. Per PAS No.1 Presentation of FS, in the absence of a Standard or Interpretation that specifically
applies to a transaction or event, management shall develop and apply accounting policy that results in
relevant and reliable information. Which of following is the least likely source of such alternative?
a. The requirements and guidance on Standards /Interpretations on similar and related issues
b. The definition, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Framework.
c. Most recent pronouncements of other standard setting bodies that use a similar conceptual
framework framework to develop accounting standards and accepted practice.
d. Textbooks and other accounting literature to the extent that these do not conflict with existing
Standards and Interpretations
15. An entity (other than a financial institution) receives dividends from its investment in shares. How
should it disclose the dividends received in the cash flow statement prepared under PAS 7?
a.. Operating cash inflow
b. Either as operating cash inflow or as investing cash inflow
c. Either as operating cash inflow or as financing cash inflow
d. As an adjustment in the operating activities section of the cash flow because it is included in the
net income for the year as a cash inflow in the financing activities section of the cash flow
statement.
16. An entity purchases a building and the seller accepts payment partly in equity shares and partly in
debentures of the entity. This transaction should be treated in the cash flow statement as follows:
a. The purchase of the building should be investing cash outflow and the issuance of shares and the
debentures financing cash outflows.
b.. The purchase of the building should be investing cash outflow and the issuance of debentures
financing cash outflows while the issuance of shares investing cash outflow.
c. This does not belong in a cash flow statement and should be disclosed only in the notes to the
financial statements.
d. Ignore the transaction totally since it is a non-cash transaction. No mention is required in either the
cash flow statement or anywhere else in the financial statements
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17. Which of the following is not a negative element under the Property, Plant and Equipment
classification?
a. Accumulated depletion of a mineral-bearing property
b. Accumulated depreciation of paved parking-lot
c. Accumulated depreciation and impairment of building
d. Reserve for Building Expansion
18. Donna Company purchased a 3-month BSP treasury bill. Donnas policy is to treat as cash
equivalent all highly liquid investments with an original maturity of 3 months or less when
purchased. How should this purchase be reported in Dons statement of cash flows?
a. As an outflow from operating activities c. As an outflow from financing activities
b. As an outflow from investing activities d. Not reported
19. Eula Company owns 2% of Powers Retailers. A property dividend distributed by Powers
consisted of merchandise with a fair value lower than the listed retail price. Eula in turn, gave the
merchandise to its employees as a holiday bonus. How should Eula report the receipt and
distribution of the merchandise in its cash flow statement?
a. As both an inflow and outflow for operating activities
b. As both an inflow and outflow for investing activities
c. As an inflow for investing activities and outflow for operating activities
d. As a non-cash activity
20. Bankard, Inc. a credit card company, has gross receipts of P 10 M and gross payments of P 6 M
arising out of its credit card transactions. Jaka Corporation, a large-scale manufacturing company
with several branches all over Luzon has gross receipts from sales of P 50 M and gross
disbursements on trade payables of P 42 M. Under present GAAP, which of these companies can
show their receipts and disbursements at net , in its statement of cash flows?
a. Bankard, Inc. only c. Both Bankard Inc, and Jaka Corporation
b. Jaka Corporation only d. Neither Bankard Inc., nor Jaka Corporation
21. Which information is normally not included in the notes to financial statements of a reporting entity?
a. A statement of compliance with PFRS and PAS
b. A statement of measurement basis for the financial statements and accounting policies applied
c. Supporting information for line items presented and aggregated
d. A statement of cash inflows and outflows from operating, financing and investing activities
22. How should repayment of a long-term comprising repayment of the principal amount and interest due
to date on the loan be treated in a cash flow statement?
a. The repayment of the principal portion of the loan is a cash flow belonging in the investing
activities section; the interest payment belongs either in the operating activities section or the
financing activities section
b. The repayment of the principal portion of the loan is a cash flow shown in the investing
activities section or the investing activities section
c. The repayment of the principal portion of the loan is a cash flow shown in the investing
activities section; the interest payment should be netted against interest received on bank
deposits and the net amount of interest is disclosed in the operating activities section.

23. Which of the following statements regarding the income statement is correct?
a. The balance sheet and the income statement are related in the sense that the contents of the income
statement are results of the movement of the assets, liabilities and equity accounts.
b. If an enterprise prepares its income statement using the function of expense method, it should
include in its disclosures a schedule of expenses classified according to nature.
c. The income statement describes the total change in owners equity during the period
d. The income statement reveals the net earnings of the enterprise for a given date.
24. An indirect approach of measuring income is
a. Transactions approach b. Double-entry approach c. Net assets approach d. Sunk cost
25. Other operating expenses include
a. Interest expense c. Patent amortization
b. Product warranty costs d. Unrealized Loss on inventory write-down

26. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility.
Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities
b. The firms ability to respond and adopt to financial adversity and unexpected and opportunities
c. The firms ability to pay its debts as they mature.
d. The firms ability to invest in a number of projects with different objectives and costs
27. A transaction that is material in amount, unusual in nature, and infrequent in occurrence, otherwise
described as extraordinary iitems should be presented separately as
a. Component of income from ordinary activities, but not net of applicable income tax.
b. Component of income from ordinary activities, net of applicable income tax.
c. Extraordinary item, a separate line item, net of applicable income tax
CRC-ACE/FAT: Second pre-board exams (October 2007 batch) 4

d. Prior period adjustment, but not net of applicable income tax.

28. Which of the following is a characteristic of a change in accounting estimate?
a. It usually need not be disclosed.
b. It does not affect the financial statements of prior periods
c. It should be reported through the restatement of the financial statements
d. It makes necessary the reporting of pro-forma amounts for prior periods.
29. Which one of the following changes should be reported by not restating the financial statements of
prior periods is the change from
a. FIFO method of inventory pricing to the weighted average method
b. Cost recovery method to percentage of completion
c. Sum-of-years digits method to the straight-line method
d LIFO method of inventory pricing to FIFO method
30. Under present GAAP, a change in accounting policy can be given prospective application
a. When ordered by management
b. When it is impracticable to determine the amount of adjustment to the opening balance of
retained earnings
c. When the amount of adjustment to the opening balance of retained earnings can be reasonably
determined
d. In no case at all.
31. The total performance of an entity is shown
a. In the Income Statement only
b. In the Statement of Changes in Equity only
c. In both the Income Statement and Statement of Changes in Equity
d. In some other financial statement than the Income Statement and Statement of Changes in Equity
32. The effect of a change in accounting policy that is inseparable from the effect of a change in
accounting estimate should be reported
a. By restating the financial statements of all prior periods presented.
b. As a correction of an error.
c. As a component of income from continuing operations, in the period of change and future periods
if the change affects both.
d.. As a separate disclosure after income from continuing operations, in the period of change and
future periods, if the change affects both.
33. Investor Inc., owns 40% of Ali Corporation. During the calendar year 2002, Ali had net earnings of
P100,000 and paid dividends of P 10,000. Investor mistakenly recorded these transactions using the
cost method rather than the equity method of accounting. What effect would this have on the
investment account, net earnings, and retained earnings respectively?
a. understate, overstate, overstate c. overstate, overstate, overstate
b. overstate, understate, understate d. understate, understate, understate
34. The event in 2007 that most likely would have no effect on 2007 net income under present GAAP is
a. Collection in 2007 of interest income arising from investment in bonds acquired in 2003.
b. Material losses resulting from adjustments specifically related to operations of prior years.
c. Available-for-sale securities acquired in 2004 were sold at a gain in 2007
d. Sale of a second hand machinery contributed by a stockholder in 1998.
35. Technically, offsetting in financial statements is accomplished when
a. Accumulated depreciation is shown as a deduction from the carrying amount of property and
equipment.
b.Sales returns and allownaces are deducted from Revenue from Sales to arrive at Net Sales.
c. Current liabilities are deducted from current assets to arrive at working capital
d.Deferred Tax Liabilities are shown net of Deferred Tax Assets after complying with certain criteria
in the applicable accounting standard.
36. The accounting policies section of the notes to financial statements should describe
a. Only the measurement basis in preparing the financial statements.
b. Only the specific accounting policies followed by the enterprise.
c. Both the measurement basis and accounting policies followed.
d. Nature of the enterprises operations and its principal activities.
37. Which is true concerning the ASC Conceptual Framework?
I. The conceptual framework is a theoretical foundation that underlie the preparation and
presentation of basic financial statements for external users.
II. The framework is not a Statement of Financial Accounting Standards and does not define
standard for any particular measurement or disclosure issue
III. If there is a conflict between a provision in the Framework and that of a Statement of Financial
Accounting Standard, the Framework should prevail.
a. I only b. I and II only c. II and III only d. I, II and III
38. Which is not a basic purpose of a conceptual framework?
a. To assist the ASC in developing accounting standards and in the review and adoption of
International Accounting Standards
CRC-ACE/FAT: Second pre-board exams (October 2007 batch) 5

b. To assist preparers of financial statements in applying ASC accounting standards.

c. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of
accountancy in the Philippines
d. To assist ASC in reviewing and adopting International Accounting Standards
39. According to the ASC Framework , who has the primary responsibility for the financial statements of
an entity?
a. Owners b. Management c. External auditor d. Internal auditor
40. The main function of this body is to establish and improve accounting standards that will be generally
accepted in the Philippines
a. Philippine Institute of CPAs c. Professional Regulation Commission
b. Board of Accountancy d. Financial Reporting Standards Council
41. According to the ASC Conceptual framework, comprehensive income excludes changes in equity
resulting from which of the following?
a. Correction of prior period errors c. Unrealized loss on noncurrent marketable equity securities
b. Revaluation surplus d. Dividends paid to stockholders
42. According to the ASC Conceptual framework, which of the following is an essential characteristic of
an asset?
a. An asset provides future benefits. c. An asset is obtained at a cost
b. The claims to an assets benefits are legally enforceable. d. An asset is exclusively owned
43. Which of the following is an appropriate basis for recognizing an asset?
a. On December 5,2007, AA Corporation entered into a commitment to buy 10,000 units of
Commodity X at a fixed price of P10 each, to be delivered early March, 2008. On Dec. 31,
2007, the selling price of Commodity X decreased to P 9.20 per unit.
b. The board of directors of BB Corporation approved a resolution authorizing the acquisition of a
delivery truck next year.
c. CC Company purchased machinery from EE Corp., still in transit, terms, FOB shipping point.
. d. DD Company purchased merchandise on December 28, 2001 under terms sale on trial.
44. Which of the following events or circumstances would justify reporting an asset above its acquisition
cost under present GAAP?
a. The market value of an investment in debt securities is lower than acquisition cost and the
investment is classified as a current asset.
b. The market value of an investment in ordinary shares accounted for under the equity method is
higher than the acquisition cost.
c. An investment in ordinary shares is accounted for under the equity method and the investee reports
a net income for the year.
d. An investment in ordinary shares is accounted for under the equity method and the investee
declares a cash dividend during the current year.
45. According to the ASC Conceptual framework, the process of reporting an item in the financial
statements of an entity is
a. Matching b. Allocation c. Realization d. Recognition
46. Which of the following expenditure subsequent to acquisition of an asset is capitalizable?
a. Major repairs on a building that did not prolong the life of the building.
b. Cost of a successful defense of a patent infringement suit
c. Replacement of a motor part of a machinery that did not increase either its productive capacity or
its scrap but reduced its operating costs
d. Research and development aimed at improvement of a patented product
47. Which of the following is a characteristic of liabilities rather than of owners equity?
a. The capital providers claim are residual in the event of liquidation of the business.
b. The capital providers normally have the right to exercise control over business operations.
c. The capital providers frequently are entitled to receive interest payments
d. The obligation to the capital provider does not mature.
48. The primary factor that distinguishes a capital from a revenue expenditure is
a. The period in which the expenditure was made
b. Whether or not the expected benefit will extend beyond the current accounting period.
c. The account to be charged
d. The materiality of the expenditure
49. A compensating balance is best reflected by which of the following?
a. A savings account maintained at the bank equal to the amount of all outstanding loans
b. An amount of capital stock held in the companys treasury equal to outstanding loan commitments
c. The portion of any demand deposit, time deposit, or certificate of deposit maintained by a
corporation which constitute support for existing borrowing arrangements of the corporation with
the lending institution.
d. A balance held in a time or demand deposit account that is equal to the interest currently due on a
loan
50. When a specific customers account is written off by a company using the allowance method, the
effect on net income and the net realizable value of the accounts receivable is
CRC-ACE/FAT: Second pre-board exams (October 2007 batch) 6

Net income Net Realizable Value of Accounts Receivable

a.None None
b. Decrease Decrease
c. Increase Increase
d. Decrease None
51. Which one of the following is included in the scope of PAS 2 Inventories but excluded from the
measurement rule?
a. Land held for resale by subdivision company or real estate developer
b. Damaged merchandise inventory of a retailer
c. Biological assets held for regular sale
d. Finished goods produced
52. A 90-day, 15% interest-bearing note receivable is sold to a bank with recourse after being held for 60
days. The proceeds are calculated using an 18% interest rate. The amount credited to notes
receivable at the date of the discounting transactions would be
a. the same as the cash proceeds c. the face value of the note
b. less than the face value of the note d. maturity value of the note
53. Which of the following statements about Inventories is false?
a. The cost of conversion of inventories does not include fixed production overhead.
b. The cost of inventories of a service provider consists primarily of labor and other costs of
personnel and attributable overhead.
c. Using the lower of cost or net realizable value convention, cost is preferably computed using either
FIFO or weighted average.
d. Storage costs are excluded from cost of inventories and recognized as expenses in the period when
incurred, unless necessary in the production process.
54. How should Unrealized gains and losses be treated for the following types of Investment
in Securities?
Held-for- trading securities Available-for-sale securities
a. Included in current income
Included in Stockholders Equity
b. Included in current income
Included in current income
c. Included in stockholders equity
Included in current income
d. Only unrealized losses included in
Only unrealized losses included in
current income stockholders equity
55. The amortization of premium over the life of the bond is an adjustment of interest income in the
investors books
a. Up b. Down c. Steady d. Cannot be determined
56. Which of the following is not a financial asset?
a. Cash
b. An equity instrument of another entity
c. A contract that may or will be settled in the entitys own equity instrument and is not classified as
an equity instrument and is not classified as an equity instrument of the entity
d. Prepaid expenses
57. According to PAS 39, which of the following is not among the criteria for a financial asset or liability
to be classified as held for trading?
a. It is a derivative
b. It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term.
c. It is a derivative that is a designated and effective hedging instrument
d. It is part of a portfolio of identified financial instruments that are managed together and for which
there is evidence of a recent actual pattern of short-term profit-taking.
58. What is the measurement basis of an asset that is acquired in non-monetary exchange
With commercial substance With no commercial substance
a. Fair value of asset given up Carrying amount of asset given up
b. Carrying amount of asset given up Carrying amount of asset received
c. Carrying amount of asset received Fair value of asset received
d. Fair value of asset given up Fair value of asset given up
59. According to PAS 16 PPE 2005, which of the following statements about valuation of property and
equipment is (are) true?
I. The recoverable amount of an impaired asset is equal to its fair value or value in use, whichever is
higher
II. If the carrying value of an asset is equal to or is lesser than its scrap value, depreciation for the
period is zero.
III. Under no circumstance can a revaluation decrease in a property account be charged to expense.
IV. Start-up and similar pre-production costs are components of the cost of property and equipment
CRC-ACE/FAT: Second pre-board exams (October 2007 batch) 7

a. I and II is true c. I, III and IV true

b. I and III are true d. All statements are true
60. Which of the following items qualify as an intangible asset under PAS 38?
a. Advertising and promotion on the launch of a huge project.
b. College tuition fees paid to employees who decide to enroll in an executive MBA program at Asian
Institute of Management while working with the company.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent

END OF EXAMINATION
Good Luck