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FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance (IABF)
Accountancy and Internal Auditing Department
Financial Accounting & Reporting, Part III
Midterm Examination
Name: _____________________________________________Yr. and Section: __________________
Instructions: In the following questions, provide the best answer in the space provided. Strictly no erasures.
Provide solutions when necessary.

THEORIES (20 Items)

1. All of the following statements are true regarding PAS 7 – Statement of Cash Flows, except:
a. The objective of this Standard is to require the provision of information about the historical
changes in cash and cash equivalents of an entity by means of a statement of cash flows
which classifies cash flows during the period from operating, investing and financing
activities.
b. The objective of PAS 7 is to analyze working capital as a basis of all cash flow activities.
c. Under PAS 7, cash flows of an entity are seen as useful in providing users of financial
statements with a basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilize those cash flows.
d. PAS 7 indicates that cash flows related to interest received and paid, and dividends
received and paid, should be separately disclosed in the statement of cash flows.

2. A company’s wages payable increased from the beginning to the end of the year. In the company’s
statement of cash flows in which the operating activities section is prepared under the direct
method, the cash paid for wages would be
a. Salary expense plus wages payable at the beginning of the year.
b. Salary expense plus the increase in wages payable from the beginning to the end of the
year.
c. Salary expense less the increase in wages payable from the beginning to the end of the
year.
d. The same as salary expense.

3. A company acquired a building, paying a portion of the purchase price in cash and issuing a
mortgage note payable to the seller for the balance. In the statement of cash flows, what amount is
included in investing activities for this transaction?
a. Mortgage amount
b. Acquisition price
c. Cash payment
d. Zero

4. To arrive at net cash provided by operating activities, it is necessary to report revenues and
expenses on a cash basis. This is done by
a. re-recording all income statement transactions that directly affect cash in a separate cash flow
journal.
b. estimating the percentage of income statement transactions that were originally reported on a
cash basis and projecting this amount to the entire array of income statement transactions.
c. eliminating the effects of income statement transactions that did not result in a corresponding
increase or decrease in cash.
d. eliminating all transactions that have no current or future effect on cash, such as depreciation,
from the net income computation.

5. The primary purpose of the statement of cash flows is to provide information

a. about the operating, investing, and financing activities of a company during a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of a company during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs for
external financing.
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6. How should significant non-cash transactions be reported in the statement of cash flows?
a. They should be incorporated in the statement of cash flows in a section labeled, "Significant
Noncash Transactions."
b. Such transactions should be incorporated in the section (operating, financing, or investing) that
is most representative of the major component of the transaction.
c. These noncash transactions are not to be incorporated in the statement of cash flows. They
appear in a note to the financial statements.
d. They should be handled in a manner consistent with the transactions that affect cash flows.

7. Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during
2011. The cumulative effect of this change should be reported in Lore’s 2011 financial statements
as a
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting principle.
c. Component of income before extraordinary item.
d. Component of income after extraordinary item.

8. Net income is understated if, in the first year, estimated salvage value is excluded from the
depreciation computation when using the
Straight-line method Production or use method
a. Yes No
b. Yes Yes
c. No No
d. No Yes

9. At the end of 2010, Ritzcar Co. failed to accrue sales commissions earned during 2010 but paid in
2011. The error was not repeated in 2011. What was the effect of this error on 2010 ending
working capital and on the 2011 ending retained earnings balance?
2010 ending 2011 ending
working capital retained earnings
a. Overstated Overstated
b. No effect Overstated
c. No effect No effect
d. Overstated No effect

10. On December 31, 2011, special insurance costs were incurred and unpaid, but were not recorded.
If these insurance costs were related to a particular job order in work in process that was not
completed during the period, what is the effect of the omission on accrued liabilities and retained
earnings in the December 31, 2011 balance sheet?
Accrued liabilities Retained earnings
a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated

11. Which of the following errors could result in an overstatement of both current assets and
stockholders’ equity?
a. An understatement of accrued sales expenses.
b. Noncurrent note receivable principal is misclassified as a current asset.
c. Annual depreciation on manufacturing machinery is understated.
d. Holiday pay expense for administrative employees is misclassified as
manufacturing overhead.

12. Justin Corporation discovered an error in their 2011 financial statements after the statements were
issued. This requires that
a. The cumulative effect of the error is reported on the 2012 income statement as a
cumulative effect of change in accounting principle.
b. The cumulative effect of the error is reported in the 2012 beginning balance of each related
account.
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c. The financial statements are restated to reflect the correction of period-specific effects of
the error.
d. An adjustment to beginning retained earnings in 2012 with a footnote disclosure describing
the error.

13. Jackson Company uses PFRS to report its financial results. During the current year, the company
discovered it had overstated sales in the prior year. How should the company handle this issue?
a. Adjust sales for the current period.
b. Spread the adjustment over the current and future periods.
c. Present the cumulative effect of the overstatement as an item in the current period income
statement.
d. Restate the prior year financial statements presented for comparative purposes.

14. Which statement is incorrect concerning the preparation of financial statements?

a. Financial statements shall be prepared on a going concern basis unless management
either intends to liquidate the entity or to cease trading, or has no realistic alternative but to
do so.
b. An entity shall prepare its financial statements using the cash basis of accounting.
c. Except when a standard or an interpretation permits or requires otherwise, an entity shall
disclose comparative information in respect of all previous period for all amounts reported
in the current period’s financial statements.
d. An entity shall include comparative information for narrative and descriptive information
when it is relevant to an understanding of the current period’s financial statements.

15. Which of the following statements best describes the term “going concern”
a. When current liabilities of an entity to continue in operation for assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The expenses of an entity exceed its income

16. Which is false concerning the rules of debit and credit?

a. The left side of an account is always debit side and the right side is always the credit side.
b. Increases in assets and expenses are debit entries, and increases in liabilities, equity and
revenue are credit entries
c. The normal balance of any account appears on the side for recording increases
d. The word “debit” means to increase and the word “credit” means to decrease

17. What is the appropriate presentation of a discontinued operation?

a. The amounts of revenue, expenses and pre-tax profit or loss from the activities attributable to
the discontinued operation during the current period, and the related income tax expense are
presented on the face of the income statement side by side with the continuing operation.
b. Net profit or loss from the activities of discontinued operation is treated as component of
equity.
c. Net profit or loss from the activities of the discontinued operation is accounted for as a change
in accounting policy.
d. The results from the discontinued operation shall be presented as a single amount net of tax
below the income from continuing operations.

18. Which is incorrect concerning the statement of financial position presentation of discontinued
operation?
a. Assets of the component held for sale are presented separately from all other assets of the
entity.
b. Assets of the component held for sale are measured at the lower of fair value less cost to sell
and their carrying amount.
c. Liabilities of the component held for sale are presented separately from all other liabilities of
the entity.
d. Noncurrent assets of the component held for sale shall continue to be depreciated.
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19. Which statement is incorrect concerning the presentation of the income statement?
a. The nature of expense method means that expenses are aggregated according to their nature
and are not reallocated among various functions within the enterprise.
b. The cost of sales method means that expenses are classified according to their function as
cost of sales, distribution or administrative activities.
c. PAS 1 requires the use of the cost of sales method because this presentation often provides
more relevant information to the users than the nature of expense method.
d. The choice between the functional and natural presentation depends on historical and industry
factors and the nature of the entity.

20.The notes to financial statements should be presented in what order?

I. Statement of compliance with PFRS
II.Summary of significant accounting policies
III.
Supporting computations for items presented on the face of the statements
IV.Other disclosures, including contingent liabilities, unrecognized contractual commitments and
nonfinancial disclosures
a. I, II, III and IV c. II, III, IV and I
b. IV, I, II and III d. No specific order

PROBLEMS (20 Items @ 2 points each)

1. Net cash flow from operating activities for 2011 for Gift Corporation was P300,000. The following
items are reported on the financial statements for 2011:
Depreciation and amortization P 20,000
Cash dividends paid on ordinary shares 12,000
Increase in accounts receivable 24,000
Based only on the information above, Gift’s net income for 2011 was:
a. P256,000. c. P296,000
b. P264,000. d. P304,000

2. Xavier Company entered into the following transactions during the year:
Purchases of trading securities 2,500,000
Sale of trading securities 1,100,000
Purchases of available for sale securities 4,500,000
Sale of available for sale securities 2,300,000

Xavier had no investment securities at the beginning of the year. The cost of the trading securities
sold was P1,500,000. The cost of the available for sale securities sold was P1,700,000. The market
value of the remaining trading securities on December 31 was P1,800,000 and the remaining available
for sale securities, P3,000,000. The net income for the year was P5,000,000. The net income does
not include any noncash items except for those related to investment securities.

Xavier Company shall report net cash flow from operating activities at
a. 4,400,000 c. 4,900,000
b. 2,400,000 d. 2,600,000

3. Cris Company reported net income of P3,000,000 for 2010. Changes occurred in several balance
sheet accounts as follows:

Equipment 250,000 increase

Accumulated depreciation 400,000 increase
Note payable 300,000 increase
 During 2010, Cris sold equipment costing P250,000, with accumulated depreciation
of P120,000 for a gain of P50,000.
 In December 2010, Cris purchased equipment costing P500,000 with P200,000
cash and a 12% note payable of P300,000.

In Cris’s 2010 cash flow statement, net cash used in investing activities should be
a. 20,000 c. 220,000
b. 120,000 d. 350,000
Use the following information for questions 4 through 6.
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The balance sheet data of Trisha Company at the end of 2011 and 2010 follow:
2011 2010
Cash P 50,000 P 70,000
Accounts receivable (net) 120,000 90,000
Merchandise inventory 140,000 90,000
Prepaid expenses 20,000 50,000
Buildings and equipment 180,000 150,000
Accumulated depreciation—buildings and equipment (36,000) (16,000)
Land 180,000 80,000
Totals P654,000 P514,000
Accounts payable P136,000 P110,000
Accrued expenses 24,000 36,000
Notes payable—bank, long-term 80,000
Mortgage payable 60,000
Share capital-ordinary, P10 par 418,000 318,000
Retained earnings (deficit) 16,000 (30,000)
P654,000 P514,000
Land was acquired for P100,000 in exchange for ordinary shares, par P100,000, during the year; all
equipment purchased was for cash. Equipment costing P10,000 was sold for P4,000; book value of the
equipment was P8,000 and the loss was reported in net income. Cash dividends of P20,000 were charged
to retained earnings and paid during the year; the transfer of net income to retained earnings was the only
other entry in the Retained Earnings account. In the statement of cash flows for the year ended December
31, 2011, for Trisha Company:

4. The net cash provided by operating activities was

a. P52,000. c. P56,000
b. P66,000. d. P48,000

5. The net cash provided (used) by investing activities was

a. P26,000. c. (P136,000)
b. P(40,000). d. (P36,000)

6. The net cash provided (used) by financing activities was

a. P -0-. c. (P40,000)
b. P(20,000). d. P60,000

7. Net Company’s total equity increased by P 320, 000 during 2012. New shareholder investment
during the year totaled P 650, 000. Total revenues during the year were P 5, 000, 000 and
expenses were P 4, 600, 000. Cash increased by P 75, 000 during the year.

What amount of dividends did Net declare during 2012?

a. P 737, 500 c. P330,000
b. P 655, 000 d. P730,000

8. During 2011, Paul Company discovered that the ending inventories reported on its financial
statements were incorrect by the following amounts:
2009 P60,000 understated
2010 75,000 overstated
Paul uses the periodic inventory system to ascertain year-end quantities that are converted to
dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring
income taxes, Paul’s retained earnings at January
1, 2011, would be
a. Correct. c. P75,000 overstated
b. P 15,000 overstated. d. P135,000 overstated

9. Tack, Inc. reported a retained earnings balance of P150,000 at December 31, 2010. In June 2011,
Tack discovered that merchandise costing P40,000 had not been included in inventory in its 2010
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financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted
beginning retained earnings in its statement of retained earnings at December 31, 2011?
a. P190,000 c. P150,000
b. P178,000 d. P122,000

10. Conn Co. reported a retained earnings balance of P400,000 at December 31, 2010. In August
2011, Conn determined that insurance premiums of P60,000 for the three-year period beginning
January 1, 2010, had been paid and fully expensed in 2010. Conn has a 30% income tax rate.
What amount should Conn report as adjusted beginning retained earnings in its 2011 statement of
retained earnings?
a. P420,000 c. P440,000
b. P428,000 d. P442,000

11. Bren Co.’s beginning inventory at January 1, 2011, was understated by P26,000, and its ending
inventory was overstated by P52,000. As a result, Bren’s cost of goods sold for 2011 was
a. Understated by P26,000. c. Understated by P78,000
b. Overstated by P26,000. d. Overstated by P78,000

12. On January 2, 2011, Air, Inc. agreed to pay its former president P300,000 under a deferred
compensation arrangement. Air should have recorded this expense in 2010 but did not do so. Air’s
reported income tax expense would have been P70,000 lower in 2010 had it properly accrued this
deferred compensation. In its December 31, 2011 financial statements, Air should adjust the
beginning balance of its retained earnings by a
a. P230,000 credit. c. P300,000 credit
b. P230,000 debit. d. P370,000 debit

13. While examining the December 31, 2010 financial statements of Dawn Company, you discover the
following:
 Inventory at January 1 had been overstated by P50,000.
 Inventory at December 31 was understated by P100,000.
 During 2010, Dawn received a P200,000 cash advance from customer for merchandise
to be manufactured and shipped during 2007. The amount was credited to sales revenue
 The net income reported on the 2010 income statement before reflecting any adjustment
for the above items is P5,000,000.

What is the adjusted net income for the year ended December 31, 2010?
a. 4,950,000 c. 5,100,000
b. 5,150,000 d. 4,850,000

14. The plant assets and accumulated depreciation account balances for Marigold Corporation are as
follows:

Plant assets: 12/31/14 – P5, 130, 000; 12/31/15 – P4, 700, 000
Accumulated depreciation: 12/31/14 – P1, 820, 000; 12/31/15 – P1,700, 000

Assuming all changes in the accounts resulted from the sale of an asset and from depreciation
expense of P80, 000, what is the selling price of the asset if a P30, 000 net gain resulted from the
transaction?
a. P420, 000 c. P260, 000
b. P360, 000 d. P230, 000

On January 1, 2015, Zhang Inc. had cash and share capital of P5,000,000. At that date, the company
had no other asset, liability, or equity balances. On January 5, 2015, it purchased for cash P3,000,000
of equity securities that it classified as financial asset at fair value through other comprehensive
income. It received cash dividends of P400,000 during the year on these securities. In addition, it has
an unrealized loss on these securities of P300,000. The tax rate is 20%.

15. Compute the amount of net income/(loss).

a. P400,000 c. P (100,000)
b. P320,000 d. P80, 000
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16. Compute the amount of comprehensive income.
a. P100,000 c. P320,000
b. P80,000 d. P300,000

17. The following items were among those that were reported on Dye Co.'s income statement for the
year ended December 31, 2015:
Legal and audit fees P130,000
Rent for office space 180,000
Interest on inventory floor plan 210,000
Loss on abandoned equipment used in operations 35,000
The office space is used equally by Dye's sales and accounting departments. What amount of the
above-listed items should be classified as general and administrative expenses in Dye's income
statement?
a. P220,000 c. P310,000
b. P255,000 d. P430,000

18. As of December 31, 2014, the current liabilities of Maze Company totaled P1,500,000 before any
year-end adjustment relating to the following:

On December 19, 2014, a supplier authorized Maze Company to return, for full credit, goods
shipped and billed at P45,000 on December 9, 2014. The returned credit memo was received and
recorded by Maze Corporation on January 2, 2015.

During December 2014, Maze received P75,000 from a customer as an advance payment for a
merchandise which Maze will make according to the customers’ specifications. For this transaction,
Maze has a P75,000 credit balance in its accounts receivable from the said customer on
December 31, 2014.

On December 28, 2014, the company wrote and recorded checks to creditors totaling P400,000
which would cause an overdraft of P100,000 in the company’s bank account on December 31,
2014. The checks were mailed on January 9, 2015.

What amount should Maze Company report as total current liabilities in its December 31, 2014
statement of financial position?
a. P1,555,000 c. P1,855,000
b. P1,630,000 d. P1,930,000

19. D Company has a business model of trading all debt security for the purpose of making profit. D
Company reported the following investments before the preparation of its December 31, 2014
statement of financial position:

Equity investment to profit or loss P 500,000

Equity investment through other comprehensive income 2,500,000
Debt investment at fair value 3,500,000
Debt investment- convertible bonds, cost at acquisition 2,000,000

The current fair value of the convertible bond is P2,400,000 on December 31, 2014. When the convertible
security was acquired, the fair value of the embedded option was P300,000. What amount of investment to
profit or loss should the company report in its December 31, 2014 financial position?
a. P2,500,000 c. P5,900,000
b. P3,500,000 d. P6,400,000

20. Beloved Corporation’s trial balance contained the following account balances at December 31,
2014:

Investment to profit or loss securities 150,000

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Prepaid insurance 30,000
Cash and cash equivalents 330,000
Inventory 900,000
Equipment and furniture, net 990,000
Patent, net 120,000
Accounts receivable 480,000
Land (held for capital appreciation) 1,200,000

How much is the total current assets in Beloved’s December 31, 2014 statement of financial position?
a. P1,890,000 c. P2,190,000
b. P2,010,000 d. P2,430,000