FRAMEWORK OF ACCOUNTING

I – ACCOUNTING AND ACCOUNTANCY PROFESSION

1. Which accounting process is the recognition or nonrecognition of business

activities as accountable events?
(a) identifying(c) communicating
(b) measuring(d) summarizingA

2. These are events that affect the enterprise and in which other entities
participate.
InternalExternalInternalExternal
(a) YesYes(c)No No
(b)YesNo(d)NoYesD

3. Which is an internal event?

(a) Casualty loss
(b) Exchange
(c) Nonreciprocal transfer between the enterprise and its owners.
(d) Nonreciprocal transfer between the enterprise and other entities.A

4. The basic purpose of accounting is:

(a) to measure periodic income of the economic entity.
(b) to provide quantitative financial information about a business enterprise that
is useful in making rational economic decision.
(c) to provide information that the creditors of an economic entity can use in
deciding whether to make additional loans to the entity.
(d) to provide information that the managers of an economic entity need to control
its operations.B

5. It focuses on general purpose reports on financial position, performance and

cash flows.
(a) financial accounting(c) management advisory services
(b) managerial accounting (d) auditingA

6. Which area of public accounting means the examination of financial statements by

a CPA for the purpose of expressing as opinion as to the fairness of the
statements?
(a) external auditing(c) management advisory services
(b) taxation(d) internal auditing A

7. Many accountants are employed in business enterprises in various capacity as

accounting staff, chief accountant or controller. These accountants are said to be
engaged in:
(a) public accounting(c) government accounting
(b) financial accounting(d) private accountingD

8. They encompass the conventions, rules, and procedures necessary to define what
is accepted accounting practice.
(a) generally accepted accounting principles(c) qualitative characteristics
(b) accounting assumptions(d) recognition principlesA

9. One of the basic features of financial accounting is the:

(a) direct measurement of economic resources and obligations and changes in them in
terms of money and sociological and psychological impact.
(b) direct measurement of economic resources and obligations and changes in them in
terms of money.
(c) direct measurement of economic resources and obligations and changes in them in
terms of money and sociological impact.
(d) direct measurement of economic resources and obligations and changes in them in
terms of money and psychological impact.B

10. Which is not part of the accounting standard setting process in the
Philippines?
(a) preparation and approval by a Task Force of a draft of the proposed SFAS
(b) distribution of the exposure draft for comment to PICPA members, FINEX members
and other interested parties
(c) publication in the Official Gazette or in a newspaper of general circulation
(d) approval by the Professional Regulation Commission C

11. It is an independent private sector body with the objective of achieving

uniformity in the accounting principles which are used by business enterprises for
financial reporting around the world.
(a) International Accounting Standards Committee
(b) International Federation of Accountants
(c) Financial Accounting Standards Council
(d) Securities and Exchange CommissionA

12. The ASC decided to move totally to International Accounting Standards by reason
of (choose the incorrect one):
(a) support of IASC standards by Philippine organizations such as SEC, Board of
Accountancy and PICPA
(b) increasing internationalization of business which has heightened interest in a
common language for financial reporting
(c) increasing recognition of IASC standards by the World Bank, Asian Development
Bank and World Trade Organization
(d) extreme pressure from the International Monetary FundD

13. Which of the following statements regarding International Accounting Standards

is not true?
(a) The purpose of IASC is to reduce the diversity of practices in financial
reporting among countries.
(b) Harmonization of international accounting standards will provide benefits to
both preparers and users of financial statements.
(c) As international trade and ownership barriers are removed, the need for
harmonization of international accounting standards will decrease.
(d) Since difference countries use financial statements for different purposes,
some countries will likely not adopt the international accounting standards. C

14. The purpose of International Accounting Standards is to:

(a) issue enforceable standards which regulate the financial accounting and
reporting of multinational corporations.
(b) develop a uniform currency in which the financial transactions of companies
throughout the world would be measured.
(c) promote uniform accounting standards among countries of the world.
(d) arbitrate accounting disputes between auditors and international companies.C

15. Financial accounting is concerned with:

(a) general-purpose reports
(b) specialized reports for
(c) specialized reports for
(d) general purpose reports
market positionA
on financial position and results of operations
inventory management and control
income tax computation and recognition
on changes in stock prices and future estimates of

16. Which of the following is not an important characteristic or limitation of the

financial statements that accountants currently prepare?
(a) the information in financial statements is expressed in units of money adjusted
for changing purchasing power
(b) financial statements articulate with one another because measuring financial
position is related to measuring changes in financial position
(c) the information in financial statements is summarized and classified to held
meet users’ needs
(d) financial statements can be justified only if the benefits they provide exceed
the costs
A

17. The branch of accounting that is concerned primarily with providing information
for internal users is called:
(a) auditing(c) financial accounting
(b) managerial accounting (d) income tax accountingB

18. Financial accounting can be broadly defined as the area of accounting that
prepares:
(a) general purpose financial statements to be used by parties internal to the
business enterprise only
(b) financial statements to be used by investors only
(c) general purpose financial statements to be used by parties both internal and
external to the business enterprise
(d) financial statements to be used primarily by managementC

19. The primary focus of financial accounting has been on meeting the needs of
which of the following groups?
(a) managers of an enterprise
(b) present and potential creditors of an enterprise
(c) national, and local taxing authorities
(d) independent auditorsB

20. The most appropriate equation for portraying the relationship of assets,
liabilities, and owners’ equity of a corporation is:
(a) assets – liabilities = owners’ equity(c) assets = restriction of assets
(b) assets = liabilities + owners’ equity(d) liabilities = assets – owners’ equity
B

21. Which of the following statements regarding the economic entity assumption is
most accurate?
(a) the economic entity assumption applies only to corporations and not to sole
proprietorships and partnerships
(b) the economic entity assumption does not apply to a segment of a firm (such as a
division)
(c) the economic entity assumption recognizes the fiduciary responsibility of
management to stockholders
(d) the economic entity assumption is irrelevant to decisions regarding the
consolidation of several interrelated firmsC

22. The financial statements prepared under GAAP:

(a) do not articulate with one another
(b) reflect a single measurement basis which is historical cost
(c) are not highly precise because many estimates and judgments must be made
(d) contain a limited number of future projects, such as projected saleC

23. The primary measurement basis currently used to value assets in general purpose
financial statements of an enterprise is:
(a) the current market price if the assets currently held by an enterprise were
sold on the open market
(b) the current market price if the assets currently held by an enterprise were
purchased on the open market
(c) the present value of the cash flows assets are expected to general over their
remaining useful lives
(d) the market price of the assets at the date the assets were acquiredD

24. 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 valuesC

25. The GAAP also apply to:

(a) The Board of Accountancy(c) The Philippine Institute of CPAs
(b) The Bureau of Internal Revenue(d) The Professional Regulation Commission
D

III – ACOUNTING ASSUMPTIONS

1. These are the basic notions or fundamental premises on which the accounting
process is based.
(a) accounting assumptions(c) generally accepted accounting principles
(b) accounting standards(d) accounting conceptsA

2. The ASC conceptual framework specifically mentions two underlying assumption.

These are:
(a) accrual and going concern(c) going concern and time period
(b) accrual and accounting entity (d) time period and monetary unitA

3. The effects of transactions and other events are recognized when they occur and
not as cash or its equivalent is received or paid, and they are recorded and
reported in the financial statements of the period to which they relate.
(a) accrual(c) time period
(b) going concern(d) monetary unitA

4. Which of the following statements is incorrect?

(a) The accrual method, which builds directly on the revenue and matching
principles, ignores the timing of cash receipts or payments when determining when
to recognize revenue or expenses.
(b) Expenses are matched with revenue, not the reverse.
(c) In accordance with the unit of measure assumption, accountants normally revise
the amounts to reflects the changing purchasing power of money due to inflation or
deflation.
(d) In accordance with the going concern assumption, the life of a business is
presumed to be indefinite.C

5. If a business is not being sold or closed, the amounts reported in the accounts
for assets used in the business operations are based on the cost of the assets.
This practice is justified by:
(a) accrual(c) continuity assumption
(b) time period(d) accounting entityC

6. John Frivs is the sole owner and manager of Ace Services. John purchased a car
for personal use. He uses a van in the business. Which of the following is violated
if John recorded the cost of the car as an asset of the business?
(a) conservatism(c) full disclosure
(b) going concern assumption(d) separate entity assumptionD

7. What is the traditional accounting period?

(a) three months(c) two years
(b) six months(d) twelve monthsD

8. Which underlying concept serves as the basis for preparing financial statements
at regular intervals?
(a) accounting entity(c) accounting period
(b) going concern(d) stable monetary unit C

9. Revenue is expressed as the number of pesos received or the peso equivalent of

the commodities of services received. Cost is expressed as the number of pesos paid
out of the peso equivalent of the items given up. Fluctuations in value of the peso
are ignored. The above describes what accounting assumption?
(a) going concern(c) historical cost
(b) unit of measure(d) realizationB

10. The financial statements should be stated in terms of a common financial

denominator.
(a) accrual(c) time period
(b) going concern(d) monetary unitD

11. The concept of accounting entity is applicable:

(a) only to be legal aspects of business organizations.
(b) only to the economic aspects of business organizations.
(c) only to business organizations.
(d) whenever accounting is involved.D

12. When a parent and subsidiary relationship exists, consolidated financial

statements are prepared in recognition of:
(a) legal entity(c) stable monetary unit
(b) economic entity(d) time periodB

13. The valuation of a promise to receive cash in the future at present value on
the financial statement of a business entity is valid because of the accounting
concept of:
(a) entity(c) going concern
(b) time period(d) monetary unitC

14. Continuation of an accounting entity in the absence of evidence to the contrary

is an example of the basic concept of:
(a) accounting entity(c) going concern
(b) time period(d) accrualC

15. This accounting concept justifies the usage of accruals and deferrals.
(a) going concern(c) consistency
(b) materiality(d) stable monetary unitA

16. During the lifetime of an entity, accountants produce financial statements at

arbitrary points in time in accordance with which basic accounting concepts?
(a) accrual(c) unit of measure
(b) periodicity(d) continuityB

17. The relatively stable economic, political and social environment supports:
(a) conservatism(c) timeliness
(b) materiality (d) going concernD
IV – CONCEPTUAL FRAMEWORK

A. DEFINITION, PURPOSE, AND STATUS

1. A conceptual framework is:

(a) a statements of financial accounting standard.
(b) an underlying accounting assumption.
(c) a theoretical foundation which guides the ASC, preparers and users of financial
accounting information.
(d) a financial statement.C

2. Which is not a basic purpose of a conceptual framework?

(a) to assist ASC in developing accounting standards.
(b) to assist preparers of financial statements in applying ASC accounting
standards.
(c) to assist ASC in reviewing and adopting International Accounting Standards.
(d) to assist the Board of Accountancy in promulgating rules and regulations
affecting the practice of accountancy in the Philippines.D

3. The ASC conceptual framework is intended to establish:

(a) generally accepted accounting principles in financial reporting by business
enterprises.
(b) the meaning of “present fairly in accordance with generally accepted accounting
principles.”
(c) the objectives and concepts for use in developing standards of financial
accounting and reporting.
(d) the hierarchy of sources of generally accepted accounting principles.C

B. SCOPE – OBJECTIVES OF FINANCIAL STATEMENTS

1. Which is not included in the scope of the ACS conceptual framework?

(a) qualitative characteristics that determine usefulness of financial accounting
information
(b) definition, recognition and measurement of the elements of financial statements
(c) objective of financial statements
(d) generally accepted accounting principlesD

2. What is the objective of financial statements?

(a) to disclose the market value of the firm’s assets and liabilities
(b) to determine compliance with tax laws
(c) to make forecasts about the economy
(d) to help users makes decisionsD

3. It is the financial flexibility of an enterprise.

(a) liquidity(c) financial structure
(b) solvency(d) capacity for adaptationD

4. It is the level if income earned by an enterprise through the efficient and

effective utilization of resources.
(a) financial position(c) positive cash flows
(b) performance(d) negative cash flowsB

5. Liquidity is defined as the :

(a) ability of the enterprise to pay currently maturing obligations.
(b) ability of the enterprise to meet obligations over a longer term.
(c) invested capital of the enterprise.
(d) borrowed capital of the enterprise.A

6. The theory of accounting which best describes the accounting equation expressed
“assets = Liabilities + proprietorship” is the :
(a) entity theory(c) proprietary theory
(b) fund theory(d) residual equity theoryA

7. What theory of ownership equity is enumerated by the following equation: assets

minus liabilities minus preferred stock equity equals common stock equity?
(a) fund(c) proprietary
(b) enterprise(d) residual equityD

8. Classifying preferred dividends as expense is an application of what concept?

(a) entity(c) residual equity
(b) proprietary(d) fundC

9. The primary accounting is fair presentation of the performance of the

enterprise.
(a) entity(c) residual equity
(b) proprietary(d) fundA

10. Government or fiduciary accounting is an application of:

(a) entity(c) residual equity
(b) proprietary(d) fundD

11. Which of the following statements is incorrect?

(a) the accounting theory which explains well the accounting equation “assets minus
liabilities equals capital” is the proprietary theory
(b) under the entity theory, the major accounting effort is directed toward proper
valuation of assets rather than income determination
(c) strict adherence to the entity concept would not allow a parent company to take
up in its books its proportionate share in the profits and losses of its
subsidiaries
(d) under the fund theory, assets represent prospective services to the fund,
liabilities represent restriction against asses of the funds, and invested capital
represents either legal or financial restrictions on the use of assetsB
12. The type of money prices which uses such concepts as present value, discounted
cash flow and value in use is known as:
(a) price in a current purchase exchange(c) price based on future exchange
(b) price in a past exchange(d) price in a current sale exchangeC

13. All accounts in the financial statements are affected to a certain extent by
inflationary conditions, but the effect is more explicit in some accounts than in
others. Which account is the more seriously affected by inflation?
(a) property, plant and equipment(c) receivables
(b) merchandise inventory(d) cash A

14. The recognition of the deficiencies of historical cost accounting has led to
the advocacy of the recognition of the effects of inflation in the accounts. The
following statements characterize the recognition of the effects of inflation
except:
(a) all accounts in the financial statements are affected to a certain extent by
inflationary conditions, and the effect is more explicit in some accounts than in
others
(b) restating the entire financial statements in terms of current prices is a very
complicated process and requires considerable additional work
(c) users of financial statements advocate the recognition of the effects of
inflation in the accounts because historical cost creates the impression that the
business entity is more profitable than what it really is
(d) inflation affects more drastically those items in the accounts where the rate
of turnover is quite highD

C. SCOPE – QUALITATIVE CHARACTERISTICS

1. It is the capacity of information to make a difference in a decision by helping

users from predictions about the outcome of past, present and future events, or
confirm and correct prior expectations.
(a) relevance(c) comparability
(b) reliability(d) understandabilityA

2. The attributes of relevance include ( choose the incorrect one):

(a) predictive value(c) timeliness
(b) feedback value(d) neutralityD

3. It is the quality of information that assures readers that the information is

free from bias or error and faithfully represents what it purports to show.
(a) understandability(c) reliability
(b) relevance(d) comparabilityC

4. Which of the following has the primary responsibility for the preparation,
presentation and reliability of information in the financial statements?
(a) management(c) external auditor
(b) internal audit staff(d) internal management accountantA

5. Verifiability of financial accounting information is synonymous with:

(a) faithful representation(c) prudence
(b) substance over form(d) completenessA

6. In the event of conflict between the economic substance of a transaction and its
legal form, the economic substance shall prevail. This concept is known as:
(a) form over substance(c) faithful representation
(b) substance over form(d) completenessB

7. The financial accounting information is directed toward the common needs of

users and is independent of presumptions about particular needs and desires of
specific users.
(a) relevance(c) neutrality
(b) verifiability(d) completenessC

8. John Company does not know exactly how long its equipment will last. It decides
to use shorter rather than longer useful life for depreciating the equipment. What
accounting concept is being applied in this decision?
(a) reliability(c) materiality
(b) relevance(d) conservatismD

9. It is the exercise of care and caution in dealing with uncertainties in

measurement so s not to overstate assets and income and not understated liabilities
and expenses.
(a) completeness(c) faithful representation
(b) prudence(d) neutralityB

10. It is the result of the standard of adequate disclosure.

(a) faithful representation(c) neutrality
(b) substance over form(d) completenessD

11. Which of the following improves the reliability of accounting information?

(a) accounting entity(c) verifiability
(b) going concern(d) time periodC

12. The conceptual framework of accounting sets out certain essential

characteristics of accounting information. Which of the following is not as
essential characteristic?
(a) understandability(c) reliability
(b) profit-oriented(d) comparabilityB

13. The financial information must be comprehensible or intelligible if it to be

useful.
(a) relevance(c) understandability
(b) reliability(d) comparabilityC

14. Which qualitative characteristics relate to the content of the financial

statements?
(a) relevance and reliability(c) relevance and understandability
(b) understandability(d) reliability and comparabilityA

15. Which qualitative characteristics relate to the presentation of financial

statements?
(a) relevance and reliability(c) relevance and understandability
(b) understandability and comparability(d) reliability and comparabilityB

16. It is the ability to bring together for the purpose of noting similarities and
dissimilarities.
(a) relevance(c) understandability
(b) reliability(d) comparabilityD

17. Which is incorrect concerning the conditions for comparability within a single
enterprise?
(a) The presentations are in the same form.
(b) The contents of the statements are identical.
(c) Accounting principles are not changed or if they are changed, the financial
effects of the changes are not disclosed.
(d) Changes in circumstances or in the nature of underlying transactions are
disclosed. C
18. The ASC conceptual framework of accounting sets out two constraints when
implementing accounting procedures. What are they?
(a) cost-benefit and cost principle(c) cost principle and revenue principle
(b) timeliness and revenue principle(d) cost-benefit and timelinessD

19. According to the ASC conceptual framework, the usefulness of providing

information in financial statements is subject to the constraints of:
(a) consistency(c) reliability
(b) cost-benefit(d) representational faithfulnessB

20. The ability through consensus among measures to ensure that information
represents what it purports to represents is an example of the concept of:
(a) relevance(c) comparability
(b) verifiability(d) feedback valueB

21. Which of the following accounting concepts states that an accounting

transaction should be supported by sufficient evidence to allow two or more
qualified individuals to arrive at essentially similar conclusions?
(a) conservatism(c) periodicity
(b) objectivity(d) stable monetary unitB

22. Objectivity is assumed to be achieved when an accounting transaction:

(a) is recorded in a fixed amount of peso.
(b) involves the payment or receipt of cash.
(c) involves an arm’s length transaction between two independent parties.
(d) Allocates revenue or expenses in a rational and systematic manner.C

23. The principle of objectivity includes the concept of:

(a) summarization(c) conservatism
(b) classification(d) verifiabilityD

24. The consistency standard of reporting requires that:

(a) expenses be reported as charges against the period in which they are incurred.
(b) the effect of changes in accounting upon income be properly disclosed.
(c) extraordinary gains and losses should not appear on the income statement.
(d) accounting procedures be adopted which give a consistent rate of return.B

25. Accounting changes are often made and the monetary impact is reflected in the
financial statements of a company even though, in theory, this may be a violation
of the accounting concept of:
(a) materiality(c) conservatism
(b) consistency(d) objectivityB

26. Timeliness is an ingredient of:

(a) reliability(c) verifiability
(b) relevance(d) adequate financial statements B

27. Which of the following situations violates the concept of reliability?

(a) Financial statements were issued nine months late.
(b) Report data on segments having the same expected risks and growth rates to
analysts estimating future profits.
(c) Financial statements included property with a carrying amount increases to
management’s estimate of market value.
(d) Management reports to stockholders regularly refer to new projects undertaken,
but the financial statements never report project results.C

28. What is the underlying concept that supports the immediate recognition of a
contingent loss?
(a) substance over form(c) matching
(b) consistency(d) conservatismD

29. What is the underlying concept governing the GAAP pertaining to recording gain
contingencies?
(a) conservatism(c) consistency
(b) relevance(d) reliabilityA

30. Uncertainty and risks inherent in business situations should be adequately

considered in financial reporting. This statement is an example of the concept of:
(a) conservatism(c) neutrality
(b) completeness(d) representation faithfulnessA

31. An estimated loss from a loss contingency should be accrued when:

(a) It is probable at the date of the financial statements that an asset has been
impaired or a liability has been incurred and the amount of the loss can be
reasonably estimated.
(b) The loss has been incurred on the date of the financial statements and the
amount of the loss may be material.
(c) It is probable that a loss will be incurred in a future period and the amount
of the loss can be reasonably estimated.
(d) It is probable at the date of the financial statements that a loss has been
incurred and the amount of the loss may be material.A

32. How should a loss contingency that is reasonably possible and for which the
amount can be reasonably estimated be reported?
(a) accrues and disclosed(c) disclosed only
(b) accrued only(d) neither accrued nor disclosedC

33. Reserves for general contingencies should:

(a) be accrued in the financial statements and disclosed in the notes thereto.
(b) not be accrued in the financial statements but should be disclosed in the notes
thereto.
(c) not be accrued in the financial statements and need no be disclosed in the
notes thereto.
(d) be accrued in the financial statements but need not be disclosed in the notes
thereto.C

34. An estimated loss from a loss contingency that is probable and for which the
amount of the loss can be reasonably estimated should:
(a) not be accrued but should be disclosed in the notes to the financial
statements.
(b) be accrued by debiting an appropriated retained earnings account and crediting
a liability account or an asset account.
(c) be accrued by debiting an expense account and crediting an appropriated
retained earnings account.
(d) be accrued by debiting an expense account and crediting a liability account or
an asset account.D
35. On December 20,2001, an uninsured property damage loss was caused by a company
car being driven on company business by a company salesman. The company did not
become aware of the loss until January 25, 2002. The amount of the loss was
reasonably estimable before the company’s 2001 financial statements were issued.
The company’s December 31, 2001 financial statements should report an estimated
loss as:
(a) a disclosure, but not an accrual.(c) neither an accrual nor a disclosure.
(b) an accrual.(d) an appropriation of retained earnings. B

36. A company did not record an accrual for a contingent loss but disclose the
nature of the contingency and the range of the loss. How likely is the loss?
(a) remote(c) probable
(b) reasonably possible(d) certainB

37. A lawsuit in connection with a safety hazard exists for a manufactured product.
Occurrence of a loss is probable and reasonably estimable. The loss contingency
should:
(a) be accrued and disclosed.(c) be disclosed.
(b) be accrued only.(d) neither be accrued nor disclosed.A

38. An expropriation of assets which is imminent and for which the amount of loss
can be reasonably estimated should be:
(a) accrued only.(c) accrued and disclosed.
(b) disclosed only.(d) neither accrued and disclosed.C

39. Management can estimate the amount of loss that will occur if a foreign
government expropriates some company assets. If the appropriation is reasonably
possible, what is the treatment of the loss contingency?
(a) disclosed but not accrued as a liability(c) accrued as a liability but not
disclosed
(b) disclosed and accrued as a liability(d) neither accrued as a liability not
disclosedA

40. A company has a probable loss that can only be reasonably estimated within a
range of outcomes. However, no single amount within the range is a better estimate
than any other amount. The amount of the loss accrual should be:
(a) zero.(c) minimum of the range.
(b) maximum of the range(d) mean of the range.C

41. Ax Company is being used for illness caused to local residents as a result of
negligence on the company’s part in permitting local residents to be exposed to
highly toxic chemicals from its plant. Ax’s lawyer states that it is probable that
Ax will loss the suit and be found liable for a judgment costing anywhere from
P500,000 to P2,500,000. However, the lawyer states that the most probable costs is
P1,000,000. As a result of the above facts, Ax should accrue:
(a) a loss contingency of P500,000 and disclose a additional contingency of up to
P2,000,000.
(b) a loss contingency of P1,000,000 and disclose as additional contingency of up
to P1,500,000
(c) a loss contingency of P1,000,000 but not disclose any additional contingency.
(d) no loss contingency but disclose a contingency of P500,000 to P2,000,000. B

42. Ever Company has consigned that mortgage note on the home of its president,
guaranteeing the indebtedness in the event that the president should default. Ever
considers the likelihood of default to be remote. How should the guarantee be
treated in Ever’s financial statements?
(a) disclosed only(c) accrued and disclosed
(b) accrued only(d) neither accrued and disclosedA
43. The likelihood that the future event will or will nor occur can be expressed by
a range of outcome. Which range means that the future event occurring is very
slight?
(a) probable(c) certain
(b) reasonably possible(d) remoteD

44. Gain contingency is usually recognized when:

(a) realized.
(b) occurrence is reasonably possible and the amount is reasonably estimable.
(c) occurrence is probable and the amount is reasonably estimable.
(d) the amount is reasonably estimable. A

45. Which of the following is the proper accounting treatment of a gain

contingency?
(a) an accrued account.
(b) deferred earnings.
(c) an account receivable with an additional disclosure explaining the nature of
the transaction.
(d) a disclosure only.D

46. When the occurrence of a gain contingency is probable and its amount can be
reasonably estimated, the gain contingency should be:
(a) recognized in the income statement and disclosed.
(b) classified as an appropriation of retained earnings.
(c) disclosed, but not recognized in the income statement.
(d) neither recognized in the income statement not disclosed.C

47. Great Company operated a plant in a foreign country. It is probable that the
plant will be expropriated. However, the foreign government has indicated that
Great will receive a definite amount of compensation for the plant. The amount of
compensation is less than the fair market value but exceeds the carrying amount of
the plant. The contingency should be reported:
(a) as a valuation allowance as a part of stockholders' equity.
(b) as a fixed asset valuation allowance account.
(c) in the notes to the financial statements.
(d) in the income statement.C

48. At December 31, 2002, Cream Company was suing a competitor for patent
infringement. The award from the probable favorable outcome could be reasonably
estimated. Cream’s 2002 financial statements should report the expected award as
a :
(a) receivable and revenue.(c) receivable and deferred revenue.
(b) receivable and reduction of patent.(d) disclosure onlyD

49. Neutrality is an ingredient of:

(a) relevance(c) understandability
(b) reliability(d) comparabilityB

50. Which of the following relates to both relevance and reliability?

(a) comparability(c) verifiability
(b) feedback value(d) timelinessA

51. Under the ASC framework, the qualitative characteristics are:

(a) understandability, relevance, reliability and comparability
(b) accrual and going concern
(c) timelines, cost and benefit and materiality
(d) entity, proprietary, residual equity and fund theoryA

52. The characteristic that is demonstrated when a high degree of consensus can be
secured among independent measurers the same measurement methods is:
(a) relevance (c) verifiability
(b) reliability(d) neutralityC

53. Which of the following are considered pervasive constraints?

(a) materiality and conservatism(c) conservatism and timeliness
(b) timeliness and predictive value(d) cost-benefit and materialityD

D – DEFINITION, RECOGNITION AND MEASUREMENT OF ELEMENTS FROM WHICH FINANCIAL

STATEMENTS ARE CONSTRUCTED

1. These are related to the economic resources (assets), economic obligations

(liabilities), residual interest (equity) and changes in them (revenue and
expense).
(a) basic elements(c) basic objectives
(b) basic principles(d) basic conceptsA

2. The basic elements directly related to the measurement of financial position

are:
(a) assets, liabilities, equity, revenue and expenses
(b) assets, liabilities, and equity
(c) revenue and expense
(d) assets and liabilitiesB

3. The basic elements directly related to the measurement performance or results of

operations are:
(a) assets, liabilities, equity, revenue and expenses
(b) assets, liabilities and equity
(c) revenue and expense
(d) sales and cost of salesC

4. These are resources controlled by the enterprise as a result of past

transactions or events and from which future economic benefits are expected to flow
to the enterprise.
(a) assets(c) equity
(b) liabilities(d) revenueA

5. These are present obligations of an enterprise arising from past transactions or

events the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits.
(a) assets(c) equity
(b) liabilities(d) revenueB

6. It is the residual interest in the assets of the enterprise after deducting all
its liabilities.
(a) revenue(c) net income
(b) expenses(d) equityD

7. It represents the gross inflows of economic benefits during the period arising
in the course of ordinary activities of an enterprise when these inflows result in
increases in equity, other than those relating to contributions from owners.
(a) assets(c) expense
(b) liabilities(d) revenueD

8. It represents the gross outflows of economic benefits during the period arising
in the course of ordinary activities of an enterprise when these outflows result in
decreases in equity, other than those relating to distributions to owners.
(a) assets(c) expense
(b) liabilities(d) revenueC

9. According to ASC conceptual framework, the process of reporting an item in the

financial statements of an enterprise is:
(a) allocation(c) realization
(b) matching(d) recognitionD

10. The term “recognized” is synonymous with the term:

(a) recorded(c) matched
(b) realized(d) allocatedA

11. Which condition is necessary for the recognition of an asset?

(a) It is probable that future economic benefits will flow to the enterprise.
(b) The cost of the asset can be measured reliably.
(c) The asset is paid for.
(d) It is probable that future economic benefits will flow to the enterprise and
the cost of the asset can be measured reliably.D

12. Internally generated goodwill is:

(a) recognized as an asset because the inflow of future economic benefits is highly
probable and the cost of the goodwill can be measured reliably.
(b) not recognized as an asset because the cost cannot be measured reliably
although the inflow of future economic benefits is highly probable.
(c) recognized as expense.
(d) recognized as revenue.B

13. A company needed a new warehouse and a contractor quoted a P5,000,000 price to
construct it. A believed that is could build the warehouse for P4,300,000 and
decided to use company employees to build it. The final construction cost incurred
by A company was P4,800,000 but the asset was recorded at P5,000,000. What
principle is this violation of?
(a) cost principle(c) matching principle
(b) separate entity(d) conservatismA

14. According to GAAP, at what value should a company show its assets on the
balance sheet?
(a) market value at all times
(b) cash equivalent of asset given up or the asset received, whichever is more
clearly evident
(c) best estimate of an internal auditor
(d) cash outlay only, even if part of the consideration given was something other
than cash.B

15. Which of the following statements is not consistent with generally accepted
accounting principles as they relate to asset valuation?
(a) assets are generally recorded in the accounting records at cost to the
enterprise.
(b) accountants assume that assets such as supplies, buildings and equipment will
be used in the business operations rather sold.
(c) subtracting total liabilities from total assets results in the current market
value or equity.
(d) accountants base asset valuation upon objective, verifiable evidence rather
than on personal opinion. C

16. The valuation basis used in conventional financial statement is:

(a) replacement cost(c) original cost
(b) market value(d) a mixture of cost and value D

17. Imputing interest for certain assets and liabilities is primarily based on the
concept of:
(a) valuation(c) consistency
(b) conservatism(d) stable monetary unitA

18. In an arm’s-length transaction, Company A and Company B exchanged nonmonetary

assets with no monetary consideration involved. The exchange did not culminate an
earning process for both Company A and Company B, and the fair values of the
nonmonetary assets were both clearly evident. The accounting for the exchange
should be based on the:
(a) fair value of the asset surrendered (c) recorded amount of the asset
surrendered
(b) fair value of the asset received (d) recorded amount of the asset received A

19. Company A and Company B exchanged nonmonetary assets with no monetary

consideration involved and no impairment of value. The exchange did not culminate
an earning process for either Company A or Company B. The accounting for the
exchange should be based on the:
(a) recorded amount of the asset received(c) fair value of the asset received
(b) recorded amount of the asset relinquished (d) fair value of the asset
relinquished
B
20. Revenue is recognized when:
(a) it is probable that future economic benefits will flow to the enterprise.
(b) the future economic benefits can be measured reliably.
(c) it is possible that reliably measurable future economic benefits will flow to
the enterprise.
(d) It its probable that reliably measurable future economic benefits will flow to
the enterprise. D
21. Normally, revenue is recognized:
(a) when the customer’s order is received.
(b) when the customer’s order is accompanied by a check.
(c) only if the transaction will create an account receivable.
(d) when the title to the goods changes.D

22. In accordance with the revenue principle, when should revenue be recognized?
(a) when the goods are shipped(c) when title to the goods passes
(b) when cash is collected(d) when goods are set asideC

23. Depending on the nature of the enterprise, revenue may be recognized based on
different acceptable criteria. Which of the following is not an accepted basis for
recognition of revenue?
(a) passage of time(c) completion of percentage of a project
(b) performance of service(d) upon signing of contractD

24. Which of the following bases of revenue recognition reflects the greatest
degree of uncertainty about future events?
(a) sales method applied to sales of a department store
(b) cost recovery method applied to an installment sales contract
(c) production method for a gold mining operation
(d) percentage of completion on a construction contractB

25. Under what methods is revenue recognized prior to delivery?

(a) percentage of completion method(c) installment sales
(b) cost recovery method(d) accrual methodA

26. This revenue recognition method is allowed when a sale is insured under a
forward contract or government guarantee or when a homogenous market exists and
there is a negligible risk of failure to sell.
(a) percentage of completion method(c) cash method
(b) production method(d) accrual methodB

27. What is an example of an accounting principle?

(a) The fact that one type of accounting is designed to help managers identity,
measure and control operating costs
(b) The definition of when revenue is to be recognized
(c) The fact that business transactions involve a completed exchange of economic
transactions.
(d) The definition of assets minus liabilities equals shareholders’ equity.B

28. Which of the following is true?

(a) Net assets always increase when revenue is recorded.
(b) Generally accepted accounting principles are men-made rules that never change.
(c) The assumption that a business will continue to operate until it can sell its
assets to pay its creditors underlies the going concern concept.
(d) The Board of Accountancy is the body that currently has the authority to issue
pronouncement of GAAP.A

29. Which of the following statements about executory contracts is correct?

(a) They need not be disclosed.
(b) They occur when two parties agree to transfer resources or services but only
one party has performed.
(c) They must be recorded if material n amount.
(d) They must be disclosed if material n amount. D

30. 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 the 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

31. Under what condition in it proper to recognize revenue prior to the sale of the
merchandise?
(a) when the concept of internal consistency is complied with.
(b) when the revenue is to be reported as an installment sale.
(c) when the ultimate sale of the goods is at an assured sales price.
(d) when management has a long-established policy to do so.C

32. Which of the following is the most precise sense means the process of
converting noncash resources and rights into cash or claims of cash?
(a) allocation(c) recognition
(b) collection(d) realizationD

33. Gains on assets unsold are identified, in a precise sense, by the term:
(a) unrecorded(c) unrecognized
(b) unrealized(d) unallocatedB

34. Which of the following statements conforms to the realization concept?

(a) Equipment depreciation was assigned to a production department and then to
product unit cost.
(b) Depreciated equipment was sold in exchange for a note receivable.
(c) Cash was collected on accounts receivable.
(d) Product unit costs were assigned to cost of goods sold when the units were
sold.B

35. According to the FASB conceptual framework, an entity’s revenue may result
from:
(a) a decrease in an asset from primary operations.
(b) an increase in an asset from incidental transactions.
(c) an increase in a liability from incidental transactions.
(d) a decrease in a liability from primary operations. D

36. It is proper to recognize revenue prior to the sale of merchandise when:

I. The revenue will be reported as an installment sale.
II. The revenue will be reported under the cost recovery method.
(a) I only(c) both I and II
(b) II only(d) neither I nor IID

37. Cash collection is a critical event for income recognition in the:

Cost recovery methodInstallment method
(a) NoNo
(b) YesYes
(c) NoYes
(d) YesNoB

38. For financial statements purposes, the installment method of accounting may be
used if the:
(a) collection period extends over more than 12 months.
(b) installment are due n different years.
(c) ultimate amount collectible is indeterminate.
(d) percentage of completion method is inappropriate.C

39. Income recognized using the installment method of accounting generally equals
cash collected multiplied by the:
(a) net operating profit percentage.
(b) net operating profit percentage adjusted for expected uncollectible accounts.
(c) gross profit percentage.
(d) gross profit percentage adjusted for expected uncollectible accounts.C

40. According to the installment method of accounting, gross profit on an

installment sale is recognized in income:
(a) on the date of sale.
(b) on the date the final cash collection is received.
(c) in proportion to the cash collection.
(d) after cash collections equal to the cost of sales have been received.C

41. According to the cost recovery method of accounting, gross profit on an

installment sale is recognized in income:
(a) after cash collections equal to the cost of sales have been received.
(b) in proportion to the cash collections.
(c) on the date the final cash collection is received.
(d) on the date of sale.A

42. Art Company is engaged in extensive exploration for water. If upon discovery of
water, the company need not recognize any revenue from water sales exceed the costs
of exploration, the basis of revenue recognition being employed is the:
(a) production method(c) sales or accrual basis
(b) cash or collection basis(d) sunk cost or cost recovery method D

43. Art Company sells equipment on installment contracts. Which of the statements
best justifies the use of the cost recovery method of revenue recognition to
account for these installment sales?
(a) The sales contract provides that title to the equipment only passes to the
purchase when all payments have been made.
(b) No cash payments are due until one year from the date of sales.
(c) Sales are subject to a high rate of return.
(d) There is no reasonable basis for estimating collectibility.D

44. X Company produces expensive equipment for sale on installment contracts. Where
there is doubt about eventual collectibility, the income recognition method least
likely to overstate income is:
(a) at the time the equipment is completed.(c) the cost recovery method.
(b) the installment method.(d) at the time of delivery.C

45. When costs can be reasonably associated with specific revenue but not with
specific product, the cost should be:
(a) expensed in the period incurred.
(b) allocated to the specific produced based on the best estimate of the product
processing time.
(c) expensed in the period in which the related revenue is recognized.
(d) capitalized and then amortized over a reasonable period.C

46. Why are certain costs of doing business capitalized when incurred and then
depreciated or amortized over the periods benefited?
(a) to adhere to the concept of conservatism
(b) to reduce income tax liability
(c) to aid management in decision –making process
(d) to properly match costs of production with revenue earnedD

47. Which of the following is an example of the expense recognition principle of

associating cause and effect?
(a) allocation of insurance cost(c) depreciation of property, plant and equipment
(b) sales commissions(d) officers’ salariesB

48. Which of the following principles best describes the conceptual rational for
the method of matching depreciation with revenue?
(a) associating cause and effect(c) immediate recognition
(b) systematic and rational allocation (d) partial recognitionB

49. Which of the following is expensed under the principle of systematic and
rational allocation?
(a) salesmens’ monthly salaries(c) transportation to customers
(b) insurance premiums(d) electricity to light office building B

50. Which of the following would be matched with current revenue on a basis other
than association of cause and effect?
(a) goodwill(c) sales commission
(b) cost of goods sold(d) warranty costA

51. A patent with a ten-year life was determined to be worthless. The write off of
the asset is an example of which of the following principles?
(a) associating cause and effect(c) profit maximization
(b) immediate recognition (d) classificationB

52. Which of the following is not a theoretical basis for the allocation of
expense?
(a) immediate recognition(c) cause and effects association
(b) systematic and rational allocation(d) profit maximizationD

53. Some costs cannot be directly related to particular revenues but are incurred
to obtain benefits that are exhausted in the period in which costs are incurred. An
example of such costs is:
(a) sales commissions(c) freight in
(b) sales salaries(d) prepaid insuranceB

54. This measurement basis is the discounted value of future net cash inflows that
an asset is expected to generate in the normal course of business.
(a) historical cost(c) realizable value
(b) current cost(d) present valueD

55. Historical cost is a measurement base currently used in financial accounting.

Which of the following measurement bases is also currently used in financial
accounting?
Current selling priceDiscounted cash flowReplacement cost
(a) YesNoYes
(b) YesYesYes
(c) YesNoNo
(d) NoYesYesB

56. When discussing asset valuation, the following valuation bases are sometimes
mentioned: replacement cost, exit value, and discounted cash flow. Which of these
bases should be considered a current value measure?
(a) replacement cost and exit value
(b) replacement cost and discounted cash flow only
(c) exit value and discounted cash flow only
(d) replacement cost, exit value, and discounted cash flowD

57. According to the FASB conceptual framework, which of the following attributes
would not be used to measure inventory?
(a) historical cost(c) net realizable value
(b) replacement cost(d) present value of future cash flows D

58. Which of the most common measurements basis in accounting?

(a) historical cost(c) realizable value
(b) current cost(d) present valueA

59. A present obligation should be accrued when:

(a) it is probable at the date of the financial statements that a liability has
been incurred and the amount can be reasonably estimated
(b) the obligation has been incurred on the date of the financial statements and
the amount may be material
(c) it is probable that the obligation will be incurred in a future period and the
amount can be reasonably estimated
(d) it is probable at the date of the financial statements that an obligation has
been incurred and the amount may be materialA

60. How should a present obligation that is not probable and for which the amount
can be reasonably estimated be reported?
(a) accrued and disclosed(c) disclosed only
(b) accrued only(d) neither accrued nor disclosedC

61. A present obligation that
reasonably estimated should:
(a) not be accrued but should
(b) be accrued by debiting an
a liability account
(c) be accrued by debiting an
retained earnings account
(d) be accrued by debiting an
is probable and for which the amount can be
be disclosed in the notes to the financial statements
appropriated retained earnings account and crediting
expense account and crediting an appropriated
expense account and crediting a liability accountD

62. Abe Company is being sued for illness caused to local residents as a result of
negligence on the company’s part in permitting the local residents to be exposed to
highly toxic chemicals from its plant. Abe’s lawyer states that it is probable
that Abe will lose the suit and be found liable for a judgment costing anywhere
from P500,000 to P2,500,000. However, the lawyer states that the most probable
cost is P1,000,000. As a result of the above facts, Abe should accrue:
(a) a loss of P500,000 and disclose an additional contingency of up to P2,000,000
(b) a loss of P1,000,000 and disclose an additional contingency of up to P1,500,000
(c) a loss of P1,000 but not disclose any additional contingency
(d) no loss but disclose a contingency of P500,000 to P2,500,000B

63. Contingent assets are usually recognized when:

(a) realized
(b) occurrence is reasonably possible and the amount can be reasonably estimated
(c) occurrence is probable and the amount can be reasonably estimated
(d) the amount can be reasonably estimatedA

64. Which of the following is the proper accounting treatment of a contingent

asset?
(a) an accrued amount
(b) deferred earnings
(c) an account receivable with an additional disclosure explaining the nature of
the transaction
(d) a disclosure onlyD

65. When the occurrence of a contingent asset is probable and its amount can be
reasonably estimated, the gain contingency should be:
(a) recognized in the income statement and disclosed.
(b) classified as an appropriation of retained earnings.
(c) disclosed, but not recognized in the income statement.
(d) neither recognized in the income statement not disclosed.C
V. FINANCIAL REPORTING

1. What is the objective of financial reporting?

(a) to provide the necessary information for the management of an enterprise to
managers of that enterprise.
(b) to provide information that the creditors of an enterprise can use in deciding
whether to make additional loans to the enterprise.
(c) to measure the periodic net income of an enterprise.
(d) to provide external users with financial information that is useful in making
rational investment, credit and similar decisions.D

2. These include not only financial statements but also other information such as
financial highlights, analysis of financial statements, description of major
products and list of directors and officers.
(a) audit reports(c) note to financial statements
(b) financial reports(d) financial statementsB

3. Which uses need financial information to enable them to asses the ability of the
enterprise to provide renumeration, retirement benefits and employment
opportunities?
(a) customers(c) public, in general
(b) government and its agencies(d) employeesD

4. The objectives of financial reporting for business enterprise are based on:
(a) the need for conservatism.
(b) reporting on management’s stewardship.
(c) generally accepted accounting principles.
(d) the needs of the users of the information.D

5. 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) individual business enterprises and an economy as a whole or to members of
society as consumers.
(c) individual business enterprises and n economy as a whole, rather than to
industries or to members of society as consumers.
(d) individual business enterprises, industries and an economy as a whole, rather
than to members of society as consumers. A

6. During a period when an enterprise is under the direction of a particular

management, financial reporting will directly provide information about:
(a) both enterprise performance and management performance.
(b) management performance but not enterprise performance.
(c) enterprise performance but not management performance.
(d) neither enterprise performance nor management performance.C

7. What is the objective of financial reporting?

(a) assist investor in analyzing the economy.
(b) assist inventor in predicting future cash flows.
(c) assist supplier in determining an appropriate discount to offer a particular
company.
(d) enable banks to determine an appropriate interest rate on their guaranteed
investment certificates.B

8. The overall objective of financial reporting is to:

(a) provide information that is useful for decision making by external users
(b) provide information for income tax preparation and payment
(c) provide information only for stockholders
(d) provide information for management to make decisions for controlling the
operations
A

9. Which one of the following items is not listed as a major objective of financial
reporting?
(a) financial reporting should provide information about enterprise resources,
claims to those resources, and changes in them
(b) financial reporting should provide information useful in evaluating
management’s stewardship
(c) financial reporting should provide information useful in investment, credit,
and similar decisions
(d) financial reporting should provide information useful in assessing cash flow
projects
B

10. Financial reporting is concerned only with information that is significant

enough to affect evaluation or decision.
(a) timeliness(c) materiality
(b) cost and benefit(d) comparabilityC

54. Proponents of historical costs maintain that in comparison with all other
valuation alternatives for general-purpose financial reporting, statements prepared
using historical costs are more:
(a) objective(c) indicative of the entity’s purchasing power
(b) relevant(d) conservativeA

55. It is the quality of information that allows comparisons within a single

enterprise through time or from one accounting period to the next.
(a) horizontal comparability(c) reliability
(b) dimensional comparability(d) uniformityA

56. When information about two different enterprises engaged in the same industry
has been prepared and presented in similar manner, the information exhibits the
qualitative characteristic of:
(a) relevance (c) consistency
(b) reliability(d) comparabilityD

SOURCES & REFERENCES:

☺ Valix, Conrado T., THEORY OF ACCOUNTS – 2001 Edition, GIC Enterprises & Co.,
Inc., 2001

1. Accounting is:
I. A service activity and its function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be
useful in making economic decision.
II. The art of recording, classifying, and summarizing in a significant manner and
in terms of money, transactions, and events which are in part at least of a
financial character and interpreting the results thereof.
III. The process of identifying, measuring, and communicating economic information
to permit informed judgment and decision by users of the information.
(a) I only(c) I and III
(b) I and II(d) I, II, and IIID

2. Which is true concerning the ASC framework?

I. The framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users.
II. The framework is not a Statement of Financial Accounting Standards and hence
does not define standard for any particular measurement or disclosure issue.
III. The framework is concerned with general-purpose financial statements including
consolidated financial statements.
(a) I only(c) I and III
(b) I and II(d) I, II, and IIID

3. Suppliers and other trade creditors are interested in information:

(a) that enables them to determine whether amounts owing to them will be paid when
due.
(b) about the continuance of an enterprise, especially when they have a long-term
involvement with or are dependent on the enterprise.
(c) in order to regulate the activities of the enterprise, determine taxation
policies and as the basis for national income and similar statistics.
(d) about the stability and profitability of the enterprise.A

4. Information about financial structure is useful in:

I. Predicting future borrowing needs and how future profits and cash flows will be
distributed among those with an interest in the enterprise.
II. Predicting the ability of the enterprise to meet its financial commitments as
they fall due.
(a) both I and II(c) II only
(b) I only(d) neither I nor IIB

5. Under this assumption, the effects of transactions and other events are
recognized when they occur and not as cash or its equivalent is received or paid,
and they are recorded in the accounting records and reported in the financial
statements of the period to which they relate.
(a) accrual basis(c) monetary unit
(b) going concern(d) time periodA

6. These are the attributes that make the information provide in financial
statements useful to users.
(a) qualitative characteristics(c) underlying assumptions
(b) quantitative characteristics(d) GAAPA

7. An essential quality of the information provided in financial statements is that

it is readily understandable by users. For this purpose, users are:
I. Assumed to have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information with reasonable diligence.
II. Informed of the accounting policies employed, any changes in those policies and
the effects of such changes.
(a) I only(c) both I and II
(b) II only(d) neither I nor IIA
8. Information has the quality of relevance:
I. When it influences the economic decision of users by helping them evaluate past,
present and future events or confirming or correcting their past evaluations.
II. When it is free from material error and bias and can be depended upon by users
to represent faithfully that which it purports to represent or could reasonably be
expected to represent.
(a) I only(c) both I and II
(b) II only(d) neither I nor IIA

9. The information contained in the financial statements is neutral when the

information:
(a) is free from bias and error.
(b) is complete within the bounds of materiality and cost.
(c) reflects the economic substance of the transactions rather than their mere
legal form.
(d) represents faithfully the transactions and other events that it purports to
represent. A

10. Which is incorrect concerning comparability of financial information?

(a) Users must be able to compare the financial statements of an enterprise through
time in order to identify trends in its financial position and performance.
(b) Users must be able to compare the financial statements of different enterprises
in order to evaluate their relative financial position, performance and cash flows.
(c) It is appropriate for an enterprise to leave its accounting policies unchanged
when more relevant and reliable alternatives exist.
(d) It is important that financial statements show financial information for the
preceding period because users wish to compare the financial position, performance
and cash flows of an enterprise over time.C

11. The elements that directly related to the measurement of financial position
are:
(a) assets, liabilities and equity. (c) income and expenses.
(b) assets and liabilities.(d) assets, liabilities, equity, income and expenses.
A
12. The elements directly related to the measurement of performance are:
(a) income and expenses.(c) assets and liabilities.
(b) assets, liabilities and equity.(d) income, expenses and equity.A

13. An asset is:

(a) a resource controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow the enterprise.
(b) a present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
(c) the residual interest in the assets of the enterprise after deducting all its
liabilities.
(d) the excess of revenues over expenses.A

14. Revenue is:

I. Gross inflow of economic benefits during the period arising in the ordinary
course of ordinary activities of an enterprise when such inflow results in an
increase in equity, other than contributions from owners.
II. Gross outflow of economic benefits during the period arising in the ordinary
course of ordinary activities of an enterprise when such outflow results in a
decrease in equity, other than distribution to owners.
(a) I only(c) both I and II
(b) II only(d) neither I nor IIA

15. Conceptually and technically, this arises in the ordinary course of ordinary
activities of an enterprise and is referred to by a variety of different names
including sales, fees, interest, dividend, royalty, and rent.
(a) revenue(c) profit
(b) income(d) gainA

16. Expenses are recognized in the income statement on the basis of a direct
association between the cost incurred and the earning of specific items of income.
This process is commonly referred to as:
(a) matching of costs with revenues(c) revenue recognition
(b) matching of revenues with costs(d) cost allocationA

17. When economic benefits are expected to arise over several accounting periods
and the association with income can only be broadly or indirectly determined,
expenses are recognized in the income statement on the basis of:
(a) cause and effect association(c) immediate recognition
(b) systematic and rational allocation(d) profit maximizationB

18. An expense is recognized immediately in the income statement:

I. When an expenditure produces no future economic benefits.
II. When cost incurred ceases to qualify for recognition as an asset in the balance
sheet.
(a) I only(c) both I and II
(b) II only(d) neither I nor IIC

19. Which statement is incorrect concerning the ASC framework?

I. The framework applies to the financial statements of all commercial, industrial,
and business reporting enterprises, whether in public and private sector.
II. Special purpose financial reports, for example, prospectuses and computations
prepared for taxation purposes, are within the scope of the framework.
(a) both I and II(c) I only
(b) neither I nor II(d) II onlyD

20. Current cost is the:

(a) amount of cash paid or fair value of the consideration given at the time of
acquisition.
(b) amount of cash that would have to be paid if the same or an equivalent asset is
acquired currently.
(c) amount of cash that could currently be obtained by selling the asset in an
orderly disposal.
(d) present discounted value of the future net cash inflows that the item is
expected to generate in the normal course of business.B

21. Historical cost is the:

(e) amount of cash paid or fair value of the consideration given at the time of
acquisition.
(f) amount of cash that would have to be paid if the same or an equivalent asset is
acquired currently.
(g) amount of cash that could currently be obtained by selling the asset in an
orderly disposal.
(h) present discounted value of the future net cash inflows that the item is
expected to generate in the normal course of business.A

22. These are also known as postulates.

(a) accounting concepts(c) accounting principles
(b) accounting standards(d) accounting assumptionsD
23. Which subsequent event requires adjustment?
(a) loss on trade receivable which is confirmed by the bankruptcy of a customer
(b) sale of common stock
(c) settlement of litigation
(d) loss of plant as a result of fireA

24. Important subsequent events should be disclosed because they:

(a) may affect the interpretation of the current period financial statements.
(b) describe change in accounting period.
(c) occur immediately after the current period.
(d) reveal losses that have a high probability of occurring in the future.A

25. These users require financial information in order to regulate the activities
of an enterprise, determine taxation policies and as basis for nation income and
similar statistics.
(a) lenders(c) investors
(b) public(d) governments and their agenciesD

26. The providers of risk capital and their advisers:

(a) have an interest in information about the continuance of an enterprise
especially when they have a long-term involvement with or are dependent on the
enterprise.
(b) are interested in information that enables them to determine whether their
loans and the interest attaching to them will be paid when due.
(c) are interested in information about the stability and profitability of the
enterprise.
(d) are concerned with the risk inherent in and return provided by their
investments and need information to help them determine whether they should buy or
sell.D

27. Which statement is incorrect concerning financial statements?

(a) Financial statements are prepared and presented at least annually and are
directed toward the specific information needs of a wide range of users.
(b) The objective of financial statements is to provide information about financial
position, performance and cash flows of an enterprise that is useful to a wide
range of users in making economic decisions.
(c) Financial statements also show the results of the stewardship of management of
the accountability of management for the resources entrusted to it.
(d) The management of an enterprise has the primary responsibility for the
preparation and presentation of the financial statements of the enterprise.

28. Information about economic resources controlled by the enterprise and its
capacity to modify these resources is useful in predicting:
(a) the ability of the enterprise to meet its financial commitments as they fall
due over a longer term.
(b) the ability of the enterprise to meet currently maturing financial commitments.
(c) the future borrowing needs and how future profits and cash flows will be
distributed among those with an interest in the enterprise.
(d) the ability of the enterprise to generate cash and cash equivalents in the
future.

29. Information about the performance of an enterprise is required in order to

assess potential changes in the economic resources that is likely to control in the
future. This information is primarily provided in the:
(a) cash flow statement(c) balance sheet
(b) statement of retained earnings(d) income statement

30. Which statement is incorrect concerning the qualitative characteristic of

relevance?
(a) The relevance of information is affected by its nature and materiality.
(b) To be useful, information must be relevant to the decision making needs of
users.
(c) Information about financial position and past performance is frequently used as
basis for predicting future financial position and performance and other matters
such as dividend and wage payments and ability of the enterprises to meet its
financial commitments as they fall due.
(d) The predictive and confirmatory roles of information are not interrelated.D

31. Which statement is incorrect concerning the qualitative characteristic of

reliability?
(a) The information in financial statements must be within the bounds of
materiality and cost.
(b) To be reliable, information must represent faithfully the transactions and
other events it either purports to represent or could reasonably be expected to
represent.
(c) The information should be accounted for in accordance with their substance and
economic reality and not merely their legal form.
(d) Prudence is the inclusion of a degree of caution in the exercise of judgment
needed in making an estimate required under conditions of uncertainty, such that
assets or income are overstated and liabilities or expenses are understated.D

32. The following statements relate to the constraints on relevant and reliable
information. Which statement is incorrect?
(a) The benefits derived from the information should exceed the cost of providing
it.
(b) In achieving a balance between relevance and reliability, the overriding
consideration is how best to satisfy the economic decision-making needs of users.
(c) If there is undue delay in the reporting of information, it may lose its
relevance and reliability.
(d) To provide information on a timely basis, it may often be necessary to report
before all aspects of a transaction or other event are known, thus impairing
reliability.C

33. Casualty loss from an earthquake is:

(a) not recognized(c) deferred loss
(b) external transaction(d) internal transaction

34. The future economic benefit embodied in an asset is the potential to contribute
directly or indirectly to the flow of cash and cash equivalent to the enterprise.
Such potential may:
I. be a productive one that is part of the operating activities of the enterprise.
II. take the form of convertibility into cash or cash equivalents.
III. take the form of a capability to reduce cash outflows, such as when an
alternative manufacturing process lowers the costs of production.
(a) I only(c) III only
(b) I and II only(d) I, II and IIID

35. Which statement is incorrect concerning liabilities?

(a) A decision by the management of an enterprise to acquire assets in the future
in itself does not give rise to a present obligation.
(b) Obligation may be legally enforceable as a consequence of a binding contract or
statutory requirement.
(c) An essential characteristic of a liability is that the enterprise has a present
obligation.
(d) If an enterprise decides as a matter of policy to rectify faults in its
products even when these become apparent after the warranty period has expired, the
amounts that are expected to be expended in respect of goods already sold are
liabilities.A
36. Which statement is incorrect concerning the elements directly related to the
measurement of performance?
(a) Gains represent other items that meet the definition of income and may or may
not arise in the course of ordinary activities.
(b) Losses represent other items that meet the definition of expenses and may or
may not arise in the course of ordinary activities.
(c) The definition and expenses encompasses losses as well as those expenses that
arise in the course of ordinary activities.
(d) The definition of revenue encompasses both income and gains.D

37. Which statement is correct concerning the recognition of the elements of

financial statements?
(a) An asset is recognized when it is possible that future economic benefits will
flow to the enterprise and the cost of the asset can be measured reliably.
(b) A liability is recognized when it is possible that an outflow of resources
embodying economic benefits will result from the settlement of an obligation that
can be measured reliably.
(c) Income is recognized when an increase in future economic benefits related to a
decrease in asset or an increase in liability has arisen and the increase in
economic benefits can be measured reliably.
(d) Expenses are recognized when a decrease in future economic benefits related to
a decrease in asset or increase in liability has occurred and the decrease in
economic benefits can be measured reliably.D

38. Which statement is correct concerning materiality?

I. Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements.
II. Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement.
III. Materiality is a primary qualitative characteristic rather than a threshold or
cut off point for useful information.
(a) I, II and III(c) I and III only
(b) I only(d) I and II onlyD

39. A contingent liability is a:

I. possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence and nonoccurrence of one or more uncertain future
events not wholly within the control of the enterprise.
II. present obligation that arises from past and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and
the amount of the obligation can be measured reliably.
(a) I only(c) both I and II
(b) II only(d) neither I nor IIA

40. The present obligation is not a contingent liability but should be recognized
as a provision when:
(a) amount is reasonably estimable and event occurs infrequently.
(b) amount is reasonably estimable and occurrence of event is probable.
(c) event is unusual in nature and occurrence of event is probable.
(d) event is unusual in nature and event occurs infrequently.B

41. Which statement is incorrect concerning contingent liability?

(a) A contingent liability is not recognized in the financial statements.
(b) A contingent liability is disclosed only.
(c) If the contingent liability is remote, no disclosure is required.
(d) A contingent liability is both probable and measurable.D

42. It is a possible asset that arises from past event and whose existence will be
confirmed only by occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the enterprise.
(a) contingent asset(c) suspense account
(b) other asset(d) current assetA

43. Which statement is incorrect concerning a contingent asset?

(a) A contingent asset is not recognized in the financial statements because this
may result to recognition of income that may never be realized.
(b) When the realization of income is virtually certain, the related asset is no
longer contingent asset and its recognition is appropriate.
(c) A contingent asset is only disclosed when the occurrence of the future event is
possible or remote.
(d) The related gain arising from the contingent asset is recognized usually when
it is realized.C

44. These are events, whether favorable or unfavorable, that occur between the
balance sheet date and the date on which the financial statements are authorized
for issue.
(a) events after balance sheet date(c) past events
(b) current assets(d) future uncertain eventsA

45. Adjusting entries after balance sheet date include all of the following,
except:
(a) resolution after balance sheet date of a court case because it confirms that
the enterprise had already a present obligation
(b) bankruptcy of customer which occurs after the balance sheet date
(c) discovery of fraud or errors that show that the financial statements were
incorrect
(d) business combination after the balance sheet dateD

46. Non-adjusting events after balance sheet date which require disclosure include
all of the following, except:
(a) plan to discontinue an operation
(b) major purchase and disposal of asset or expropriation of major asset by
government
(c) destruction of a major production plant by a fire after the balance sheet date
(d) determination after balance sheet date of the cost of assets purchased or
proceeds sold before the balance sheet dateD

47. Which of the following is most likely to prepare the most accurate financial
forecast for a corporate enterprise based on empirical evidence?
(a) investors using statistical models to generate forecasts
(b) corporate management
(c) financial analysts
(d) independent CPAsB

48. The overriding criterion by which accounting information can be judged is that
of:
(a) usefulness for decision making(c) timeliness
(b) freedom from bias(d) comparabilityA

49. Which concept of accounting holds that, to a maximum extent possible, financial
statements should be based on arm’s length transactions?
(a) revenue realization(c) monetary unit
(b) verifiability(d) matchingB

50. Allowing firms to estimate rather than physically count inventory at interim
periods is an example of a tradeoff between:
(a) verifiability and reliability(c) timeliness and verifiability
(b) reliability and comparability(d) neutrality and consistencyC

57. Which of the following relates to both relevance and reliability?

(a) faithful representation(c) substance over form
(b) feedback value(d) cost-benefit constraintD

58. Which of the following financial attributes of assets is generally considered

to be the most relevant?
(a) present value(c) current cost
(b) current exit value(d) historical costA

59. The conservative approach in the measurement of financial position is best

illustrated in which of the following?
(a) arbitrary reduction of property items to report a conservative asset position
(b) recognition of fictitious liabilities
(c) inventories valued at cost or market, whichever is lower
(d) intangible asses are valued at nominal amountsC

60. An example of subsequent event which requires adjustment of financial

statements is:
(a) settlement of litigation when the event giving rise to the claim took place
subsequent to the balance sheet date
(b) decline in market value of investment between the balance sheet date and date
on which financial statements are issued
(c) loss on trade receivable which is confirmed by the bankruptcy of a customer
occurring after the balance sheet date
(d) loss of inventories as a result of floodC

61. Events after balance sheet date are those which occur between the balance sheet
date and the date on which the financial statements are issued. Which subsequent
event requires adjustment as opposed to mere disclosure in the financial
statements?
(a) material decline in market value of inventory
(b) loss of plant as a result of fire
(c) material writeoff of receivables resulting from customer’s major casualty after
the balance sheet date
(d) payment to BIR of disputed income tax assessmentD

62. Under the accrual basis of accounting, cash receipts and disbursements may:
(a) precede, coincide with, or follow the period in which revenue and expenses are
recognized
(b) precede or coincide with, but never follow the period in which revenue and
expenses are recognized
(c) coincide with or follow, but never precede the period in which revenue and
expenses are recognized
(d) only coincide with the period in which revenue and expenses are recognizedA

63. Financial statements portray the financial effects of transactions and other
events by grouping them into broad classes according to their economic
characteristic. These broad classes are termed as:
(a) audit reports(c) notes to financial statements
(b) financial reports(d) elements of financial statementsD

64. It is the process of incorporating in the balance sheet or income statement an

item that meets the definition of an element of financial statement.
(a) measurement(c) allocation
(b) realization(d) recognitionD

65. What is another term for equity?

(a) net assets(c) revenue
(b) net loss(d) liabilityA

66. The elements of financial statements should be measured in:

(a) constant pesos(c) fixed pesos
(b) nominal pesos(d) flexible pesosB

67. Generally, revenue from sales should be recognized at a point when:

(a) management decides it is appropriate to do so
(b) the product is available for sale to the ultimate consumer
(c) the entire amount receivable has been collected from the customer and there
remains no further warranty liability
(d) the enterprise has transferred to the buyer the significant risks and rewards
of ownership of the goodsD

68. Which of the following represents the least desirable choice in terms of
realization and recognition of revenue?
(a) recognition of revenue during production
(b) recognition of revenue when a sale occurs
(c) recognition of revenue when a cash is collected
(d) recognition of revenue when production is completedC

69. Which accounting principle is being observed when an accountant charges to

expense a cost that contributed to revenue during a period?
(a) revenue realization(c) monetary unit
(b) matching(d) conservatismB

70. The costs of selling and administration in a manufacturing firm are an example
of:
(a) direct matching(c) asset valuation
(b) systematic and rational allocation(d) immediate recognitionD

71. A decrease in net assets arising from peripheral or incidental transactions is

called:
(a) capital expenditure(c) loss
(b) cost(d) expenseC

72. An outflow of assets from an entity based on an activity that represents the
entity’s major operations is called:
(a) loss (c) expense
(b) liability(d) equityC

73. Which of the following is not among the economic resources of a business
enterprise?
(a) money(c) obligations to pay money
(b) products or output of the enterprise(d) ownership interest in other enterprises
C

74. The following statements relate to the concept of asset. Which is false?
(a) the primary characteristic of an asset is its capacity to provide the
enterprise with probable economic benefits
(b) there is an expiration of economic benefits when an asset is used up in the
production of another asset
(c) a business entity may recognize an asset even if it does not possess legal
title
(d) the assets of an enterprise result from past transactions or other past eventsB

75. The following statements relate to the concept of revenue. Which statement is
not true?
(a) income determination is technical term that refers to the process of
identifying, measuring and relating revenue and expenses during an accounting
period
(b) transactions like issuance of capital stock and payment of dividends between
the business entity and its owners cannot give rise to revenue
(c) deferred revenue is synonymous with unrealized revenue
(d) the definition of income encompasses both revenue and gains C

76. Gross decreases in assets or gross increases in liabilities recognized and

measured in conformity with GAAP that result from those types of profit-directed
activities of an enterprise that can change owners’ equity refer to:
(a) expenses (c) revenue
(b) results of operations(d) net incomeA

77. The following statements relate to the concept of expense. Which of the
following is false?
(a) all expenses and loss are expired costs, but not all expired cots are expenses
or losses
(b) all expenses decrease owners’ equity, but not all decreases in owners’ equity
are expenses
(c) expense is synonymous with expenditure
(d) business enterprise do not incur expenses per se but they initially acquire
assetsC

78. An expiration of cost which is incurred without compensation or return and not
absorbed as cost of revenue is called:
(a) deferred credit(c) loss
(b) deferred charge(d) indirect costC

79. The allowance for cash discounts which would appear as a deduction from
accounts receivable on a balance sheet and would be based on an estimate of cash
discounts to be taken on accounts receivable is an effect of the application of:
(a) matching (c) materiality
(b) consistency(d) objectivityA

80. Some costs cannot be directly related to particular revenue but are incurred to
obtain benefits in the period in which the costs are incurred. An example of such
cost is:
(a) telephone expenses(c) cost of merchandise sold
(b) sales commissions(d) transportation inA

81. This represents the approximation of the exchange price in transfers in which
money or promises to pay money are not involved.
(a) fair value(c) selling price
(b) estimated value(d) transfer priceA

82. Which transaction indicates compliance with the concept of objectivity?

(a) the accounting transaction that furthers the objectives of the enterprise
(b) the accounting transaction which involves the allocation of revenue or expense
items in a rational and systematic manner
(c) an arm’s length transaction between two independent parties
(d) the accounting transaction which is promptly recorded in a fixed amountC

83. Which of the following accounting theory justifies the use of historical cost
in the preparation of the financial statements?
(a) conservatism (c) relevance
(b) objectivity (d) comparabilityB

84. Robbers stole from a company 30 computers worth P300,000. The value of the
loss should be classified as:
(a) an exchange(c) a cost
(b) a casualty(d) a nonreciprocal transferD

85. An example of revenue derived from a nonreciprocal transfer is:

(a) compensation received as damages in a successful lawsuit
(b) appreciation of property
(c) land acquired as donation
(d) settlement of a liability at less than its book valueA

86. The restatement of historical peso financial statements in terms of current

prices results in presenting assets at:
(a) lower of cost or market value
(b) current appraisal value
(c) current replacement cost
(d) costs adjusted for purchasing power changesC

87. The following statements relate to current value accounting. Which statement
is correct?
(a) the objective of current value accounting is to report the effects of general
price changes rather than specific price changes
(b) the term current value may mean current replacement cost, net realizable value
or net present value of expected future cash flows
(c) all items in a current value balance sheet are difference in amount from what
they would be in a historical cost balance sheet
(d) both purchasing power and holding gains and losses are recognized in current
value accountingB

88. The main function is to establish and improve accounting standards that will be
generally accepted in the Philippines.
(a) PICPA (c) PRC
(b) Board of Accountancy(d) ASC D

89. Expenses are recognized when:

(a) It is probable that an outflow of future economic benefits has occurred.
(b) The outflow of future economic benefits can be measured reliably.
(c) It is probable that a reliably measurable outflow of future economic benefits
has occurred.
(d) It is possible that a reliably measurable outflow of future economic benefits
has occurred. C

90. The requirement that expenses be reported in the same accounting period as the
revenues earned as a result of those expenses is:
(a) revenue principle(c) cash basis of accounting
(b) cost principle(d) matching principleD

91. Some costs are recognized as expenses on the basis of a presumed direct
association with specific revenue.
(a) associating cause and effect(c) immediate recognition
(b) systematic and rational allocation(d) income tax methodA

92. If an asset provides benefits for several periods, its cost is allocated on the
periods benefited in the absence of a more direct basis for relating the cost to
revenue.
(a) associating cause and effect(c) immediate recognition
(b) systematic and rational allocation(d) installment methodB

93. Which of the following is not a basis for the immediate recognition of a cost
during a period?
(a) The cost provides no discernible future benefit.
(b) The cost recorded in a prior period no longer provides discernible benefit.
(c) The income tax savings using the immediate write-off method exceed the savings
obtained by allocating the cost to several periods.
(d) Allocation of the cost on the basis of association with revenue among several
accounting periods is considered to serve no useful purpose.C

94. When costs can be reasonably associated with specific revenues but not with
specific products, the costs should be:
(a) charged to expense in the period incurred
(b) allocated to specific products based on the best estimate of the product
processing time
(c) expensed in the period in which the related revenue is recognized
(d) capitalized and then amortized over a reasonable periodC

95. Why are certain costs of doing business capitalized when incurred and then
depreciated or amortized over subsequent accounting cycles?
(a) to reduce the income tax liability
(b) to aid management in the decision making process
(c) to mach the costs of production with revenue as earned
(d) to adhere to the accounting concept of conservatismC

66. Which of the following is expensed under the principle of systematic and
rational allocation?
(a) amortization of intangible assets(c) research and development costs
(b) sales commissions(d) officers’ salariesA

96.

SOURCES & REFERENCES:

☺ Valix, Conrado T., THEORY OF ACCOUNTS – 2002 & 2004 Edition, GIC Enterprises &
Co., Inc., 2002 & 2004