FRAMEWORK OF ACCOUNTING

1. Which is not a qualitative characteristic?

(a) understandability (c) comparability
(b) relevance (d) accrual basis D

2. Which of the following is an implication of the going concern assumption?

(a) the historical cost principle is credible
(b) depreciation and amortization policies are justifiable and appropriate
(c) the current-noncurrent classification of assets and liabilities is justifiable and significant
(d) all of these D

3. Under the accountant’s interpretation of measuring income and reporting financial position, which of
the following would be of least importance?
(a) capital contributions and withdrawals during the period
(b) the current values of net assets during the period
(c) the historical cost of net assets at the end of the period
(d) income statement transactions during the period B

4. In financial accounting, revenues and expenses are often included in the determination of net income
even though no cash receipts or disbursements have occurred. This practice is based on the concept
of:
(a) time period (c) going concern
(b) historical cost (d) accrual basis D

5. The matching principle provides guidance in accounting for:

(a) owner’s equity (c) liabilities
(b) expense (d) assets B

6. What is the primary criterion by which accounting information can be judged?

(a) consistency (c) usefulness for decision-making
(b) predictive value (d) comparability C

7. Generally accepted accounting principles are:

(a) a set of standards and rules that are recognized as a general guide for financial reporting.
(b) usually established by the bureau of internal revenue.
(c) the guidelines used to resolve ethical dilemmas.
(d) fundamental truths that can be derived from the laws of nature. A

8. Choose the incorrect statement.

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

9. Which of the following best states the purpose of general-purpose financial statements?
(a) To disclose the marker value of the firm’s assets and liabilities.
(b) To determine compliance with tax laws.
(c) To identify shareholders.
(d) To help users make decisions. D

10. Which of the following may be recognized as revenue?

(a) rental deposits
(b) cash from advance magazine subscriptions
(c) value of gold extracted from a mine but not yet sold
(d) cash received in payment of a note receivable C

INCOME STATEMENT

11. Which of the following best describes the concept of accounting income?
(a) Income is measured as the amounts of “real wealth” that an entity could consume during a period
and be as well-off at the end of that period as it was at the beginning.
(b) Market values adjusted for the effect of inflation or deflated are used to calculate real wealth.
(c) Transaction approach is used to record revenues, expenses, gains and losses throughout the
reporting period.
(d) Income equals the change in shareholders’ equity during the period. C

12. The term revenue recognition conventionally refers to:

(a) the process of identifying transactions to be recorded as revenue in an accounting period
(b) the process of measuring and relating revenue and expenses during a period
(c) the earning process which gives rise to revenue realization
(d) the process of identifying those transactions that result in an inflow of assets to the enterprise
A
13. As a minimum, the face of the income statement shall include line items that present the following
amounts for the period, except:
(a) finance costs (c) extraordinary items
(b) tax expense (d) share in the profit of an associate C

14. Under the capital maintenance approach, net income or loss is computed as:
(a) beginning net assets minus ending net assets.
(b) ending net assets minus beginning net assets.
(c) ending net assets plus withdrawals minus beginning net assets minus additional investments.

(d) ending net assets plus additional investments minus beginning net assets minus withdrawals.
C

15. Which capital maintenance concept is applied to currently reported net income, and which is applied to
comprehensive income?
Currently reported net income Comprehensive income
(a) Financial capital Physical capital
(b) Physical capital Physical capital
(c) Financial capital Financial capital
(d) Physical capital Financial capital C

16. Data was provided by SHELLUP, a manufacturer of the famous HAMDUP, covering its first year of
operations:
Units produced 3,000
Cost per unit to produce P120
Sales in units 2,400
Selling price per unit P180
Cash collected P420,000
The amount of gross margin, if revenue is recognized at the end of production but prior to sale is:
(a) P144,000 (b) P108,000 (c) P132,000 (d) P180,000 D
Total selling price (3,000 x P180) P540,000
Total cost of production (3,000 x P120) (360,000)
Estimated gross margin P180,000

17. Imelda Company’s advertising expense account had a balance of P600,000 at December 31, 2007,
before any necessary year-end adjustment relating to the following:
a. Included in the P600,000 is the P50,000 cost of newspaper per advertising for a sales promotional
campaign in January 2008.
b. Radio advertising spots broadcast during December 2007 were billed to Imelda on January 15,
2008. Imelda paid the P30,000 invoice on January 31, 2008.
What amount should Imelda report as advertising expense in its income statement for the year ended
December 31, 2007?
(a) P630,000 (b) P620,000 (c) P580,000 (d) P600,000 C
Per book 600,000
Prepaid advertising (50,000)
Accrued advertising 30,000
Advertising expense 580,000

18. West Corporation reports operating expenses in two categories: (1) distribution and (2) administrative.
The adjusted trial balance at December 31, 2007 included the following expense and loss accounts:
Accounting and legal fees P120,000
Advertising 150,000
Freight out to consignees 80,000
Interest on bank loans 70,000
Loss on sale of long- term investment 30,000
Officer’s salaries 225,000
Rent for office space 220,000
Sales salaries and commissions 140,000
One-half of the rented premises is occupied by the sales department. Total distribution costs for 2007
are:
(a) P480,000 (b) P400,000 (c) P410,000 (d) P500,000 B

19. The following information is available from Belle Company’s 2007 accounting records:
Purchases P 530,000
Transportation out to consignees 40,000
Purchase discounts 10,000
Beginning inventory 160,000
Ending inventory 215,000
Belle’s cost of goods sold is:
(a) P465,000 (b) P475,000 (c) P505,000 (d) P585,000 A

20. Twin Corporation’s trial balance of income statement accounts for the year ended December 31, 2007
included the following:
Debit Credit
Sales 150,000
 Cost of sales 60,000
Sales salaries 5,000
Office salaries 3,000
SSS, Philhealth, PAG-IBIG – office 1,000
SSS, Philhealth, PAG-IBIG – sales 2,000
Share in profit of associate (32%) 3,000
Loss on sale of equipment 9,000
Commissions to salespersons 8,000
Depreciation – office equipment 1,000
Dividend revenue 5,000
Freight-out 3,000
Loss on early retirement of long-term debt 10,000
Interest on short-term bank borrowings 2,000
Bad debts expense 3,000 ______
110,000 155,000
Additional information:
(a) Inventories:
12/31/2007 12/31/2006
Finished goods 90,000 100,000
Goods in process 80,000 50,000
Raw materials 70,000 60,000
(b) Effective income tax rate for 2007 is assumed to be 30%.
(c) Minority interest is 40%.

Requirements:
a. Income statement using the nature of expense method.
b. Income statement using the function of expense method.

STATEMENT OF CASH FLOWS

21. The statement of cash flows is designed to assist users in assessing each of the following, except:
(a) the ability of a company to remain solvent.
(b) the company’s profitability.
(c) the major sources of cash receipts during the period.
(d) the reasons why net cash flow from operating activities differs from net income. B

22. The cash flows shown in the statement of cash flows are grouped into the following major categories:
(a) operating activities, investing activities, and financing activities
(b) cash receipts, cash disbursements, and noncash activities
(c) direct cash flows and indirect cash flows
(d) operating activities, investing activities, and collecting activities A

23. How should a loss from the sale of used equipment for cash be reported in a cash flow statement using
the indirect method?
(a) in investment activities as a reduction of the cash inflow from the sale
(b) in investment activities as a cash outflow
(c) in operating activities as a deduction from income
(d) in operating activities as an addition to income D

24. Which of the following is a financing cash flow?

(a) purchase of stock of another company (c) rental payments
(b) dividend payments (d) interest payments B

25. What is the proper treatment for the increase in taxes payable when preparing the statement of cash
flows?
(a) it should be a negative adjustment to operating activities
(b) it should be a positive adjustment to operating activities
(c) it should not be a negative or positive adjustment to operating activities
(d) it should not be considered for the statement of cash flows B

26. A corporation reported the following information in its income statement:

Sales revenue (none on credit) P70,000
Cost of goods sold (paid in cash) 40,000
Gross margin on sales P30,000
Depreciation expense ( 4,000)
Amortization expense ( 1,000)
Wages expense (paid in cash) ( 2,500)
Income before taxes P22,500
Income taxes (20%) (paid in cash) ( 4,500)
Net income P18,000
The corporation should report the following amount on its statement of cash flows for net cash from
operating activities:
(a) P18,000 (b) P27,500 (c) P22,500 (d) P23,000 D
Net income 18,000
Depreciation 4,000
Amortization 1,000
Cash flows from operating activities 23,000
27. Kirk Company’s balance sheet accounts as of December 31, 2005 and 2004 and information relating to
2005 activities are presented below:
2005 2004
Cash 1,000,000 400,000
Short-term investments 1,200,000 -
Accounts receivable, net 2,000,000 2,000,000
Inventory 2,700,000 2,400,000
Long-term investments 800,000 1,200,000
Property, plant and equipment 6,800,000 4,000,000
Accumulated depreciation (1,800,000) (1,800,000)
Goodwill 300,000 400,000
13,000,000 8,600,000

Accounts payable & accruals 2,400,000 2,800,000

Short-term debt 1,800,000 -
Common stock, P25 par 3,500,000 3,000,000
Additional paid in capital 1,500,000 1,000,000
Retained earnings 3,800,000 1,800,000
13,000,000 8,600,000
Other activities during 2005 follow: The net income was P2,900,000. There was a declaration of a cash
dividend of P900,000, which was paid in 2005. A machine with a cost of P1,600,000 and a carrying
amount of P600,000 was sold for P600,000. Kirk sold a long-term investment for P500,000. There
were other transactions affecting long-term investments. Kirk also issued 20,000 shares of common
stock for P50 per share. The short-term investments consist of treasury bills maturing on June 30,
2005.
The net cash provided by Kirk’s operating activities was:
(a) P2,900,000 (b) P3,200,000 (c) P3,300,000 (d) P2,200,000 B
Net income 2,900,000
Depreciation (1,800,000 + 1,000,000 –
1,800,000) 1,000,000
Gain on sale (500,000 – 400,000) ( 100,000)
Amortization of goodwill 100,000
Increase in inventories ( 300,000)
Decrease in accounts payable & accruals ( 400,000)
Net cash provided by operating activities 3,200,000

28. A company started business on January 1, year 1. At the end of year 1, the financial statements
showed the following amounts (in 000’s):
Sales P180
Cost of goods sold 112
Expenses 40
Accrued wages payable 4
Accounts receivable 18
Accounts payable 8
Income on the accrual basis and net cash inflow from operating activities were:
Cash inflow from
Income – accrual operating activities
(a) P28 P22
(b) 68 22
(c) 28 28
(d) 68 62 A
Sales 180 Net income – accrual 28
Cost of goods sold (112) Increase in wages payable 4
Gross profit 68 Increase in accounts r’ble. (18)
Expenses ( 40) Increase in accounts p’ble. 8
Net income – accrual 28 Cash inflow – operating act. 22

29. Art Company has determined its cash flows from 2004 operating activities as P5,350,000. The cash
balance on January 1, 2004 was P6,500,000. During 2004, the company had the following investing
and financing activities. Cash dividends of P3,500,000 were declared and paid. An additional
P1,400,000 of cash dividends were declared but remained unpaid at the end of the year.
Machinery with a book value of P1,750,000 was sold for that amount. Additional machinery of
P2,600,000 was acquired for cash to replace the one sold.
Note payable of P4,200,000 was taken out of the local bank early in the year. By the end of the
year, P1,500,000 of this amount including interest of P300,000 had been repaid.
Bonds payable with a book value of P2,500,000 was converted into common stock having par value
of P2,000,000.
How much should be reported as net cash used in financing activities in the 2002 cash flow
statement?
(a) P4,700,000 (b) P5,000,000 (c) P1,900,000 (d) P500,000 D

Payment of dividends (P3,500,000)

Issuance of note 4,200,000
Partial payment of note ( 1,200,000)
 Net cash used in financing activities (P 500,000)

30. Part Optical completed the following transactions:

a. Acquired land for P3,000,000
b. Purchased office building for P2,000,000.
c. Sold one factory equipment for P3,500,000. The accumulated depreciation on the
warehouse is P1,700,000 and the original cost was P5,700,000.
Net cash used for investing activities was:
(a) P1,000,000 (b) (P700,000) (c) P1,500,000 (d) P5,000,000
C

Acquisition of land (3,000,000)

Acquisition of office building (2,000,000)
Sale of factory equipment 3,500,000
Net cash used for investing activities (1,500,000)

CASH AND CASH EQUIVALENTS

31. Cash or Cash on Hand and In Banks on the balance sheet may include the following items:
(1) Currency or cash items on hand
(2) Deposits in foreign countries which are subject to foreign exchange restrictions
(3) Short-term placements of excess cash which can be preterminated
 (4) Postdated checks
(5) Cash set aside for the acquisition or construction of noncurrent assets
(a) 1, 2 and 3 only (c) 1 and 3 only
(b) 2, 3 and 5 only (d) not given C

32. Balances representing cash, accounts receivable, and payable denominated in other than the local
currency should be translated for consolidation at the:
(a) historical rate (c) forward rate
(b) spot rate (d) current rate D

33. The cash balance reported in the balance sheet normally will not include:
(a) small amounts of cash (petty cash) kept on hand in the office.
(b) checks received from customers and deposited in the bank.
(c) money orders.
(d) temporary investments due in one year. D

34. Which of the following is not considered cash for financial reporting purposes?
(a) petty cash funds and change funds (c) coin, currency and available funds
(b) money order and certified checks (d) postdated checks and IOUs D

35. Which of the following items in a cash drawer at November 30 is not cash?
(a) money orders (c) a customer check dated December 1
(b) coins and currency (d) a customer check dated November 28 C

36. If a financial institution has cash funds in a company, which is in bankruptcy, and the amount
recoverable is estimated to be lower than the face amount, cash should be:
(a) eliminated from the balance sheet.
(b) written down to its discounted or present value.
(c) written down to estimated realizable value.
(d) stated at face amount. C

37. If the deposit is legally restricted as to withdrawal, the compensating balance related to a long-term
long is shown as:
(a) cash (c) long-term investment
(b) other asset (d) current liability C

38. The following statements relate to the petty cash fund. Which statement is true?
(a) The amount of coins and currency in the petty cash fund is the same before the fund is reimbursed
as it is afterwards.
(b) Entries to record the replenishment of the imprest petty cash fund result in debit to various expense
accounts and a credit to the petty cash funds.
(c) At any time, the sum of the cash in the petty cash fund and the total petty cash vouchers should
equal the amount for which the imprest petty cash fund was established.
(d) Under the imprest petty cash system, it is not necessary to adjust unreplenished petty cash
expenses at end of the year. C

39. Expenses paid out of the petty cash is recorded under two systems of accounting for petty cash:
Imprest system Fluctuating system

(a) When paid When paid

(b) When replenished When paid
(c) When paid When replenished
(d) When replenished When replenished B

40. In the process of preparing a bank reconciliation:

(a) outstanding checks should be added to the bank balance of cash.
(b) outstanding checks should be subtracted from the book balance of cash.
(c) all of the reconciling items shown on a bank reconciliation must be entered in the accounting
records after the reconciliation is completed.
(d) items that appear on the reconciliation as corrections to the book balance of cash should be
entered in the accounting records. D

41. The following information pertains to Aura Corporation on December 31, 2001:
Correct cash balance in general account with First Bank P300,000
Overdraft in special checking account with Second Bank 20,000
Cash accumulated in a special fund that will be used for
plant expansion 1,500,000
Cash surrender value 325,000
Cash travel advances in the hands of company sales
persons 50,000
Currency and coins in petty cash fund (the company has
not replenished the fund to the imprest amount
of P10,000) 2,000
What is the total amount that Aura should report as cash in the current assets
(a) P7,750,000 (b) P4,750,000 (c) P4,250,000 (d) P5,250,000 B

Cash on band 250,000

Cash in bank 4,500,000
 4,750,000

42. A cash count on the morning of January 2, 2002 showed the following items in the petty cash box of
Tray Corporation:
Currencies and coins counted P12,560
Envelope containing contributions to employee’s party 90,000
Approved and paid petty cash vouchers 14,500
Employee’s IOUs 180,000
Company check for fund replenishment 92,000
The petty cash fund was established for an amount of P300,000. What is the correct amount of petty
cash on the balance sheet as of December 31, 2002?
(a) P300,000 (b) P12,560 (c) P104,560 (d) P13,500 C

43. Bugoy’s checkbook balance at December 31, 2002 was P50,000. In addition, Bugoy had the following
items in its safe on that date:
 Check payable to Bugoy, dated December 31, 2002, in payment of a sale
made in December 2002 not included in December 31 checkbook balance, P20,000.
 Check payable to Bugoy, deposited December but returned by bank on
December 30 marked NSF. The deposit and the return were both reflected in the checkbook,
P5,000.
 Check drawn on Bugoy’s account, payable to a vendor, dated December 30
but not mailed to payee as of December 31, 2002. The check of P3,000 is not yet recorded.
The proper amount to be shown as cash on Bugoy’s balance sheet at December 31, 2002 is:
(a) P48,000 (b) P65,000 (c) P68,000 (d) P70,000 D

44. The following pertains to Mine Company on December 31, 2002:

Bank statement balance P5,000,000
Checkbook balance 5,600,000
Deposit in transit 2,000,000
Outstanding checks, including P100,000
certified check 500,000
In Mine’s December 31, 2002 balance sheet, cash should be reported at:
(a) P6,600,000 (b) P6,500,000 (c) P7,100,000 (d) P7,200,000 A

45. Bored Company is making a four-column reconciliation at June 30 from the following data. The
amounts per bank statement were: Balance - May 31, P6,500; June receipts, P13,000; June
disbursements, P11,000. The amounts per books were: Balance – May 31, P7,635; June receipts,
P11,548; June disbursements, P11,235; Balance – June 30, P7,948.
May 31 June 30
Deposits in transit P1,200 P1,500
Outstanding checks 670 840
The bank overlooked a check for P75 when
recording a deposit on June 10
Note collected by bank, recorded after
receiving the bank statement 1,800
NSF checks recorded after receiving
bank statement 560 480
Service charge, recorded after receiving
the bank statement 45 60
Bored recorded a P374 check received from
a customer in June as P347
The corrected June disbursements per books is:
(a) P10,830 (b) P11,170 (c) P11,250 (d) P11,300 B

TRADE AND OTHER RECEIVABLES

46. Which of the following statements is not valid in determining balance sheet disclosures of accounts
receivable?
(a) accounts receivable should be identified on the balance sheet as pledged if they are used as
security for a loan eventhough the loan is shown on the same balance sheet as a liability
(b) the portion of installment accounts receivable from customers which falls due more than 12
months from the balance sheet date usually would be excluded from current assets
(c) allowances to be deducted from accounts receivable for discounts, returns and adjustments to be
made in the future on accounts can be shown in the current balance sheet
(d) trade receivables are best shown separately from nontrade receivables where amounts of each are
material B

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

48. Bad debt expense represents:

(a) that portion of this period’s sales on account not likely to be collected
(b) that portion of the balance in accounts receivable at the end of the period not likely to be collected
 (c) the amount of accounts receivable written off as uncollectible during the current period
(d) the total of those accounts receivable written off during the period and the amount judged to be
uncollectible at the beginning of the period A

49. Accounts receivable of a company are sold outright to a financing company on a without recourse basis
are said to have been:
(a) pledged (c) factored
(b) assigned (d) collateralized C

50. When a specific customer’s accounts receivable is written off as uncollectible, what will be the effect on
net income under each of the following methods of recognizing bad debt expense?
Allowance Direct writeoff Allowance Direct writeoff
(a) none decreased (c) decreased decreased
(b) decreased none (d) none none A

51. At the end of its first year of operations, December 31, 2007, Solid Company had accounts receivable
of P500,000, which were net of related allowance for doubtful accounts. During 2007, Solid recorded
charged to bad debt expense of P80,000 and wrote off uncollectible accounts receivable of P20,000.
What should Solid report on its balance sheet at December 31, 2007, as accounts receivable before the
allowance for doubtful accounts?
(a) P500,000 (b) P520,000 (c) P560,000 (d) P600,000 C
Accounts receivable at 12/31/2007 P500,000
Allowance (80,000 – 20,000) 60,000
Accounts receivable bef. allow. at 12/31/2007 P560,000

52. B Corporation began operations in 2007. For the year ended December 31, 2007, B made available the
following information:
Total merchandise purchases for the year P350,000
Merchandise inventory at December 31, 2007 70,000
Collections from customers 200,000
All merchandise was marked to sell at 40% above cost. Assuming that all sales are on a credit basis
and all receivables are collectible, what should be the balance in accounts receivable at December 31,
2007?
(a) P50,000 (b) P192,000 (c) P250,000 (d) P290,000 B
Total merchandise purchases for the year P350,000
Merchandise inventory at December 31, 2007 ( 70,000)
Cost of goods sold P280,000
Credit sales (280,000 x 1.40) P392,000
Collections from customers (200,000)
Accounts receivable, 12/31/2007 P192,000

53. The following accounts were abstracted from the December 31, 2007 trial balance of R Company:
Debit Credit
Credit sales P750,000
Sales discounts P15,000
On January 1, 2007, allowance for doubtful accounts had a credit balance of P18,000. During 2007,
P30,000 of uncollectible accounts receivable were written off. Past experience indicates that 3% of
gross sales prove to be uncollectible. What should be the allowance for doubtful accounts at December
31, 2007 after provision is made for the current year?
(a) P10,050 (b) P10,500 (c) P22,050 (d) P34,500 B

Allowance for doubtful accounts, 1/1 P18,000

Uncollectible accounts written off (30,000)
Current provision (750,000 x 3%) 22,500
Allowance for doubtful accounts, 12/31 P10,500

54. Regal Company reported revenue of P1,980,000 in its income statement for the year ended December
31, 2007. Additional information was as follows:
12/31/2006 12/31/2007
Accounts receivable P415,000 P550,000
Allowance for doubtful 25,000 40,000
No uncollectible accounts were written off during 2007. Had the cash basis of accounting being used
instead, Regal would have reported receipts for 2007 of:
(a) P2,115,000 (b) P1,885,000 (c) P1,860,000 (d) P1,845,000 D

Reported revenue, accrual basis, 2007 P1,980,000

Accounts receivable, 12/31/2006 415,000
Accounts receivable ( 550,000)
Cash receipts for 2007 P1,845,000

55. Alpha Company’s account balances at December 31, 2007 for accounts receivable and the related
allowance for doubtful accounts were P800,000 and P40,000, respectively. An aging of accounts
receivable indicated that P71,100 of the December 31 receivables may be uncollectible. The net
realizable value of accounts receivable was:
(a) P688,900 (b) P728,900 (c) P760,000 (d) P768,900 B

Accounts receivable, 12/31/2007 P800,000

 Accounts deemed to be uncollectible ( 71,100)
Net realizable value P728,900

INVENTORIES

56. The cost of conversion of inventories include all of the following, except:
(a) costs directly related to the units of production, such as direct labor
(b) systematic allocation of fixed production overhead
(c) systematic allocation of variable production overhead
(d) systematic allocation of administrative overhead D

57. The amount of any writedown of inventory to net realizable value and all losses of inventory shall be:
(a) recognized as operating expenses in the period the writedown or loss occurs
(b) recognized as other expense in the period the writedown or loss occurs
(c) recognized as component of cost of sales in the period the writedown or loss occurs
(d) deferred until the related inventory is sold C

58. The costs of inventories of a service provided include all of the following, except:
(a) labor and other costs of personnel directly engaged in providing the service
(b) compensation of supervisor personnel directly engaged in providing the service
(c) attributable overhead incurred in providing the service
(d) profit margin factored into the price charged against the customer by the service provider
D
59. An exception to the general rule that costs should be charged to expense in the period incurred is:
(a) factory overhead costs incurred on a product manufactured but not sold during the current
accounting period
(b) interest costs for financing of inventories that are routinely manufactured in large quantities
on a repetitive basis
(c) general and administrative fixed costs incurred in connection with the purchase of inventory
(d) sales commission and salary costs incurred in connection with the sale of inventory A

60. An entity paid the in-transit insurance premium for consignment goods shipped to another entity, the
consignee. In addition, the entity advanced part of the commission that will be due when the
consignee sells the goods. Should the entity include the in-transit insurance premium and advanced
commission in inventory costs?
I. Insurance premium
II. Advanced commission
(a) I only (b) II only (c) both I and II (d) neither I nor II A

61. An inventory determined by observation and evidenced by a listing of the actual count, weight, or
measure is called:
(a) continuous inventory. (c) physical inventory.
(b) perpetual inventory. (d) spot check inventory. C

62. The cost of inventories should comprise all of the following costs, except:
(a) cost of purchase.
(b) cost of conversion.
(c) other cost incurred in bringing the inventories to their present location and condition.
(d) selling cost. D
63. The cost of agricultural produce harvested from biological assets is:
(a) cost
(b) fair value
(c) lower of cost or net realizable value
(d) fair value less estimated point of sale costs at the point of harvest D

64. Net realizable value is:

(a) current replacement cost.
(b) estimated selling price.
(c) estimated selling price less estimated cost to complete.
(d) estimated selling price less estimated cost to complete and estimated cost to sell. D

65. In computing cost ratio, the average retail method should:

(a) includes markup and markdown (c) includes markup but not markdown
(b) excludes markup and markdown (d) includes markdown but not markup A

66. Case Corporation had accounts payable of P1,000,000 recorded in the general ledger as of December
31, 2005 before consideration of the following unrecorded transactions:
Invoice Date Date
date Amount shipped received FOB terms
1/3/06 P80,000 12/22/04 12/24/04 Destination
1/2/06 130,000 12/28/04 1/2/05 Shipping point
12/26/05 120,000 1/2/05 1/3/05 Shipping point
1/10/06 90,000 12/31/04 1/5/05 Destination
In the December 31, 2005 balance sheet, the accounts payable should be reported in the amount of:
(a) P1,000,000 (b) P1,080,000 (c) P1,210,000 (d) P1,420,000 C
Accounts payable per ledger P1,000,000
Invoice date on 1/3/2006 80,000
Invoice date on 1/2/2006 130,000
Correct balance of accounts payable P1,210,000

67. Bell Company’s current liabilities at December 31, 2005 totaled P1,000,000 before any necessary year-
end adjustment relating to the following:
- During December 2005, Bell received P50,000 from Fox, a customer, as an advance payment for a
packaging machine which Bell will construct to Fox’s specifications. From this transaction, Bell has
a P50,000 credit balance in its accounts receivable from Fox at December 31, 2005.
- On December 27, 2005, Bell wrote and recorded checks to creditors totaling P400,000 which would
cause an overdraft of P100,000 in Bell’s bank account at December 31, 2005. The checks were
mailed out on December 31 2005.
At December 31, 2005, what amount should Bell report as total current liabilities?
(a) P1,050,000 (b) P1,150,000 (c) P1,400,000 (d) P1,450,000 D
Current liabilities per book P1,000,000
Advance payment 50,000
Delivered company checks 0
Adjusted current liabilities P1,050,000

68. Lee Company’s current liabilities at December 31, 2005 totaled P1,500,000 before any necessary year-
end adjustment relating to the following:
- On December 23, 2005, a vendor authorized Lee to return, for full credit, goods shipped and billed
at P45,000 on December 10, 2005. The returned goods were shipped by Lee on December 29,
2005. A P45,000 credit memo was received and recorded by Dean on December 31, 2005.
- During December 2005, Lee received P75,000 from Marr, a customer, as an advance payment for a
bottling machine which Lee will construct to Marr’s specifications. From this transaction, Bell has a
P75,000 credit balance in its accounts receivable from Marr at December 31, 2005.
At December 31, 2005, what amount should Lee report as total current liabilities?
(a) P1,455,000 (b) P1,470,000 (c) P1,530,000 (d) P1,575,000 D
Current liabilities per book P1,500,000
Advance payment 75,000
Adjusted current liabilities P1,575,000

69. Lewis Company’s usual sales terms are net 60 days, FOB shipping point. Sales, net or returns and
allowances totaled P2,300,000 for the year ended December 31, 2005 before year-end adjustments.
Additional data are as follows:
- On December 27, 2005, Lewis authorized a customer to return, for full credit, goods shipped and
billed at P50,000 on December 15, 2004. The returned goods were received by Lewis on January 4,
2006 and a P50,000 credit memo was issued on the same date.
- Goods with an invoice amount of P80,000 were billed to a customer on January 3, 2006. The goods
were shipped on December 30, 2005.
- Goods with an invoice amount of P100,000 were billed but unrecorded on December 30, 2005. The
goods were shipped on January 3, 2006.
Lewis’ adjusted net sales for the year 2005 should be:
(a) P2,330,000 (b) P2,280,000 (c) P2,250,000 (d) P2,230,000 A

Net sales per book P2,300,000

Sales returns ( 50,000)
Goods shipped on Dec. 30, 2005 80,000
 Adjusted net sales P2,330,000

70. Dean Company uses the retail inventory method to estimate its inventory for interim statement
purposes. Data relating to the computation of the inventory at July 31, 2005 are as follows:
Cost Retail
Inventory, February 1, 2004 P 180,000 P 250,000
Purchases 1,020,000 1,575,000
Net markups 175,000
Sales 1,705,000
Net markdowns 125,000
Estimated normal shoplifting losses 20,000
Under the approximate lower of average cost retail method, Dean’s estimated inventory at July 31,
2005 is:
(a) P102,000 (b) P150,000 (c) P90,000 (d) P96,000 C

Cost Retail
Inventory, February 1 P 180,000 P 250,000
Purchases 1,020,000 1,575,000
Net markups _________ 175,000
Available for sale – conservative P2,000,000
Net markdowns _________ ( 125,000)
Available for sale – average P1,200,000 P1,875,000
Sales (1,705,000)
Estimated normal shoplifting losses ( 20,000)
Inventory, July 31 P 150,000

Inventory (150,000 x 60%) P90,000