Framework of Accounting (TOA) - Valix
Framework of Accounting (TOA) - Valix
Framework of Accounting (TOA) - Valix
2. These are events that affect the enterprise and in which other entities participate.
Internal External Internal External
(a) Yes Yes (c) No No
(b) Yes No (d) No Yes D
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) auditing A
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
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 principles A
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 Commission A
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 Fund D
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
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 accounting B
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 management C
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 auditors B
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
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 firms C
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 acquired D
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 concepts A
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 unit A
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 unit A
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 entity C
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 assumption D
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) realization B
10. The financial statements should be stated in terms of a common financial denominator.
(a) accrual (c) time period
(b) going concern (d) monetary unit 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 period B
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 unit C
15. This accounting concept justifies the usage of accruals and deferrals.
(a) going concern (c) consistency
(b) materiality (d) stable monetary unit A
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) continuity B
17. The relatively stable economic, political and social environment supports:
(a) conservatism (c) timeliness
(b) materiality (d) going concern D
IV – CONCEPTUAL FRAMEWORK
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 flows B
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 theory A
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 equity D
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 exchange C
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 high D
C. SCOPE – QUALITATIVE CHARACTERISTICS
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) comparability C
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 accountant A
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) completeness B
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) completeness C
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) conservatism D
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) neutrality B
10. It is the result of the standard of adequate disclosure.
(a) faithful representation (c) neutrality
(b) substance over form (d) completeness D
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) comparability B
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 comparability A
16. It is the ability to bring together for the purpose of noting similarities and dissimilarities.
(a) relevance (c) understandability
(b) reliability (d) comparability D
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 timeliness D
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 faithfulness B
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 value B
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 unit 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) objectivity B
29. What is the underlying concept governing the GAAP pertaining to recording gain
contingencies?
(a) conservatism (c) consistency
(b) relevance (d) reliability A
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 faithfulness 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 disclosed 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) certain B
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
disclosed A
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 disclosed A
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) remote D
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 only D
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) neutrality C
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 concepts A
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 liabilities B
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) revenue A
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) revenue B
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) equity D
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) revenue D
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) revenue C
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) recognition D
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) conservatism A
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
17. Imputing interest for certain assets and liabilities is primarily based on the concept of:
(a) valuation (c) consistency
(b) conservatism (d) stable monetary unit A
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 aside C
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 contract D
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 contract B
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 method B
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) realization D
33. Gains on assets unsold are identified, in a precise sense, by the term:
(a) unrecorded (c) unrecognized
(b) unrealized (d) unallocated 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
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 earned D
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’ salaries B
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 recognition B
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 cost A
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) classification B
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 maximization D
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 insurance B
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 value D
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 price Discounted cash flow Replacement cost
(a) Yes No Yes
(b) Yes Yes Yes
(c) Yes No No
(d) No Yes Yes B
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 flow D
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
61. A present obligation that is probable and for which the amount 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
(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 D
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 P2,500,000 B
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 only D
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
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 statements B
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) employees D
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
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) comparability C
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) conservative A
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) uniformity A
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) comparability D
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 III D
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 period A
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) GAAP A
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
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) gain A
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 allocation A
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 maximization B
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 agencies D
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
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
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 III D
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
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
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 asset A
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 events A
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 date D
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 date D
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 CPAs B
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) comparability A
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) matching B
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 consistency C
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 cost A
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 amounts C
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 flood C
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 assessment D
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 recognized A
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 statements D
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) recognition D
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 completed C
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) conservatism B
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 recognition D
71. A decrease in net assets arising from peripheral or incidental transactions is called:
(a) capital expenditure (c) loss
(b) cost (d) expense C
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) equity C
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 events B
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 income A
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 assets C
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 cost C
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) objectivity A
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 in A
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 price A
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) comparability B
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 transfer D
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 changes C
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
accounting B
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
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 principle D
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 method A
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 method B
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 period C
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 conservatism C
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’ salaries A
96.