UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY

LAGUNA, PHILIPPINES
FINANCIAL ACCOUNTING & REPORTING 3
EDMUND E. HILARIO, CPA, MBA
REVIEW MATERIAL ON THEORY
TEST 1 (100%) THEORY OF ACCOUNTS
------------------------------------------------------------------Instruction: Select the correct answer for each of the
following questions. Mark only one answer for each
item by writing the letter of your choice on the
answer sheet.
STRICTLY NO ERASURES ARE
ALLOWED.
1. Value in use is
a) The market price
b) The discounted present value of future cash
flows arising from use of the asset and form
its disposal
c) The higher of an assets fair value less cost to sell
and its market value
d) The amount at which the asset is recognized in the
statement of financial position
2.

The
a)
b)
c)
d)

3.

An
important
implication
of
this
qualitative
characteristics is that users are informed of the
accounting policies employed, changes in those policies
and the effects of such changes
a) Consistency
c. Full disclosures
b) Comparability
d. Materiality

4.

5.
I.

II.

6.

7.

a)

b)
c)
d)

Which is correct concerning segment reporting?

An operating segment identified as a reportable
segment in the immediately preceding period shall
continue to be reported separately in the current
period even if it no longer meets any of the
quantitative thresholds, if management of the
entity judges the segment to be of continuing
significance
If an operating segment is identified as reportable
segment in the current period in accordance with
the quantitative thresholds, prior segment data
presented for comparative purposes shall be
restated to reflect the newly reportable segment
even if that segment did not satisfy any of the
quantitative thresholds in the prior period.
a) I only
c. Both I and II
b) II only
d. Neither I nor II
What is the first item presented in the notes to
financial statements?
a) Statement of compliance with PFRS
b) Summary of significant accounting policies
c) Supporting information for items presented in the
financial statements
d) Other disclosures, including contingent liabilities,
unrecognized contractual commitments and non
financial disclosures
An entity shall disclose for each reportable segment
which of the following specified amounts that are
included in the measure of segment assets?

The amount of investment in associates and

joint ventures accounted for by the equity
method
Financial assets
Deferred tax assets
Post-employment benefit assets

8.

An entity deals extensively with foreign entities, and its

financial statements reflect these foreign currency
transactions.
Subsequent to the end of reporting
period and before the date of authorization of the
issuance of the financial statements, there were
abnormal fluctuations in foreign currency rates. The
entity should
a) Adjust the foreign exchange year-end balances to
reflect the abnormal adverse fluctuations in foreign
exchange rate
b) Adjust the foreign exchange year-end balances to
reflect all the abnormal fluctuations in foreign
exchange rates and not just adverse movements
c) Disclose the event after reporting period in
footnotes as a non-adjusting event
d) Ignore the event after the reporting period

9.

An outflow of resources embodying economic benefits is

regarded as probable when
a. The probability that the event will occur is
greater than the probability that the event
will not occur
b. The probability that the event will not occur is
greater than the probability that the event will
occur
c. The probability that the event will occur is the
same as the probability that the event will not
occur
d. The probability that the event will not occur is 90%
likely

framework deals with the following except

Generally accepted accounting principles
Objective of financial statements
Qualitative characteristics of financial statements
Concepts of capital and capital maintenance

It is an adjustment of the carrying amount of an asset

or a liability or the amount of the periodic consumption
of an asset that results from the assessment of the
present status and expected future benefit and
obligation associated with the asset and liability
a) Change in accounting estimate
b) Change in accounting policy
c) Correction of a prior period error
d) Change in reporting entity

1st Semester 2016 - 2017

10. As regards the relationship between PFRS and the

framework, which statement is true?
I.
The framework is a reporting standard
II.
In cases of conflict the requirements of the
framework prevail over those of the relevant PFRS
a) I only
c. Both I and II
b) II only
d. Neither I nor II
11. An entity shall change on accounting policy only if the
change
I.
Is required by law
II.
Results in providing reliable and more relevant
information about the entitys financial position,
financial performance and cash flow
a) I only
c. Both I and II
b) II only
d. Neither I and II
12. Under PAS 12, which of the following statement is true?
I.
Accounting profit is the net profit or loss for a
period before deducting tax expense
II.
Taxable profit is the profit or loss for a period
determined
in
accordance
with
the
rules
established by taxation authorities upon which the
income taxes are payable
a) I only
c. Both I and II
b) II only
d. neither I nor II
13. According to PAS 24, which of the following is not a
related party of an entity?
a) A shareholder of the entity owning 30% of the
ordinary shares
b) An entity providing banking facilities to the
entity
c) An associate of the entity
d) Key management personnel of the entity

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UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY
LAGUNA, PHILIPPINES
FINANCIAL ACCOUNTING & REPORTING 3
EDMUND E. HILARIO, CPA, MBA
REVIEW MATERIAL ON THEORY
14. What are the conditions for offsetting financial assets
and financial liabilities?
a) A legal right of offset
b) A legal right of offset and an intention to
settle net or simultaneously
c) The existence of a clearing mechanism or other
market mechanism for net settlement and an
expectation of net settlement
d) A netting agreement and an expectation of net
settlement
15. Which of the following errors could cause an
understatement of owners equity and overstatement of
liabilities?
a) Failure to record interest accrued on a note payable
b) Failure to make the adjusting entry to record
revenue which had been earned but not yet billed
to customers
c) Failure to make the adjusting entry to record
revenue which had been earned but not yet billed
to customers
d) Failure to record the earned portion of fees
received in advance
16. Which statements is incorrect concerning the
presentation of the income statement?
a) The nature of expense method means that
expenses are aggregated according to their nature,
for example, depreciation, purchases, transport
cost, employee benefits and advertising
b) The function of expense method classifies expenses
according to their function as part of cost of sales,
cost of distribution and cost of administrative
activities
c) Because the nature of expense method or the
function of expense method has merit for the
different types of entities, the standard requires
management to select the presentation that is
reliable and more relevant
d) If the function of expense method is used, no
additional disclosure is required about the
nature of expense
17. The purpose of adjusting entries is to
a) Prepare revenue and expense accounts for
recording the transactions of the next period
b) Apply the realization principle and the
matching principle to transactions affecting
two or more accounting periods
c) Adjust daily the balance in assets, liability, revenue
and expense accounts for the effects of business
transactions
d) Adjust the capital account for the revenue, expense
and withdrawal transactions which occurred during
the year.
18. What are the qualitative characteristics of financial
statements?
a) Qualitative characteristics are the attributes
that make the information provided in
financial statements
b) Qualitative characteristics are broad classes of
financial effects of transactions and other events
c) Qualitative characteristics are non-qualitative
aspects of an entitys position and performance and
changes in financial positions
d) Qualitative characteristics measure the extent to
which an entity has complied with all relevant
standards and interpretations
19. Which qualitative characteristics relate to the content of
financial statements?
a) Relevance and reliability
b) Understandability and comparability

c)
d)

1st Semester 2016 - 2017

Relevance and understandability

Reliability and comparability

20. Which qualitative characteristics relate

presentation of financial statements?
a) Relevance and reliability
b) Understandability and comparability
c) Relevance and understandability
d) Reliability and comparability

to

the

21. The attributes of relevance include all of the following,

except
a) Predictive value
c. Timeliness
b) Feedback value
d. Neutrality
22. The following statements relate to materiality. Which
statement is true?
I.
Materiality of items depends on their individual or
collective influence on the economic decisions of
users
II.
Materiality of an item depends on its absolute size
and nature
a) I only
c. Both I and II
b) II only
d. Neither I nor
23. An item would be considered material and therefore
would be disclosed in the financial statement if
a) The expected benefits of disclosure exceed the
additional costs
b) The impact on earnings is greater than 10%
c) The standard definition of materiality is met
d) The omission or misstatement of the amount
would make a difference to the users
24. Financial information exhibits consistency when
a) Accounting procedures are adopted which smooth
net income and make results consistent between
years
b) Gains and losses are shown separately on the
income statement
c) Accounting entities give similar events the
same accounting treatment each period
d) Expenditures are reported as expenses and netted
against revenue in the period in which they are
paid
25. The consistency standard of reporting requires that
a) Expenses be reported as charges against the
period in which there are incurred
b) The effect of changes in accounting upon
income be properly disclosed
c) Gains and losses should not appear on the income
statement
d) Accounting procedures be adopted which give a
consistent rate of return
26. Which statement is incorrect concerning materiality?
a) Information is material if its omission or
misstatement
could influence the economic
decisions of users taken on the basis of the
financial statement
b) Materiality depends on the relative size of the item
or error judged in the particular circumstances of
its omission or misstatement
c) Materiality
is
a
primary
qualitative
characteristics rather than a threshold or cutoff point in determining useful information
d) Materiality is dependent on professional judgment
because no threshold limit is defined in the
framework or accounting standard
27. The accrual basis of accounting is most useful for
a) Determining the amount of income tax an entity
should pay

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UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY
LAGUNA, PHILIPPINES
FINANCIAL ACCOUNTING & REPORTING 3
EDMUND E. HILARIO, CPA, MBA
REVIEW MATERIAL ON THEORY
b)
c)
d)

Predicting the short-term financial performance of

an entity
Predicting
the
long-term
financial
performance of an entity
Determining the amount of dividends an entity
should pay

28. Application of the full disclosure principle

a) Is theoretically desirable but not practical because
the cost of complete disclosure
exceeds the
benefits
b) Is violated when important financial information is
buried in the notes to the financial statements
c) Is demonstrated by the use of supplementary
information
presenting
the
effects
of
changing prices
d) Requires that the financial statements be
consistent and comparable
29. Indicate the proper order of presenting the notes to
financial statements
I.
Statement of compliance with PFRS
II.
Other disclosures, such as contingent liabilities,
unrecognized contractual commitments and nonfinancial disclosures
III.
Supporting information for items presented on the
face of the financial statements
IV.
Summary of significant accounting policies
a) I, II, III and IV
c. I, III, IV and II
b) I, IV, III and II
d. I, IV, II and III
30. The summary of accounting policies shall describe
a) Only the measurement basis used in preparing the
financial statement
b) Only the accounting policies used by the entity
c) Both the measurement basis and accounting
policies used
d) Nature of the entitys operations and its principal
activities
31. Related parties include all of the following, except
a) Affiliates
b) Associates
c) Individuals owning, directly or indirectly, an
interest in the voting power of the reporting entity
that gives them significant influence over the entity
d) Two entities that have a common director
32. This is a pricing policy between related parties which
sets the price by reference to comparable goods sold in
an economically comparable market to a buyer
unrelated to the seller
a) No price method
b) Cost plus method
c) Resale price method
d) Uncontrollable price method
33. PAS 24 requires disclosure of compensation of the
management personnel. Which of the following would
not be considered compensation for this purpose?
a) Short-term benefits
b) Share-based payments
c) Termination benefits
d) Reimbursement of out of pocket expenses
34. Are
the
following
statements
in
relation
to
compensation, true or false, according to PAS 24
S1 Compensation includes social security contribution
paid by the entity
S2 Compensation includes postemployment benefits
paid on behalf of a parent of the entity in respect
of the entity
S1
S2
a) False
False
b) False
True
c) True
False
d) True
True

1st Semester 2016 - 2017

35. A general principle of disclosure is that material related

party transactions shall be disclosed. As the auditor of
an entity, you have noted the following transaction
entered into by the entity during the past fiscal year
I.
The entity borrowed P1,000,000 from the EastWest Bank issuing a noninterest-bearing note
II.
The borrowed P2,000,000 from BDO Bank at a rate
significantly above the market rate prevailing at
that time for such a borrowing
III.
The entity borrowed P500,000 from BPI bank with
no scheduled terms for how or when funds will be
repaid
Assuming all of the transactions are material, which
transactions most likely would be a related party
transaction requiring disclosure in the entitys financial
statements?
a) I only
c. Both I and III
b) III only
d. Both II and III
36. Noncurrent asset or disposal group is classified as held
for sale when the asset is available for immediate sale
and the sale is highly probable. For the sale to be highly
probable, (choose the incorrect one)
a) Management must be committed to plan to sell the
asset
b) An active program to locate a buyer and complete
the plan must have been initiated
c) The asset must be actively marketed for sale at a
reasonable price in relation to its current fair value
d) The sale is expected to qualify for recognition
as a completed sale within two years from the
data of classification of the asset as held for
sale.
37. What is the treatment of any gain on a subsequent
increase in the fair value cost to sell of a noncurrent
asset classified as held for sale?
a) The gain shall be recognized in full
b) The gain shall be recognized
c) The gain shall be recognized but not in excess
of the cumulative impairment loss previously
recognized
d) The gain shall be recognized but only in retained
earnings
38. An abandoned noncurrent asset
a) Shall be classified as held for sale
b) Shall not be classified as held for sale
because its carrying amount will be recovered
principally through continuing use
c) Shall be accounted for as a discontinued operation
d) Shall be treated as a loss
39. A discontinued operation is a component of an entity
that either has been disposed of or is classified as held
for sale and
I. Represents a separate major line of business or
geographical area of operations
II. Is part of a single coordinated plan to dispose of a
separated major line of business or geographical
area of operations
III. Is a subsidiary acquired exclusively with a view to
resale
a. I only
c. I and II only
b. I and III only
d. I, II and III
40. Which of the following criteria does not have to be met
in order for an operation to be classified as
discontinued?
a. The operation shall represent a separate major line
of business or geographical area
b. The operation is part of a single plan to dispose of
a separate major line of business or geographical
area

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UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY
LAGUNA, PHILIPPINES
FINANCIAL ACCOUNTING & REPORTING 3
EDMUND E. HILARIO, CPA, MBA
REVIEW MATERIAL ON THEORY
c.

The operation is a subsidiary acquired exclusively

with a view to resale
The operation must be sold within three
months of the year-end

a.

41. The effect of a change in accounting estimate shall be

recognized currently and prospectively be including it in
income or loss of
I. The period of change if the change effects that
period only
II. The period of change if the and future if the change
affects both.
a. I only
c. II only
b. Both I and II
d. Neither I nor II

c.
d.

d.

42. Prior period errors are omission from and misstatement

in the financial statements or one more periods arising
from a failure to use or misuse of reliable information
that
I. Was available when expected statements for those
periods were authorized for issue
II. Could reasonably be expected to have been
obtained and taken into account in the preparation
and presentation of those financial statements
a. I only
c. II only
b. Either I or II
d. Both I and II
43. Which of the following is characteristic of a change in
an accounting estimate?
a. It usually need not be disclosed
b. It does not affect the financial statements of
prior period
c. It should b reported through the restatement of
the financial statements
d. It makes necessary the reporting of pro forma
amounts for prior periods
44. Where financial statements for a single year are being
presented, a period error recognized in the current year
ordinary would
a. Be shown as an adjustment of the balance of
retained earnings at the start of the current
year
b. Affect net income of the current year
c. Be shown in current years statement of changes in
equity
d. Be included in the statement of recognized gains
and losses
45. Which statement is correct concerning interim financial
reporting?
I. PAS 34 mandates which entities are required to
publish interim financial reports, how frequently, or
how soon after the end of an interim period
II. Entities that provide interim financial reports in
conformity with generally accepted accounting
principles shall conform to the recognition,
measurement and disclosure principles set out in
the standard
a. I only
c. II only
b. Both I and II
d. Neither I nor II
46. Which statements in correct concerning interim
financial reporting?
I. An entity shall apply the same accounting policy in
its interim financial statements as are applied in its
annual financial statements
II. If an entitys interim financial report is in
compliance with PFRS, that fact shall be disclosed
a. I only
c. II only
b. Both I and II
d. Neither I nor II
47. An entity owns a number of farms that harvest produce
seasonally. Approximately 80% of the entitys sales are
in the period August of October. Because the entitys
business is seasonal, PAS 34 suggests

b.

1st Semester 2016 - 2017

Additional notes be written in the interim reports

about seasonal nature of the business
Disclosure of financial information for the
latest and comparative 12-month period in
addition to the interim report
Addition disclosure in the accounting policy note
No additional disclosure

48. The following statements relate to interim reporting.

Which statement is true?
I. It is necessary to count inventories in full at the
end of each interim period
II. The net realizable value of inventories is
determined by reference to selling prices at the
interim date
a. I only
c. II only
b. Both I and II
d. Neither I nor II
49. Which may be considered an operating segment?
a. Start-up operations before earning revenue
b. Corporate headquarters that earn revenue
c. Functional department
d. Post-employment benefit plans
50. An entity shall report information about an operating
segment when
a. Its assets are 10% or more of the combined
assets of all operating segments
b. Its net assets are 10% or more of the combined
assets of all operating segments
c. Its net assets are 10% or more of the combined
net assets of all operating segments
d. Its assets are 10% or more of the total assets of
the entity
51. An entity shall disclose which of the following general
information?
I. Factors used to identify the entitys reportable
segments, including the basis of organization
II. Types of products and services from which each
reportable segment derives its revenue
a. I only
c. II only
b. Both I and II
d. Neither I nor II
52. The following statement relate to information about
profit or loss of a reportable operating segment. Which
statement is true?
I. The measurement of profit or loss to be disclosed
for each reportable operating segment is defined in
PFRS 8
II. The profit or loss disclosed for a reportable
operating segment shall relate to the total assets
attributed to that segment
a. I only
c. II only
b. Both I and II
d. Neither I nor II
53. Prior to the current year, an entity used the cash basis
of accounting, As of December 31 of the current year,
the entity changed to the accrual basis. The entity
cannot determine the beginning balance of supplies
inventory. What is the effect of the entitys inability to
determine beginning supplies inventory on its accrual
basis net income and December 31 accrual basis
owners equity?
Net income
Owners equity
a.
b.
c.
d.

No effect
No effect
Overstated
Overstated

No effect
Overstated
No effect
Overstated

54. An entitys inventory and accounts payable balances

increased. Should these increases be added to or
deducted from cash payments to supplier to arrive at
cost of goods sold for the current year?
Increase in
Increase in

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UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA

CALAMBA CAMPUS, BRGY. PACIANO RIZAL, CALAMBA CITY
LAGUNA, PHILIPPINES
FINANCIAL ACCOUNTING & REPORTING 3
EDMUND E. HILARIO, CPA, MBA
REVIEW MATERIAL ON THEORY
a.
b.
c.
d.

Inventory
Added
Added
Deducted
Deducted

Accounts payable
Deducted
Added
Deducted
Added

55. The premium on a four-year insurance policy expiring

on December 31, 2011 was paid on total January 1,
2008. Assuming that the original payment was recorded
as a prepaid asset, the balance in the prepaid asset
account on December 31, 2009 would be
a. Lower than the balance on December 31,
2008
b. Lower than the balance on December 31, 2010
c. The same as the balance on December 31, 2011
d. The same as the original payment
56. If an inventory account is understated at year-end, he
effect will be to
a. Overstate the net purchases
b. Overstate the gross margin
c. Overstate the cost of goods available for sale
d. Overstate the cost of goods

57. If an inventory account is overstated at the beginning

of the year, the effect will be to
a. Overstate net purchases
b. Overstate gross margin

c.
d.

1st Semester 2016 - 2017

Overstate cost of goods available for sale

Understate cost of goods sold

58. At the middle of the year, an entity paid for insurance

premium of the current year and debited the amount to
prepaid insurance. At year-end, the bookkeeper forgot
to record the amount expired. In the financial
statements prepared at year-end, the omission
a. Overstates owners equity
c. Understates
assets
b. Understates net income
d. Overstates liabilities
59. Which of the following would cause income of the
current period to be understated?
a. Capitalizing research and development costs
b. Failure to recognize unearned rent revenue
c. Changing from weighted average to FIFO for
merchandise inventory
d. Understating estimate of residual value

60. Which of the following is a counterbalancing error?

a. Understated depletion expense
b. Bond premium under-amortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expense

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