Theory of Accounts d.
Statement 1 is correct, Statement 2 is incorrect
1. “Accounting is the process of identifying, measuring and
communicating economic information to permit informed judgment
and decisions by users of the information.” This is the definition of
accounting as provided by:
a. ASC (Accounting Standards Council)
b. AICPA (American Institute of Certified Public Accountants)
c. AAA (American Accounting Association)
d. IASB (International Accounting Standards Board)
2. Which of the following is the most accurate description of the
Conceptual Framework of accounting?
a. The Framework prevails over any provision of PFRS,
particularly in areas where there is a conflict between the
Framework and PFRS
b. The Framework is a collection of PFRS’s which constitute
generally accepted accounting practice
c. The Framework is a theoretical foundation that guides
standard-setters, preparers, and users in the preparation
and presentation of financial statements
d. The Framework encompasses the conventions, rules, and
procedures necessary to define what is generally accepted
accounting practice
3. The information provided by financial reporting shall pertain to:
a. Individual enterprise
b. The whole economy, and to members of society as
consumers
c. Business industries
d. All of the above
4. The following are the purposes of the conceptual framework. Which is
the exception?
a. To assist preparers of the financial statements in applying
accounting standards
b. To assist the FRSC in reviewing and adopting IAS and IFRS
c. To assist the BOA in the promulgation of rules and
regulations affecting the practice of accountancy in the
Philippines
d. To assist auditors in forming an audit opinion
5. Which of the following is true?
a. In the absence of a standard or interpretation that applies to
a transaction, management shall consider the applicability
of the framework in developing and applying an accounting
policy that results in information that is relevant and reliable
b. The Framework has the highest status among standards and
interpretations
c. In the absence of a standard or interpretation, the
Framework shall be followed
d. The Framework applies only when FRSC develops or revises
new standard
6. Which of the following information is useful in predicting future
borrowing needs and how profits and cash flows will be distributed
between creditors and owners?
a. Financial Flexibility c. Cash Flows
b. Solvency d. Financial Structure
7. Four types of money prices are used in measuring resources in
financial accounting. Which of the following uses such concepts as
present value, discounted cash flow, and value in use?
a. Price in current purchase exchange
b. Price in past purchase exchange
c. Price based on future exchange
d. Price in a current sale exchange
8. Statement 1: The fundamental qualitative characteristics are:
relevance, faithful representation, and materiality.
Statement 2: The enhancing qualitative characteristics are:
comparability, verifiability, understandability, and timeliness.
a. Both are correct
b. Statement 1 is incorrect; Statement 2 is correct
c. Both are wrong
9. Which is not true regarding materiality?
a. If the omission or misstatement of certain information could
influence the economic decisions that users make, that
information is said to be “material”.
b. Materiality depends on the relative size of the item or error
judged in the particular circumstance of its omission or
misstatement
c. Materiality is a threshold or cut-off point in determining
useful information, and as such, it is one of the fundamental
qualitative characteristics
d. There is no threshold limit stated in the Conceptual
Framework; hence, materiality is a matter of professional
judgment.
10. Conservatism or prudence is best described as selecting an accounting
information that
a. Understates assets or net income
b. Overstates liabilities
c. Is least likely to mislead users of information
d. Has the least favorable effect on equity
11. Which of the following best illustrates conservatism in measurement
of financial position?
a. Inventory measured at lower of cost or NRV
b. Goodwill is measured at nominal amount
c. Arbitrary reduction of PPE for a more conservative asset
position
d. Recognition of fictitious liabilities to understate income
12. Statement 1: By timeliness, financial information is reported early
enough to be used for decisions it might influence and to avoid delay.
Statement 2: Historical cost has been the valuation basis most
commonly used in accounting because of its timeliness.
a. Both are correct
b. Statement 1 is incorrect; Statement 2 is correct
c. Both are wrong
d. Statement 1 is correct, Statement 2 is incorrect
13. Which statement is incorrect concerning relevance?
a. The relevance of information is affected by its nature and
size
b. Information must be relevant to decision makers in order to
be useful
c. The predictive and confirmatory roles of information are
interrelated
d. Relevance is the capacity of information to influence the
economy
14. From among the choices below, who is most likely to prepare the
most accurate financial forecast of a company based on empirical
evidence?
a. Investors using statistical models
b. Corporate management
c. Financial analysts
d. Independent Certified Public Accountants
15. Allowing entities to estimate rather than physically count inventories
at interim periods is an example of the trade-off between:
a. Neutrality and consistency
b. Timeliness and verifiability
c. Accuracy and timeliness
d. Verifiability and reliability
16. Consistency is an important factor in comparability within an entity. It
requires that:
a. Some costs should be recognized as expenses on the basis of
a presumed direct association with specific revenue
b. Assets whose prices or utility are increased by external
event other than transfers should be retained in the
accounting records at their recorded amount until they are
exchanged
c. Historical cost should be the basis used in measuring
inventory, intangible assets, and property, plant and
equipment
 d. Changes in circumstances or in the nature of the underlying
transactions should be disclosed.
17. The usefulness of providing information in the financial statements, as
per the Framework, is subject to the constraint of:
a. Consistency c. Faithful representation
b. Cost-benefit d. Cost-efficient
18. The Framework defines recognition of financial elements when the
following conditions are met:
I. When it is probable that any future benefit associated with
the item will flow to the entity
II. When the item has a cost or value that can be measured
reliably or reasonably estimated.
III. When the entity obtains control of the rights or obligations
associated with the item.
a. I and II only c. II only
b. I, II and III d. II and III
19. The process that involves the simultaneous or combined recognition
of revenue and expenses that result directly and jointly from the same
transaction or other events.
a. Systematic and rational allocation
b. Immediate recognition
c. Matching of cost with revenue
d. Matching of revenue with cost
20. Revenue is recognized under the following conditions except:
a. The entity has transferred to the buyer the significant risks
and rewards of ownership of the goods
b. The amount of revenue can be measured reliably
c. It is probable that economic benefits associated with the
transaction will flow to the entity
d. The entity retains continuing managerial involvement and
effective control over the goods
21. Which of the following is incorrect concerning assets?
a. Physical form is not essential to the existence of an asset
b. In determining the existence of an asset, the right of
ownership of an asset is essential
c. An asset can result from past events only
d. There is a close association between incurring an
expenditure and generating asset but the two do not
necessarily coincide
22. Asset measurements in the financial statements
a. Are confined to historical cost because this is the most
verifiable
b. Do not reflect output value
c. Reflect several financial attributes
d. Can only be either current cost or historical cost in
accordance with PFRS
23. Which of the following conditions does not apply to the recognition of
revenue for transactions involving the rendering of services?
a. The amount of revenue and the costs incurred and costs to
complete can be measured reliably
b. It is probable that payment for the services shall be received
by the entity
c. The significant risks and rewards of ownership have been
transferred to the buyer
d. The stage of completion can be measured reliably
24. Under which of the following circumstances is the installment sales
method appropriate for the recognition of revenue?
a. For sales where collection is spread over a reasonable long
period of time
b. In any situation where management wishes to delay the
recognition of revenue in order to smooth its income
c. For sales where collection is spread over a reasonable long
period of time and significant doubt exists about the
ultimate collection of receivables
d. For sales where collection is spread over a reasonable long
period of time and no significant doubt exists about the
ultimate collection of receivables.
25. Which of the following is not among the first five steps in the
accounting cycle?
a. Record transactions in journals
b. Record closing entries
c. Adjust the general ledger accounts
d. Post entries to general ledger accounts
26. Which is false concerning the rules of debit and credit?
a. The left side of an account is always the debit side and the
right side is always the credit side
b. Increases in assets and expenses are debits while increases
in liabilities and income are credits
c. The normal balance of an account appears on the side
where increases are recorded
d. Debit means “to increase” while credit means “to decrease”
27. Premium on bonds payable is an example of
a. Nominal and adjunct account
b. Real and adjunct account
c. Nominal and contra account
d. Real and contra account
28. If an entity uses special journals, the sale of merchandise for cash shall
be recorded in
a. Sales Journal c. General Journal
b. Cash Receipt Journal d. Invoice register
29. Adjusting entries that should be reversed include those for prepaid or
unearned items that
a. Create an asset or liability account
b. Were originally entered as revenue or expense account
c. Were originally entered as asset or liability account
d. Create as asset or liability, and were originally entered as
revenue or expense account
30. The dividends declared account is a nominal account and
a. Closed directly to retained earnings
b. Carried forward to the next accounting period as dividend
payable
c. Closed to income summary
d. Presented as cash inflows
31. Electronic data processing
a. The systematization of processing operations in a manner
that will provide rapid and uninterrupted flow of
information in the conduct of business
b. Is a global phenomenon intended to bring about greater
transparency and a higher degree of comparability in
financial reporting essential to achieve the goal of one
uniform and globally accepted financial reporting standards
c. A system of accumulating, assembling and recasting
transactions by the use of electronic devices, in order to
record, analyze, and report useful output data.
d. Application of research findings or other knowledge to a
plan or design for the production of improved material,
device, process, system, or service, prior to commercial
production
32. In preparing a 10-column worksheet,
a. Beginning inventory is extended as credit in the income
statement column
b. Beginning inventory is extended as credit in the balance
sheet column
c. Ending inventory is extended as a debit in the income
statement column and as a credit in the balance sheet
column
d. Ending inventory is extended as a credit in the income
statement column and as a debit in the balance sheet
column
33. The purpose of adjusting entries is to
 a. Prepare revenue and expense accounts for recording activities, addresses the information need of which users of the
transactions of the next period financial statements?
b. Apply realization and matching principles to transactions a. Government and its instrumentalities
affecting 2 or more periods b. Customers
c. Adjust daily balances in assets, liability, revenue and c. Trade suppliers and creditors
expense account for effects of business transactions d. The general public
d. To guarantee that all adjustments have been made and the
financial statements are free of any error 43. Which of the following represents income derived from a
nonreciprocal transfer?
34. The elements of financial statements are measured in terms of a. Settlement of liability at less than its carrying at less than its
a. Constant peso c. ixed peso carrying amount
b. Nominal peso d. Variable peso b. Appreciation of land
c. Land donated by a major stockholder
35. Which of the following is also included as component of financial d. Compensation received as damages in a successful lawsuit
statements?
a. A statement of retained earnings 44. Which of the following financial attribute of an element is generally
b. Accounting policies considered to be the most relevant?
c. Auditor’s report a. Present value
d. Annual director’s report b. Current value
c. Realizable value
36. Conceptually, asset valuation accounts are d. Historical cost
a. Assets
b. Neither assets nor liabilities 45. The purpose of the International Financial Reporting Standard (IFRS) is
c. Part of shareholder’s equity to
d. Liabilities a. Issue enforceable standards which regulate the financial
accounting and reporting of multinational entities
37. Indicate the proper order of presenting the notes to financial b. Develop uniform currency in which the financial transaction
statements. of entities throughout the world shall be measured
I. Statement of compliance with PFRS c. Promote uniform accounting standards among the countries
II. Other Disclosures of the world
III. Supporting information d. Arbitrate accounting disputes between auditors and
IV. Summary of significant accounting policies international entities
a. I, II, III, and IV c. I, III, IV and II
b. I, IV, III, and II d. I, IV, II and III 46. Adjusting entries that should be reversed are those prepaid or
unearned items that
38. Related parties include all of the following except: a. Create an asset or a liability account
a. Affiliates b. Were originally entered in as asset or liability account
b. Associates c. Were originally entered as an expense or revenue account
c. Individuals owning, directly or indirectly, an interest in the d. Create an asset or liability account and were originally
voting power of the reporting entity that gives them entered as an expense or revenue account
significant influence over the entity
d. Two entities that have a common director 47. Which of the following is not a purpose of the Conceptual
Framework?
39. If there have been transactions between related parties, the entity a. To provide definition of key terms and fundamental
shall disclose concepts
I. Nature of the relationship b. To assist accountants in selecting among alternative
II. Information about the transaction and outstanding balances accounting and reporting methods
c. To assist the FRSC in the standard setting process
a. I only c. Both d. To provide specific guidelines for resolving situations not
b. II only d. Neither covered by existing accounting standards

40. What is the purpose of information presented in notes to financial
statements?
a. To provide disclosures required by generally accepted
accounting principles
b. To correct improper presentation in the financial statements
c. To provide recognition of amounts not included in the total
of the financial statements
d. To present management’s responses to auditor’s comments
41. The principles which constitute the ground rules for financial reporting
are termed generally accepted accounting principle. To qualify as
generally accepted, an accounting principle must
a. Guide corporate managers in preparing financial
statements, which will be understood by widely scattered
shareholders
b. Guide corporate managers in preparing financial
statements, which will be used for collecting bargaining
agreements with trade unions
c. Guide an entrepreneur of the choice of an accounting entity
like single proprietorship, partnership or corporation.
d. Receive substantial authoritative support
42. An entity, by providing information about trends and recent
developments in the prosperity of the entity and the range of its
48. The accrual basis of accounting is most useful for
a. Determining amount of income tax an entity should pay
b. Determining the amount of dividends an entity should pay
c. Predicting short term performance of an entity
d. Determining long term performance of an entity
49. A newly acquired plant asset is to be depreciated over its useful life.
The rationale for this process is
a. Economic entity assumption
b. Materiality assumption
c. Going concern assumption
d. Monetary unit assumption
50. Which is correct regarding assets?
a. Physical form is essential to the existence of an asset
b. An asset results from present event
c. In determining existence of an asset, the right of ownership
is essential
d. None of the above is correct
51. Which one of the following may be recognized as revenue?
a. Rental deposit
b. Cash received in payment of note receivable
c. Cash from advance magazine subscription
d. Value of gold extracted from a mine but not yet sold