Cpa Diagnostics

CONCEPTUAL FRAMEWORK
Question #1
The majority of monitoring and bonding costs will be borne by:
agents.
Creditors.
shareholders.
principals.
CPA Financial Accounting - Conceptual Framework (Average)
Question #2
Which of the following statements about asset substitution is incorrect:
Asset substitution increased the risk borne by lenders.

The problem of asset substitution can be reduced by having a debt covenant that restricts investment
opportunities of the entity.
When managers invest in higher-risk projects, lenders would share higher returns earned from the projects.
Managers have incentives to use debt finance to invest in higher-risk assets.
Question #3
Debt covenants:
result in higher interest rates being imposed on the borrowers.

reduce the risk to lenders.
are designed to protect the interest of managers.
contain restrictions to control lenders activities.
Question #4
The statement of the financial position of non-profit organization display's the organization's:
Assets, liability and fund balance

Assets, liability and equity
Excess of assets over liabilities
Assets, liability and net assets
CPA Financial Accounting - Conceptual Framework (Easy)
Question #5
In which of the following contexts would accountants be required to exercise professional judgement:
All of the options are correct.

Deciding which model to use to measure value of property, plant and equipment after initial recognition.
Determining depreciation method used for non-current assets.
Estimating net realizable value of inventories.
Question #6
CPA DIAGNOSTICS Page 1
Question #6
Which of the following contractual relationships is not the focus of positive accounting theory:
Manager - lender relationships.
Shareholder - lender relationships.

Shareholder - manager relationships.
Political relationships.
Question #7
The most correct reason of why residual loss is incurred is:
agents are rational wealth maximizers.

it is too costly for principals to completely monitor agents behaviors.
agents do not always act in the best interest of principals.
principals do not take any actions to control agents behaviors.
Question #8
The way that lenders charge a higher interest rate for loans assessed to be of higher risk is known as:
price protection.
risk aversion.
claim dilution.
wealth maximization.
Question #9
A public utility reports noncurrent assets as the first item on its balance sheet. This is an example of:
Conservatism
Substance over form
Industry practice
Improper statement presentation
Question #10
The risk aversion problem in shareholder - manager agency relationships arises because:
shareholders are not able to diversify their risk.

managers have less capital invested in the entity than shareholders.
shareholders prefer less risk than do managers.
managers are more risk-averse than shareholders.
Question #11
An example of political costs is:
having a debt covenant.

higher tax imposed on mining companies.
excessive consumption of perquisites.
cost of implementing sound corporate governance arrangements.

cost of implementing sound corporate governance arrangements.
Question #12
Application of the full disclosure principle:
requires that the financial statements be consistent and comparable

is violated when important financial information is buried in the notes to the financial statements
is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits
is demonstrated by the use of supplementary information explaining the effects of financing arrangements
Question #13
This is defined in PFRS 1 as the "first annual financial statements in which an entity adopts Philippine Financial
Reporting Standards (PFRS) by an explicit and unreserved statement of compliance with PFRS":
Opening PFRS statement of financial position

PFRS financial statements
First audited PFRS financial statements
First PFRS financial statements
Question #14
Which of the following statements conforms to the realization concept?
Depreciated equipment was sold in exchange for a note receivable

Product unit costs were assigned to cost of goods sold when the units were sold.
Equipment depreciation was assigned to a production department and then to product unit cost
Cash was collected on accounts receivable
Question #15
Normative theories:
prescribe what should be the case based on a specific objective.

predicts unobserved phenomena.
are based on what is happening in the world.
explain why people behave in certain ways.
Question #16
The horizon problem in owner-manager agency relationships can be reduced by:
paying a portion of managerial remuneration as shares.
having financial statements audited.
paying a bonus linked to the dividend pay-out ratio.
linking managements bonus to profits.
Question #17
An economic assumption which assumes that all individuals act in their own self-interest and are wealth
maximizers is called:
responsible economic person assumption.

responsible economic person assumption.
reasonable economic person assumption.
rational economic person assumption.
logical economic person assumption.
Question #18
Under the debt hypothesis:
managers of entities with high leverage are likely to choose accounting policies that increase profit and equity.
managers do not have discretion in choosing accounting policies.
managers prefer to have more remuneration.
managers interests are more aligned with those of lenders than with those of shareholders.
Question #19
Which of the following is a limitation of the use of inductive reasoning in the development of theory:
it is not based on observed actions.

it is only useful for developing prescriptive theories.
it is based on the subjective selection of objectives by the theorist.
it does not attempt to improve current practices.
Question #20
Issuance of interim financial statements is an example of a trade-off between:
Timeliness and materiality

Reliability and periodicity
Relevance and reliability
Understandability and timeliness
Question #21
An example of bonding costs is:
cost of setting up company's code of conducts.

cost of preparing quarterly financial reports.
auditors fees.
cost of implementing a management remuneration plan.
Question #22
All of the following statements pertain to the concept of going concern or an aspect of it, except:
Assets and liabilities are classified in the balance sheet as "current" and "non-current"
Accruals and deferrals are recognized in accounting for accountable events
The cost of an inexpensive office equipment which has a life of three years is charged to expense
Disclosure of an entity's troubled-debt restructuring and dacion en pago in the notes to financial statements.
Question #23
The international Accounting Standards Boards (IASB) Conceptual Framework ________.

The international Accounting Standards Boards (IASB) Conceptual Framework ________.
excludes the concept of prudence or conservatism because it is inconsistent with neutrality, which encompasses
freedom from bias.
includes the concept of prudence or conservatism which means when in doubt, choose the solution that will be
least likely to overstate assets or income and/ or understate liabilities or expenses.
Includes the concept of prudence or conservatism as a desirable, but not required quality of financial reporting
information.
includes the concept of prudence or conservatism which means, when in doubt choose the solution that will be
likely to understate assets or income and/ or overstate liabilities or expenses.
Question #24
How many years of comparative information must an entity present under first time adoption of PFRS?
Two
Five
One
Ten
Question #25
Which of the following statements is not consistent with agency theory:
There are costs incurred in order to control agents behavior.

Entities employ managers to conduct business on their behalf and to negotiate contracts with other parties.
Managers will not always act in the best interest of shareholders.
Managers are more likely to favor the interests of debtholders than those of shareholders in managing debt
contracts.
Question #26
Which one of the following enhances the relevance of accounting information?
Monetary unit
Predictive
Neutrality
Understandability
Question #27
Which of the following statements about the mechanistic hypothesis is not correct:
investors are only concerned about changes in reported figures in financial statements.
investors ignore differences in accounting policies when analyzing financial statements.
investors respond differently to changes in profit depending on what causes the changes.
investors can be misled by the use of different accounting policy choices.
Question #28
Which one of these is not among the criteria for accountable events?
Its cost can be measured reliably

Its cost can be measured reliably
It must affect a financial accounting element, either increasing or decreasing it.
It must have already happened.
It must involve an exchange between two parties.
Question #29
This accounting theory emphasizes the importance of Income Statement as it is general toward proper income or
performance determination of the enterprise
Proprietary theory
Residual equity theory
Fund theory
Entity theory
Question #30
The recognition of periodic depreciation expense on company-owned automobiles requires estimating both
salvage and residual value, and the useful life of the vehicles. The use of estimates in this case is an example of
Providing relevant data at the expense of reliability
Maintaining consistency
Conservatism
Invoking the materiality constraint rather than cost benefit constraint
Question #31
A company's first PFRS financial statements must include at least how many statements of financial position?
Three
Five
Two
One
Question #32
Revenue generally should be recognized:
At the time of cash collection

When realized
When a sale occurs.
At the end of production
Question #33
Comparability is sometimes sacrificed for:
Reliability
Relevance
Objectivity
Conservatism
Question #34
The following statements pertain to the provisions of Conceptual Framework on the concepts of Capital

The following statements pertain to the provisions of Conceptual Framework on the concepts of Capital
Maintenance.
Statement The principal difference between two concepts of capital maintenance is the treatment of the effects of
I changes in the prices of assets and liability of the entity.
Statement The selection of the appropriate concept of capital by an entity should be based on the needs of the users of its
II financial statements.
Statement The concept of capital maintenance chose by an entity shall determine the accounting model used in the
III preparation of its financial statements.
One element of the objective of financial reporting is to provide:
Only statement I is false

None of the foregoing statement is false
Only statement III is false
Only statement II is false
Question #35
Which of the following problems arises within owner-manager agency relationships:
I. Risk aversion
II Asset substitution
III Claim dilution
IV. Dividend retention
I and IV.
II and III.
I and III.
II and IV.
Question #36
Which of the following processes describe how positive theories are developed:
Definitions/Actions - Principles - Assumptions - Objectives.

Objectives - Definitions/Actions - Assumptions - Principles.
Principles - Assumptions - Objectives - Definitions/Actions.
Objectives - Assumptions - Principles - Definitions/Actions.
Question #37
This is defined in PFRS 1 as the "first annual financial statements in which an entity adopts Philippine Financial
Reporting Standards (PFRS) by an explicit and unreserved statement of compliance with PFRS":
PFRS financial statements

First PFRS financial statements
First audited PFRS financial statements
Question #38
It is the set of rules and regulations promulgated for the supervision, control and regulation of the practice of

It is the set of rules and regulations promulgated for the supervision, control and regulation of the practice of
Accountancy in the Philippines.
The Code of Ethics for CPAs

The Implementing Rules and Regulations (IRR) of the Philippine Accountancy Act
Philippine Standards on Audit (PSAs)
Philippine Financial Reporting Standards (PFRSs)
Question #39
The consistency standard of reporting requires that:
Gains and losses should not appear in the income statement

Accounting procedures be adopted that give a consistent rate of return
Expenses be reported as charges against the period in which they are incurred
The effect of changes in accounting upon income be properly disclosed
Question #40
The overriding qualitative characteristic of accounting information is:
Freedom from bias

Relevance
Comparability
Usefulness for decision making
Question #41
The problem of underinvestment occurs when the entity faces financial difficulty and managers are reluctant to
undertaken projects with positive net present value because:
the projects lead to increased funds available to lenders rather than shareholders.
managers prefer less risk than do lenders.
managers prefer to maintain a greater level of funds within the entity.
the projects would adversely affect managers bonus payments.
Question #42
Political contracts refer to the relationship between an entity and the following parties, except:
creditors.
trade unions.
lobby groups.
government.
Question #43
The Accounting Standards Council (ASC) used to be composed of nominees from all of the following
organizations, except:
Philippine Institute of Certified Public Accountants (PICPA)

Securities and Exchange Commission (SEC)
Bangko Sentral ng Pilipinas (BSP)

Bangko Sentral ng Pilipinas (BSP)
Bureau of Internal Revenue (BIR)
Question #44
The physical capital maintenance concept is consistent with:
Current cost/nominal peso and current cost/constant peso

Historical cost/nominal peso and current cost/constant peso
Historical cost/nominal peso and historical cost/constant peso
Current cost/nominal peso and historical cost/constant peso
Question #45
The following statements are based on the PAS 1 (Presentation of Financial Statements):
I The number of share authorized for issue shall be shown in the statement of financial position or the statement of
changes in equity or in the notes to the financial statements
II An entity presenting a separate income statement and a statement of comprehensive income shall present a
statement of changes in equity
III An income statement is prepared under the "natural presentation" when it presents expenses based on logistics,
marketing and production
Which of the forgoing statements are true:
II only
I only
I , II and III
I and II
Question #46
An entity's statement of financial position, published or unpublished, at the date of transition to PFRS is best
described as the:
Provisional PFRS statement of financial position

Originating PFRS statement of financial position
Closing GAAP statement of financial position
Question #47
Which of the following statements apply to the political cost hypothesis:
Smaller entities are more likely to be the target of lobby groups.

Managers would prefer accounting policies that increase profit in order to compensate for political costs.
Political costs arise as a result of an entity's relationships with shareholders and lenders.
Managers of larger entities are more likely to choose accounting policies that reduce profit in order to avoid
political costs.
Question #48
Sally observes that the cash account is an asset account and has a debit balance. She also notices that
inventories account is an asset account and has a debit balance. Therefore, Sally comes into conclusion that all

inventories account is an asset account and has a debit balance. Therefore, Sally comes into conclusion that all
asset accounts have a debit balance. Which approach does Sally use in developing her theory about all asset
accounts having a debit balance?
Deductive reasoning.
Conceptual reasoning.
Inductive reasoning.
Conclusive reasoning.
Question #49
Which is not a part of the scope of the Conceptual Framework of Accounting?
Quantitative characteristics of financial information

Financial and physical capital maintenance concept
Recognition and measurement of the elements of financial statements
Objectives of financial statements
Question #50
Which of the following is not an example of debt covenant:
a maximum interest cover of 2.5 times.

a maximum leverage ratio of 60%
.a restriction in undertaking mergers and takeovers unless approved by the lender.
a restriction in the amount of dividends distributed as a percentage of profit.
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FINANCIAL STATEMENTS
Question #1
On July 1, 2020, Sam Company incurred a loss of P300,000 on the disposal of an investment. The
operating income for full year ending December 31, 2020 was expected to be P500,000. In the statement
of comprehensive income for the quarter ended September 30, 2020, how much of this loss should be
disclosed separately.
300,000
150,000
75,000
0
SOLUTION:
The loss on the disposal of an asset is reported in the period in which it is incurred and should not be
allocated among the interim periods.
CPA Financial Accounting - Notes to Financial Statements (Average)
Question #2
Under the voucher system, a check register is:
A ledger for cash disbursements

A summary of cash transactions
An authorization to disburse cash
A journal for cash disbursements
CPA Financial Accounting - Financial Statements (Average)
Question #3
Financial statements are said to be authorized for issue when:
The shareholders approve the financial statements at their annual meeting.

The management (board of directors) reviews the financial statements and authorizes them for issue.
The financial statements are filed with the SEC.
The management is required to submit the financial statements to a supervisory body made up solely of
nonexecutives and the supervisory body approves the FS.
Question #4
Which of the following adjusting entries cannot be subject to reversing entries:
Accrual of income
Deferral of expense under the asset method
Deferral of income under the income method
Accrual of expense
CPA Financial Accounting - Financial Statements (Easy)
Question #5
Part of the notes to financial statements are events after the reporting period which pertain to those
events, both favourable and unfavourable that occur:
Between the balance sheet date and the date when the financial statements are authorized for issue
After the balance sheet date
After the balance sheet date but prior to issuance of financial statements
After issuance of the statements
CPA Financial Accounting - Notes to Financial Statements (Easy)
Question #6
According to PAS 1, which of the following are not commonly required disclosures of accounting
policies?
the nature of a companys and the policies that the users of its financial statements would expect to be
disclosed for that type of entity.
the measurement basis or bases used in the financial statements.
personnel involved in drafting the summary of significant accounting policies or including those made
the judgment and estimations.
disclosures required by other IFRS, like the reasons why the entitys ownership interest does not
constitute control.
Question #7
Under PAS 1, which of the following items is not included in the computation of net income?
Finance cost
Unrealized gain in change in value of available for sale securities
Unrealized gain in change in value of biological assets
Post-tax Gain (Loss) on discounted operations
Question #8
The summary of significant accounting policies shall disclose a:
None of the above.

The depreciation method used only
The composition of property, plant and equipment and the depreciation method used
The composition of property, plant and equipment only
Question #9
At the end of the reporting period, an entity has a 180-day note payable outstanding. The entity has
followed the policy of replacing the note rather than repaying it over the last three years. The entity's
treasurer says that this policy is expected to continue indefinitely and the arrangement is acceptable to
the bank to which the note was issued. How will the entity classify the note in the statement of financial

the bank to which the note was issued. How will the entity classify the note in the statement of financial
position?
Current liability, unless specific refinancing criteria are met

Classification is dependent on management intention
Classification is dependent on actual ability to refinance.
Noncurrent liability
Question #10
Related parties include all of the following, except:
Two venturers simply because they share joint control over a joint venture
Associate
Key management personnel and close family members of such individuals
Parent, subsidiary, and fellow subsidiaries
Question #11
Which of the following is not a function of an accounting system?
Interpret summarized data

Retrieve recorded data
Record transactions and events
Stored recorded data
Question #12
Adjusting events are those that:
Provide for conditions that existed after the date the financial statements were authorized for issue.
Are favorable or unfavorable and indicative of conditions that arose after the end of the reporting period.
Provide evidence of conditions that existed at the end of the reporting period.
Are indicative of conditions that arose after the end of the reporting period.
Question #13
It is the basic summary device of accounting that is used to store the recorded monetary information
from the entity's transaction and events.
REF documents
Journal
Account
Ledger
Question #14
Which of the following adjusting entries cannot be subject to reversing entries?

Deferral of income under the income method
Accrual of income
Accrual of expense
Deferral of expense under the asset method
Question #15
Which of the following is not a principal purpose of an unadjusted trial balance?
It is the basis for any adjustments to the account balances.

It proves that debits and credits of equal amounts are in the ledger.
It supplies a listing of open accounts and their balances.
It proves that debits and credits were properly entered in the ledger accounts.
Question #16
Which of the following should be disclosed in a Summary of Significant Account Policies?
Depreciation method followed

Amount for cumulative effect of change in accounting policy
Claims of equity holder
Types of executor contracts
Question #17
Which of the following is not a required supplemental disclosure for the statement of financial position?
Accounting policies.
Contractual situations.
Financial forecasts.
Contingencies.
Question #18
Joanne Company initially records prepayments in balance sheet accounts and make reversing entries
when appropriate. Which of the following year-end adjusting entries should be reversed?
The entry to record supplies used during the period.

The entry to record service fees earned by year-end but not billed.
The entry to record the portion of service fees received in advance that is earned by year-end.
The entry to record bad debts expense for the period
Question #19
In which section of the statement of financial position should employment taxes that are due for
settlement in 15 months' time be presented, according to PAS 1 Presentation of financial statements?
Non-current assets

Non-current assets
Non-current liabilities
Current liabilities
Current assets
Question #20
Reversing entries should be made for:
I Adjusting entries that create accrued income or accrued expenses to be collected or paid in
the next accounting period.
II Adjusting entries related to prepayments of costs initially recorded as expenses or receipts in
advance initially recorded as income.
I only
II only
Neither I nor II
Both I and II
Question #21
An example of an inventory accounting policy that should be disclosed in a summary of significant
accounting policies is the:
Major backlogs of inventory orders

All of the above should be disclosed.
Composition of inventory into raw materials, work in process, and finished goods
Method used for pricing inventory
Question #22
The full disclosure principle, as adopted by the accounting profession, is best described by which of the
following?
Disclosure of any financial facts significant enough to influence the judgment of an informed reader
Enough information should be disclosed in the financial statements so a person wishing to invest in the
share of the company can make a profitable decision
Information about each account balance appearing in the financial statements is to be included in the
notes to the financial statements
All information related to an entitys business and operating objectives is required to be disclosed in the
financial statements
Question #23
An entity initially records prepayments in real accounts and makes reversing entries when appropriate.
Which of the following year-end adjusting entries should be reversed?
The entry to record depreciation expense for the period
The entry to record service fees earned by year-end but not billed
The entry to record the portion of service fees received in advance that is earned by year-end
The entry to record supplies used during the period
Question #24
Adjusting events are those that:
Are favorable or unfavorable and indicative of conditions that arose after the end of the reporting period.
Provide evidence of conditions that existed at the end of the reporting period.
Are indicative of conditions that arose after the end of the reporting period.
Provide for conditions that existed after the date the financial statements were authorized for issue.
Question #25
Between the reporting date and the date of authorization of financial statements, a number of events
took place. All of the following events should be classified as nonadjusting events requiring disclosure,
except:
Destruction of a major production plant by fire

The entity announced the discontinuation of its assembly operation
The entity entered into an agreement to purchase the freehold of its currently leased building.
A mistake was discovered in the calculation of the allowance for uncollectible accounts resulting to
understatement of accounts receivable
Question #26
A development stage entity:
Issues an income statement that shows only cumulative amounts from the entity's inception.
Issues an income statement that is the same as an established operating entity, and shows cumulative
amounts from the entity's inception as additional information.
Does not issue an income statement.
Issues an income statement that is the same as an established operating entity, but does not show
cumulative amounts from the entity's inception as additional information.
Question #27
Which of the following accounts is recognized under single-entry bookkeeping?
Merchandise inventory
Property and Equipment
Cash
Salaries Expense
Question #28
Which of the following is not a principal purpose of a trial balance?
It proves that debits and credits of equal amounts are in the ledger.
It is the basis for any adjustments to the account balances.

It proves that debits and credits were properly entered in the ledger accounts.
Question #29
The accrual basis of accounting is most useful for:
Determining the amount of dividends an entity should pay.

Predicting the short-term financial performance of an entity.
Determining the amount of income tax an entity should pay.
Predicting the long-term financial performance of an entity.
Question #30
The following statements are based on the PAS I (Presentation of Financial Statements):
I The number of shares authorized for issue shall be shown in the statement of financial
position or the statement of changes in equity or in the notes to the financial statements.
II An entity presenting a separate income statement and a statement of comprehensive income
shall present a statement of changes in equity.
III An income statement is prepared under the "natural presentation" when it presents expenses
based on logistics, marketing and production.
Which of the foregoing statements are true?
II only
I only
I, II and III
I and II
CPA Financial Accounting - Financial Statements (Difficult)
Question #31
Under both the periodic and perpetual inventory system, which account is constantly updated during the
year?
Cost of goods available for sale

Cost of goods sold
Sales
Inventory
Question #32
As part of the objective of general-purpose financial reporting, there is an emphasis on "assessing cash
flow prospects." Under Philippine Financial Reporting Standards this is interpreted to mean:
Cash basis accounting is preferred over accrual based accounting.

Over the long run trends in revenues and expenses are generally more meaningful than trends in cash
receipts and disbursements.
All of the choices are correct regarding assessing cash flow prospects under PFRS.
Information about the financial effects of cash receipts and cash payments is generally considered the

best indicator of a company's present and continuing ability to generate favorable cash flows.
Question #33
A companys rate of return on investment (ROI) is equal to the:
Investment capital multiplied by the capital employed turnover rate.

Investment capital divided by the capital employed turnover rate.
Percentage of profit on sales multiplied by the capital employed turnover rate.
Percentage of profit on sales divided by the capital employed turnover rate.
CPA Financial Accounting - Financial Statement Analysis (Easy)
Question #34
Which of the following is not a characteristic of the financial statements that accountants currently
prepare?
Financial statements can be justified only if the benefits exceed the costs.
Financial statements articulate with one another because measuring financial position is related to
measuring changes in financial position.
The information in financial statements is summarized and classified to help meet user's needs.
The information in financial statements is expressed in units of money adjusted for changing purchasing
power.
Question #35
An entity deals extensively with foreign entities, and its financial statements reflect these foreign
currency transactions. Subsequent to the end of reporting period, end before the "date of authorization"
of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates.
How should the entity account for this event?
Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in foreign
exchange rate
Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in foreign
exchange rates and not just adverse movements
Ignore the post-reporting period event
Disclose the post-reporting period event in footnotes as a non-adjusting event.
Question #36
The process of identifying, measuring, analyzing and communicating financial information needed by
management to plan, evaluate and control an organization's operations is called:
Managerial accounting
Financial accounting
Auditing
Tax accounting
Question #37
Question #37
The following books of account are used in single-entry bookkeeping:
Cashbook and subsidiary ledger

Cash receipts book, cash disbursements book, general ledger and subsidiary ledger
Cashbook and general ledger
Cash receipts book and general ledger
Question #38
The entity's current ratio is 4:1. Which of the following transactions would normally increase current
ratio?
Selling inventory on account

Purchasing machinery for cash.
Purchasing inventory on account
Collecting an account receivable.
CPA Financial Accounting - Financial Statement Analysis (Average)
Question #39
Adjustments of financial statements are required to those events after the balance sheet date which:
Occurred prior to issuance of the financial statements.

Are unusual and material.
Have a material effect on a user's evaluation of the information presented in the financial statements.
Provide additional information for determining the amounts relating to conditions existing at the balance
sheet date.
Question #40
Which of the following subsequent events would generally require disclosure, but non adjustment of the
financial statements?
Issue of a large amount of ordinary shares

Retirement of the company president
Settlement of litigation when the event that gave rise to the litigation occurred prior to the statement of
financial position date
Employee strikes
Question #41
The level of rounding used in the financial statements refers to:
The truncation of the amounts presented

The presentation of a concise financial report rather than full financial report
The shortening of the notes by removing comparative numbers
The abbreviation of the words used

Question #42
The recording phase of financial accounting covers the following steps, except:
Transactions are posted to the ledger

Financial statements are prepared
Transactions are journalized
Business documents are received and prepared
Question #43
The presentation and classification of items in the financial statements shall be retained from one period
to the next.
Comparability
Aggregation
Consistency of presentation
Materiality
Question #44
Which of the following should be disclosed in the summary of significant accounting policies?
Depreciation charges for the period

Adequacy of pension plan assets in relation to vested benefits
Borrowing cost capitalized for the period
Valuation method used for work in process inventory
Question #45
Which of the following subsequent events would generally require disclosure but no adjustment of the
financial statements?
Issue of a large amount of ordinary shares.

Retirement of the company president
Settlement of litigation when the event that gave rise to the litigation occurred prior to the statement of
financial position date.
Employee strikes
Question #46
Which statement is incorrect concerning the rule on "offsetting"?
Gains and losses arising from a group of similar transactions are reported on a net basis, for example,
foreign exchange gains and losses arising from financial instruments held for trading
Gains and losses on disposal of noncurrent assets are reported by deducting from the proceeds on
disposal the carrying amount of the asset and related selling expenses.
An entity shall not offset assets and liabilities, and income and expenses, unless required or permitted
by PFRS.
Measuring assets net of valuation allowance is offsetting.

Measuring assets net of valuation allowance is offsetting.
CPA Financial Accounting - Financial Statements (Difficult)
Question #47
A firms financial risk is a function of how it manages and maintains its debt. Which one of the following
sets of ratios characterizes the firm with the greatest amount of financial risk?
High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
High debt-to-equity ratio, high interest coverage ratio, stable return on equity
Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
High debt-to-equity ratio, low interest coverage ratio, volatile return on equity*
Question #48
When special journals are used, which of the following is true?
All purchase transactions should be recorded in the purchase journal.

All cash receipts should be recorded in the cash receipts journal
A general journal is not used
All sales transactions should be recorded in the sales journal.
Question #49
An unadjusted trial balance:
Is a summary taken directly from the general journal

Provides information that is helpful when making adjusting entries
Proves no errors have been made in the accounting records
Usually contains the account balances that should appear in the financial statements
Question #50
An entity shall present a complete set of financial statements, including imperative information, at least
annually. When an entity changes the end of its reporting period longer or shorter than one year, an
entity shall disclose all of the following, except:
The fact that similar entities in the geographical area in which the entity operates have done so in the
current year.
The reason for using longer or shorter period
Period covered by the financial statements
The fact that amounts presented in the financial statements are not entirely comparable
Question #51
The journal entry to record uncollectible accounts expense using the allowance method will:
Not affect net income or total current assets

Not affect net income but will reduce total current assets
Reduce net income but will not affect total current assets
Reduce net income and total current assets

Reduce net income and total current assets
Question #52
An error which is disclosed by a trial balance is:
Posting to the correct debit or credit side of a wrong account.

A journal entry for salaries paid amounting to P500,000 was not posted
An omission of a journal entry on purchases on account.
Double-posting a credit to Sales amounting to P210,000
Question #53
The disclosure of accounting policies, is important to financial statement readers in determining:
whether the working capital position is adequate for future operations

the value of obsolete items included in ending inventory
whether accounting policies are consistently applied from year to year
net income for the year
Question #54
The postclosing trial balance:
Proves that accounts have been closed properly.

Does not include nominal accounts.
Is identical to the statement of financial position.
Provides a convenient listing of account balances that can be used to prepare the financial statements.
Question #55
Profit or loss computed based on the difference between income and expenses is according to:
Natural presentation approach

Functional presentation approach
Capital maintenance approach
Transactions approach
Question #56
Which one of the following items least resembles a typical adjusting entry?
Debit an expense and credit liability

Debit revenue and credit liability
Debit an asset and credit liability
Debit an asset and credit revenue
Question #57
Question #57
Which of the following is an example of a nominal and contra account?
Freight out
Purchase discount
Allowance for sales discount
Freight in
Question #58
The days sales-in-receivable ratio will be understated if the company:
uses a natural business year for its accounting period*

has high sales at the end of the year
uses average receivable in the ratio calculation
uses a calendar year for its accounting period
Question #59
These are the specific principles, bases, conventions, rules and practice applied by an entity in preparing
and presenting financial statements:
Accounting policies
Accounting concepts
Accounting standards
Accounting principles
Question #60
Non-adjusting events after balance sheet date should be disclosed if:
Non-disclosure would affect the ability of users of the financial statements to make proper valuations
and decisions
Non-disclosure would affect the amounts presented in the financial statements.
They are unusual and material
They relate to conditions existing at the balance sheet date
Question #61
Revenues are:
Impacted by debits and credits in the same way that expenses are impacted by debits and credits.
All of the choices are correct regarding revenues.
A subdivision of equity, providing information about why equity increased.
Reported in the statement of financial position as a current item.
Question #62
Which of the following statements is false regarding adjusting entries?

Each adjusting entry affects one revenue account and one expense account.
Cash is neither debited nor credited as a result of adjusting entries.
Each adjusting entry affects one statement of financial position account and one income statement
account.
Adjusting entries involve accruals or deferrals.
Question #63
Staff costs are:
Administrative expenses
Allocated to the three categories above according to the function of the employee to which the particular
staff costs relate
Cost of sales
Distribution expenses
Question #64
A general ledger account which, summarizes the collection of related accounts appearing in a subsidiary
ledger is called:
Control account
Subsidiary ledger account
Contra account
Summary account
Question #65
The manufacturing summary account summarizes:
All accounts that enter into computing cost of goods sold

All accounts that enter into computing cost of goods manufactured
All accounts that enter into computing total manufacturing costs
All revenues, expenses, gains and losses
Question #66
Financial statements include a statement of financial position, a statement of comprehensive income, a
statement of changes in equity and a statement of cash flows. Which of the following is also included
within the financial statements?
A statement of retained earnings

Accounting policies
An auditor's report
A directors' report
Question #67
Question #67
PAS I presents two alternative methods of classifying expenses in the income statement within the
Statement of Comprehensive Income. Which of these statements is/ are correct?
Statement I: Additional disclosure is required for the function of expense when the nature of expense
classification is used
Statement II Additional disclosure is required for the nature of expense when the function of expense
classification is used
I only
Neither I nor II
Both I and II
II only
Question #68
The entry to record depreciation is an example of an adjusting entry:
To record unrecorded revenue

To record unrecorded expense
To apportion unearned revenue
To apportion a recorded cost
Question #69
An entity must present each of the line items required by PFRS:
Even if the amount recognized for the line item is nil
Unless the amount recognized of the line item is nil
Unless the line item is either immaterial or irrelevant
Under all circumstances
Question #70
Selected data from Maui Companys year-end financial statements are presented below. The difference
between average and ending inventory is immaterial.
Current ratio 2.0

Quick ratio 1.5
Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
Mauis net sales for the year were:
800,000
672,000
480,000
1,200,000

Question #71
The following information is available for Fenny, Inc.:
Current assets 500,000

Property, plant & equipment 4,000,000
Total assets 4,500,000
Current liabilities 30,000
Long-term debt 2,500,000
Common stock 200,000
Retained earnings 1,770,000
Total liabilities and stockholders equity 4,500,000
Cost of debt before tax 7%
Cost of equity 12%
Tax rate 25%
What is Fennys debt-to-equity ratio?
1.20
0.56
2.10
1.28
SOLUTION:
P2,530,000/P1,970,000 = 1.28
CPA Financial Accounting - Financial Statement Analysis (Difficult)
Question #72
D equals the sum of the debit column of a firm's unadjusted trial balances, and C equals the sum of the
credit column. Which of the following statement is correct?
If D does not equal C, it is possible that no errors were committed

D does not equal the sum of all account increases during the period
D typically does not equal C because the adjusting entries have not yet been recorded
If D equals C, there is no chance that the company committed a recording error
Question #73
An entity shall disclose key management personnel compensation. Which of the following is included in
key management personnel compensation?
Social security contribution only

Both social security contribution and postemployment benefit
Postemployment benefit only
Neither social security contribution nor postemployment benefit

Question #74
All of the following are disadvantages of the single-entry bookkeeping system, except for the fact that:
Financial statements are not likely to be fairly presented in accordance with GAAP.
It is simple and less costly to apply
Accounting records are incomplete
Internal control is inadequate
Question #75
Mansho Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Manshos quick
ratio is 0.8. Which of the following actions would increase Manshos quick ratio?
Selling obsolete inventory at a loss.

Implementing stronger procedures to collect accounts receivable at a faster rate.
Purchasing inventory through the issuance of a long term note.
Paying an existing account payable.
CPA Financial Accounting - Financial Statement Analysis (Difficult)
Question #76
Debt is generally the least expensive source of capital. This is primarily due to:
The tax deductibility of interest payments

Fixed interest payments
Its position in the priority of claims on assets and earnings in the event of liquidation
The secured nature of a debt obligation
Question #77
Which of the following statements is incorrect in relation to fair presentation and compliance with PFRS?
An entity whose financial statements comply with PFRS shall make an explicit and unreserved statement
of such compliance in the notes.
An entity can rectify inappropriate accounting policies either by disclosure of the accounting policies
used or by notes or explanatory material.
An entity shall not describe financial statements as complying with PFRS unless they comply with all the
requirements of PFRS
Fair presentation requires the faithful representation of the effects of transactions, other events and
conditions in accordance with the definition criteria for assets, liabilities, income and expense set out in
the Conceptual Framework.
Question #78
A voucher system is usually used for transactions involving:
Cash receipts
Cash disbursements
Purchases on account

Purchases on account
Cash receipts and disbursements
Question #79
Which of the following statements about financial statements is incorrect?
They are the primary responsibility of the management of the entity

They are prepared at least annually and are directed to both the common and specific information needs
of a wide range of statement users.
They provide information about the financial position, performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions.
They show the results of the stewardship of management for the resources entrusted to it by the capital
providers.
Question #80
Reversing entries:
Must be made at year-end.

Are desirable to exercise consistency and establish standardized procedures.
Are normally prepared for accrued, prepaid and estimated items.
Are necessary to achieve a proper matching of revenue and expense.
Question #81
Which of the following would appear first in a statement of retained earnings?
Cash dividends
Prior period adjustment
Net income
Share dividends
Question #82
Where a material error occurs in the recording process, an adjustment:
Is not necessary but the item must be fully explained in the notes to the financial statements
May be deferred and recognized in a later accounting period
Must be made to the prior period comparative balances
May be recognized directly in retained earnings
Question #83
Which accounting process is the recognition or non-recognition of business activities as accountable
events?
Communicating
Identifying

Identifying
Measuring
Recording
Question #84
Which of the following events after the reporting period is considered to be a non-adjusting event?
Expropriation of major assets by the government
Discovery of fraud or errors that show the FS are incorrect
Sale of inventories after balance sheet date that may give evidence about the net realizable value of the
inventories
Bankruptcy of a customer that occurs after the BS date
Question #85
This means "applying new accounting policy to transactions occurring after that date at which the policy
changed".
Retrospective restatement
Prospective application
Retrospective application
Prospective restatement
Question #86
Which ratio is preferred to be lower for a large retail company?
Defensive interval ratio

Price earnings ratio
Times interest earned ratio
Inventory turnover ratio
Question #87
As part of the objective of general-purpose financial reporting, there is an emphasis on "assessing cash
flow prospects." This is interpreted to mean:
All of the choices are correct regarding "assessing cash flow prospects".
Cash basis accounting is preferred over accrual basis accounting.
Over the long run, trends in revenue and expenses are generally more meaningful than trends in cash
receipts and disbursements.
best indicator of an entity's present and continuing ability to generate favorable cash flows.
Question #88
This means "applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied".

Question #89
An entity must disclose comparative information for:
The previous comparable period for all amounts reported, and for all narrative and descriptive
information when it is relevant to an understanding of the current period's financial statements
The previous comparable period for all amounts reported and for all narrative and descriptive
information
The previous comparable for all amount reported
The previous two comparable periods for all amounts reported.
Question #90
Prospective financial information is defined as:
Any financial information about the present or future

Any financial information about the future
Any financial information about the future related to the day to day operation
Any financial information about the past, present or future.
Question #91
An accounting device for accumulating increases and decreases relating to a particular accounting value
such as an asset, a liability, etc.
Journal
Account
Ledger
Book of secondary entry
Question #92
The error of posting P100,000as P10,000 can be detected by:
Dividing the out-of-balance amount by 9.

Examining the chart of accounts.
Totalling each account's balance in the ledger.
Dividing the out-of-balance amount by 2
Question #93
This means "correcting the recognition, measurement and disclosure of amounts of elements of financial
statements as if a prior period error never occurred"

Question #94
Which of the following statements about the bases of recognition of income and expense is true?
Under cash basis accounting, only cash and property and equipment accounts are recognized as assets.
Under accrual basis of accounting, accruals and deferrals are recognized in adjusting entries which are
subsequently reversed in the immediately accounting period.
In modified cash basis of accounting, prepaid expenses and accrued income are recognized.
Accrual basis and modified cash basis of accounting for income and expenses will yield the same
amount of gross profit for the period.
Question #95
When is materiality not used in providing financial information?
Applying the revenue recognition principle

Determining the level of disclosure
Applying the going concern assumption
Determining what items to include in the financial statements
Question #96
On July 1, Year 2, a company decided to adopt PFRS. The company's first PFRS reporting period is as of
and for the year ended December 31, Year 2. The company will present one year of comparative
information. What is the company's date of transition to PFRS?
January 1, Year 1
January 1, Year 2
July 1, Year 2
December 31, Year 2.
Question #97
The ratio that measures a firm's ability to generate earnings is:
times interest earned.

operating asset turnover.
days sales in receivables.
sales to working capital.
Question #98
What is a major objective of financial reporting?

What is a major objective of financial reporting?
To provide information that is useful to management in making decisions.

To provide information that clearly portrays nonfinancial transactions.
To provide information that excludes claims to the resources.
To provide information that is useful to assess the amounts, timing and uncertainty of perspective cash
receipts.
Question #99
Unrelated parties include all of the following, except:
Postemployment benefit plan for the benefit of employees.

Two entities simply because they have a common director
Customers with whom an entity transacts a significant volume of business, merely by virtue of the
resulting economic dependence
Providers of finance simply by virtue of their normal dealing with an entity.
Question #100
The summary of significant accounting policies shall disclose:
The composition of property, plant and equipment only

Neither the composition of property, plant and equipment nor the depreciation method used
The depreciation method used only
The composition of property, plant and equipment and the depreciation method used
CPA Financial Accounting - Notes to Financial Statements (Easy)
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CASH AND CASH EQUIVALENTS
Question #1
In a statement of cash flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing
activities equals the carrying amount of the equipment:
Less both the loss and the amount of tax attributable to the loss
Less the loss
Less the amount of tax attributable to the loss
With no addition or subtraction
CPA Financial Accounting - Statement of Cash Flows (Average)
Question #2
Which is not a key element of internal control over cash receipts?
Cash deposit on a regular basis

Daily entry in a voucher register
Immediate counting by the person opening the mail or using the cash register
Daily recording of all cash receipts in the accounting records
CPA Financial Accounting - Cash and Cash Equivalents (Average)
Question #3
Ronnie Corporation prepares its financial statements in accordance with PFRS. Ronnie acquired equipment by issuing
5,000 shares of its common stocks. How should this transaction be reported on the statement of cash flows?
As an inflow of cash from financing activities and an outflow of cash from operating activities
In the notes to the financial statements as a significant noncash transaction
At the bottom of the statement of cash flows as a significant noncash transaction
As an outflow of cash from investing activities and an inflow of cash from financing activities
Question #4
How should gain on sale of an office building be presented in a statement of cash flows?
As an adjustment to net income under operating activities prepared under indirect method
As a financing inflow
Added to the sale proceeds and presented under investing activities
As an investing inflow because it pertains to a long-term asset
Question #5
The primary purpose of the statement of cash flows is to provide information:
About the cash receipts and cash payments of an entity during a period
That is useful in assessing cash flow prospects
About the entity's ability to meet its obligations and dividends, and its needs for external financing
About the operating, investing, and financing activities of an entity during a period
CPA Financial Accounting - Statement of Cash Flows (Easy)
Question #6
When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit
and traces them to underlying documents, the auditor is: gathering evidence primarily to support the assertion that:
incurred obligations were recorded in the correct period

incurred obligations were recorded in the correct period
cash disbursements were recorded as incurred obligations
recorded obligations were paid
recorded obligations were valid
CPA Auditing Problems - Audit of Cash and Accrual Basis (Easy)
Question #7
A voucher:
is received from customers to explain the purpose of a payment

is normally prepared in the Accounting Department
system is used to control cash receipts
system is an internal control procedure to verify that the assets in the ledger are the ones the company owns
Question #8
The notification accompanying a check that indicates the specific invoice being paid is called a:
debit memorandum
credit memorandum
Voucher
remittance advice
Question #9
An entity reports its income from investments under the equity method and recognized income from its investment in
another entity during the current year, even though no dividends were declared or paid by the other entity during the year.
On the entity's statement of cash flows (indirect method), the investment income should:
Not be shown.
Be shown as a deduction from net income in the cash flows from operating activities section.
Be shown as cash inflow from investing activities
Be shown as cash outflow from financing activities
Question #10
EFT:
means Effective Funds Transfer

can process certain cash transactions at less cost than by using the mail
makes it easier to document purchase and sale transactions
means Efficient Funds Transfer
Question #11
In line with your audit of Marlon Corporation for the period ended December 31, 2016, your audit staff provided you the
following audit notes:
1. Accounts receivables from customers increased during the year by P4,200,000. Total discounts taken by customers was
at P1,580,000 while total sales returns which included the customer refunds was at P2,420,000.
2. The allowance for bad debts increase during the year by P840,000. During the year, the Company wrote-off P1,120,000 in
bad debts. While recovery of previous write-off (included in the cash collections from customers) was at P420,000.
3. Advances from customers decreased during the year by P1,900,000.
4. Accounts payable to suppliers increased during the year by P3,780,000. Total discounts taken by the Company for
purchases was at P1,290,000 while total purchase returns which included the supplier refunds was at P1,960,000.
5. Advances to suppliers increased during the year by P1,512,000.
6. Inventories increased during the year by P2,690,000.

6. Inventories increased during the year by P2,690,000.
7. The equipment account increased by P2,000,000 during the year while carrying value of the equipment sold during the
year was at P1,600,000.
8. The accumulated depreciation account increased by P1,000,000 during the year.
9. The following information had been provided by the companys accountant based on its cash records:
Cash collections from customers 45,780,000

Cash payments to suppliers 24,490,000
Cash payment of operating expenses 8,650,000
Cash payment for acquisition of an equipment 5,000,000
Cash collection from disposal of an equipment 1,040,000
Cash refunds received from purchase returns 640,000
Cash refunds paid for sales returns 830,000
What is the accrual basis cost of sales?
24,068,000
25,580,000
23,428,000
24,940,000
SOLUTION:
Gross sales, accrual
Cash collection from customers 45,780,000

Add: 1,580,000
Sales discounts 1,590,000
Sales returns, excluding refunds 1,120,000
Write-off of receivables 1,900,000
Decrease in advances from customers 4,200,000
Increase in accounts receivables 56,170,000
Total
Less: Recoveries of previous write-off (420,000)
Accrual basis gross sales 55,750,000
Gross purchases, accrual
Cash payments to suppliers of inventory 24,490,000

Add:
Purchase discounts 1290,000
Purchase returns, excluding refunds 1,320,000
Increase in accounts payable 3,780,000
Total 30,880,000
Less: Increase in advances to suppliers (1,512,000)
Accrual basis gross purchases 29,368,000
Cost of sales, accrual
Accrual basis gross purchases 29,368,000

Less:
Purchase discounts 1,290,000
Purchase returns 1,960,000
Net purchases 26,118,000

Net purchases 26,118,000
Less: Increase in inventories 2,690,000
Cost of sales 23,428,000
Bad debts expense
Increase in allowance for bad debt 840,000

Add:
Write off of AR 1,120,000
Less: Recovery of previous written off 420,000
Bad debt expense 1,540,000
Depreciation expense
Increase in equipment account 2,000,000

Purchase of equipment during the year 5,000,000
Cost of equipment sold during the year 3,000,000
Carrying value of equipment sold 1,600,000
Accumulated depreciation of equipment sold during the year
1,400,000
Increase in accumulated depreciation 1,000,000
Decrease in accumulated depreciation from sold equipment
1,400,000
Depreciation expense for the year 2,400,000
CPA Auditing Problems - Audit of Cash and Accrual Basis (Difficult)
Question #12
An inventory record indicates that 12 items of a specific product are on hand. A customer purchased two of the items, but
when recording the order, the data entry clerk mistakenly entered 20 items sold. Which check could detect this error?
limit check
numeric/alphabetic data checks
range check
reasonableness check
Question #13
Which of management's assertions relating to the financial statements is tested when auditors examine a sample of cash
disbursements made after year end?
Completeness
Rights
Existence
Valuation
Question #14
Which of the following would not be included with the Cash and Equivalents on the Balance Sheet?
Money Market Mutual Funds

Short-Term Receivables
Commercial Paper
Municipal Securities
Certificates of Deposit

Question #15
An entity's first PFRS financial statements must include at least how many separate statements of cash flows?
Three
None
Two
One
Question #16
Most entities interpret that significant noncash transactions should be reported:
In a separate schedule which is part of the statement of cash flows.

In the statement of cash flows.
In the notes to the financial statement.
In the statement of financial position.
Question #17
If a financial institution holding the funds of the company is in bankruptcy or other financial difficulty, cash should be
valued at:
estimated realizable value, if amount recoverable is estimated to be lower than the face amount.
estimated realizable value
face value, regardless of the realizable value
estimated realizable value, if amount recoverable is estimated to be higher than the face amount.
Question #18
A person authorized to write checks drawn on a checking account at a bank must sign and have on file with the bank a:
bank card
Checkbook
deposit ticket
signature card
Question #19
Hillary Company had the following bank reconciliation at March 31:
Balance per bank statement, March 31 93,000

Add deposit in transit 20,600
113,600
Less outstanding checks 25,200
Balance per books, March 31 88,400
Data per bank statement for the month of April follow:
Deposits 116,800
Disbursements 99,400
All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled P15,000.
What is the amount of cash disbursements per books in April?
109,600
114,400
99,400

99,400
89,200
Question #20
The exchange of shares for land would be reported in the statement of cash flows as
Noncash investing and financing activities

Exchanges
Investing activities
Financing activities
Question #21
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:
Eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in
cash
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.
Re-recording all income statement -transactions that directly affect cash in a separate cash flow journal.
Eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income
computation.
Question #22
How are increases in accounts payable and inventory treated respectively in computing cost of sales under cash basis?
Deducted and added
Deducted and deducted
Added and added
Added and deducted
Question #23
Which of the following statements concerning compensating balance agreement is not true?
They always involve legal restrictions on the cash received

They increase the effective interest rate to the borrower
They reduce the amount of cash available to the borrower.
They must be disclosed in the financial statements footnotes.
Question #24
The statement of cash flows reports all of the following, except:
investing transactions
the cash effects of operations during the period
the free cash flows generated during the period
the net change in cash for the period
Question #25
Cagas Corporation is negotiating with a bank for a P300,000 one-year loan. The loan is discounted with a 9 percent
interest rate and a 20% compensating balance. Suppose that Cagas Corporation requires the entire amount of P300,000 as
net proceeds, how much is the Loans required compensating balance?

net proceeds, how much is the Loans required compensating balance?
75,000
65,934
60,000
84,507
SOLUTION:
(300,000 / (100% - 9% - 20%)) 20%: P84,507
CPA Financial Accounting - Cash and Cash Equivalents (Difficult)
Question #26
Which of the following is true about the operating cycle concept?
it causes the distinction between current and non-current items to depend on whether they will affect cash within one
year.
the period covered is the time normally required to convert cash invested in tangible assets back into cash, or 12 months,
whichever is longer.
it affects the income statement but not the statement of cash flows
it permits some assets to be classified as current even though they are more than one year removed from becoming cash.
CPA Financial Accounting - Cash and Accrual Basis (Average)
Question #27
Supplemental disclosures required only when the statement of cash flows is prepared using the indirect method:
Significant noncash investing and financing activities

A schedule reconciling net income with net cash flows from operating activities
Amounts paid for interest and taxes
Amounts deducted for depreciation and amortization
Question #28
Incomplete accounting records using only a cash book is a characteristic of:
Cash basis
Double entry system
Single entry system
Accrual basis
Question #29
Free cash flow is calculated as net cash provided by operating activities less:
Capital expenditures
Capital expenditures and dividends
Capital expenditures and depreciation
Dividends
Question #30
Under PAS 7 (statement of cash flows), which of the following item is not being added to profit under the indirect method
of computing operating cash flows?
Increase in trade receivable

Depreciation expense
Bad debt losses

Bad debt losses
Loss on sale of equipment
Question #31
An auditor suspects that a clients cashier is misappropriating cash receipts for personal use by lapping customer checks
received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
dates check are deposited per bank statements with the dates remittance credits are recorded
daily cash summaries with the sums of the cash receipts journal entries
dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.
individual bank deposit slips with the details of the monthly bank statements
Question #32
Which of the following is an internal control that would prevent a paid disbursement voucher from being presented for
payment a second time?
vouchers should be prepared by individuals who are responsible for signing disbursement checks
the date on a disbursement voucher should be within a few days of the date the voucher is presented for payment
the official signing the check should compare the check with the voucher and should deface the voucher documents.
disbursement vouchers should be approved by at least two responsible management officials
Question #33
Which of the following could lead to a cash flow problem?
Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers

Obsolete inventory, increasing notes payable, easing of credit of suppliers
Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers
Slow-moving inventory, increasing notes payable, easing of credit of suppliers
Question #34
In preparing the statement of cash flows, how is unrealized gain on AFS securities treated?
It is ignored.
It is subtracted from net cash flow from investing activities.
It is subtracted from net income.
It is subtracted from net cash flow from financing activities.
Question #35
Which of the following statements is correct in relation to the statement of cash flows?
The direct, method is known as the reconciliation method.

The direct method is more consistent with the primary purpose of the statement of cash flows
All of the statements are correct.
The indirect method starts with income before income taxes.
Question #36
Which of the following will not be classified under operating activities in a statement of cash flows?
Cash receipts from sale of equity instruments representing interests in joint ventures
Cash receipts from sale of equity and debt instruments of other entities held primarily for the purpose of being traded

Cash receipts from sale of equity and debt instruments of other entities held primarily for the purpose of being traded
Cash payments to employees for short-term employee benefits
Cash receipts from sale of goods or rendering of services
Question #37
In reconciling the bank balance with the cash balance, which of the following would not cause the bank balance shown in
the bank statement to be lower than the unadjusted book balance?
Interest credited to the account by the bank

Cash on hand at the company
NSF checks from a customer, as reported on the bank statement
Deposits in transit
Question #38
Compared to the accrual basis of accounting, the cash basis of accounting understates income by net decrease during the
accounting period of:
Accounts receivable but not of accrued expenses

Both account receivable and accrued expenses
Accrued expenses but not of accounts receivable
Neither accounts receivable nor of accrued expenses
Question #39
An entity (other than a financial institution) receives dividends from its investment in shares. How should it disclose the
dividends received in the statement of cash flows?
As an adjustment under "operating activities"

Either as operating cash inflow or as financing cash inflow
Either as operating cash inflow or as investing cash inflow
Operating cash inflow
Question #40
Which of the following statements is false?
A certified check is one drawn by a bank upon itself

A certified check should not be included in the outstanding check
A certified check will be accepted by many persons who would not otherwise accept a personal check.
A certified check is a liability of the bank certifying it
Question #41
Which test is not an example of a white box test?
reconciling control totals

verifying that all pay rates are within a specified range
determining the fair value of inventory
ensuring that passwords are valid
Question #42
All of the following are arguments in favor of using the indirect method as opposed to the direct method of reporting a

All of the following are arguments in favor of using the indirect method as opposed to the direct method of reporting a
statement of cash flows except:
The direct method is nothing more than a cash basis income statement which will confuse and create uncertainty for
financial statement users who are familiar with the accrual-based income statements.
The direct method would probably lead to additional preparation cost because the financial records are not maintained on
a cash basis.
By providing a reconciliation between net income and cash provided by operations, the differences are highlighted.
The indirect method shows higher quality cash flows from investing and financing activities.
Question #43
Dolmar Corporation prepares its financial statements in accordance with PFRS. Dolmar must report finance costs on the
statement of cash flows:
Either in operating activities or financing activities

In operating activities
In financing activities
In investing activities or financing activities
Question #44
LMN Company issued a note solely in exchange for cash. Assuming that the items below differ in amount the present
value of note at issuance is equal to the:
Proceeds received
Face amount
Proceeds received, discounted at the prevailing interest rate for similar notes
Face amount discounted at the prevailing interest rate for similar notes
CPA Financial Accounting - Cash and Cash Equivalents (Easy)
Question #45
The first step in the preparation of the statement of cash flows requires the use of information included in which
comparative financial statements?
Statements of cash flows

Statements of retained earnings
Statements of financial positions
Income statements
Question #46
In reconciling the bank balance with the book cash balance, which of the following would not cause the bank balance
shown in the bank statement to be lower than the unadjusted book balance?
Deposits in transit
NSF checks from a customer as reported on the bank statement
Cash on hand at the company
Interest credited to the account by the bank
Question #47
When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash
paid for operating expenses to determine accrual basis operating expenses?
subtract interest expense

add beginning accrued liabilities

add beginning accrued liabilities
subtract beginning prepaid expenses
subtract ending prepaid expenses
Question #48
Modified cash basis (or hybrid basis) differs from the accrual basis in the computation of:
Gross profit
Bad debts expense
Depreciation
Expenses
CPA Financial Accounting - Cash and Accrual Basis (Easy)
Question #49
An entity purchased a call option to protect itself from the price volatility of goods. In preparing the statement of cash
flows, the purchase will be reported as:
A note disclosure
An investing activity
An operating activity
A financing activity
Question #50
PAS 7 requires that investing and financing transactions that do not require the use of cash or cash equivalents should be:
Included in the statement of cash flows before operating, investing and financing activities.
Excluded from the statement of cash flows.
Presented in the statement of cash flows after operating activities and before investing and financing activities.
Presented in the statement of cash flows after the operating, investing and financing activities have been presented.
ANSWER KEY:
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RECEIVABLES
Question #1
Under the allowance method, the entries at the time of collection of an account previously written off would
Have no effect on net income

Increase net income
Decrease the allowance for doubtful accounts
Have no effect on the allowance for doubtful accounts
CPA Financial Accounting - Receivable (Average)
Question #2
On July 1, 2012, an entity obtained a two-year 8% note receivable for services rendered. At that time, the market
rate of interest was 10%. The face amount of the note and the entire amount of interest are due on June 30,
2014. Interest receivable on December 31,2012 was:
4% of the July 1, 2012 present value of the amount due on June 30, 2014
5% of the face value of the note
4% of the face value of the note
5% of the July 1, 2012 present value of the amount due on June 30,2014.
CPA Financial Accounting - Notes Receivable (Difficult)
Question #3
If the adjusting entry to accrue interest on a note receivable is omitted:
Assets, net income, and shareholders' equity are understated.

Assets are overstated, net income is understated, and shareholders' equity is understated
Assets, net income, and shareholders' equity are overstated
Liabilities are understated, net income is overstated, and shareholders' equity is overstated
CPA Financial Accounting - Notes Receivable (Easy)
Question #4
An entity uses the allowance method to recognize uncollectible accounts expense. What is the effect at the
time of the collection of an account previously written off on allowance for doubtful accounts and doubtful
accounts expense, respectively?
No effect and Decrease

No effect and No effect
Increase and Decrease
Increase and No effect
Question #5
Which of the following is not permitted for accounting for material amounts of uncollectible accounts
receivable?

Percentage of receivables, allowance method
Percentage of sales, allowance method
All of the choices are acceptable under PFRS
Direct writeoff method
Question #6
Short-term non-interest bearing notes receivable are usually recorded at their:
Discounted value
Net realizable value
Maturity value
Present value
Question #7
The confirmation of customers receivable rarely provides reliable evidence about the completeness assertion
because:
recipients usually respond only if they disagree with the information on the request
customers may not be inclined to report understatement errors in their accounts
many customers merely sign and return the confirmation without verifying its details
auditors typically select many accounts with low recorded balances to be confirmed
CPA Auditing Problems - Audit of Receivable (Easy)
Question #8
An entity uses the installment sales method to recognize revenue. Customers pay installment notes in 24
equal monthly amounts, which include 12% interest. What is the installment notes receivable balance six
months after the sale?
Less than the present value of the remaining monthly payments discounted at 12%
The present value of the remaining monthly payments discounted at 12%
75% of the original sales price
Less than 75% of the original sales price
CPA Financial Accounting - Notes Receivable (Average)
Question #9
Fenn Company had sales of P5,000,000 in December 2012. Experience had shown that merchandise equalling
7% of sales would be returned within 30 days, and an additional 3% will be returned within 90 days. Returned
merchandise is readily resalable. Also, merchandise equalling 15% of sales will be exchanged for merchandise
of equal or greater value. What amount should be reported for net sales for December 2012?
4,250,000
3,750,000
4,500,000
3,900,000
SOLUTION:

SOLUTION:
P5,000,000 x 90% = P4,500,000
CPA Financial Accounting - Accounts Receivable (Easy)
Question #10
The cut-off tests for sales are designed to ensure that both sales and receivables are
recorded in the correct accounting period and that inventories and accounts payable are recorded in the same
accounting period.
True
False
CPA Auditing Theory - Evidence Sales and Receivables (Easy)
Question #11
Credit checks should be performed for all customers after sending the customer order to the warehouse for
processing, pickup, and delivery.
True
False
CPA Auditing Theory - Evidence Sales and Receivables (Easy)
Question #12
In applying the aging method of estimating doubtful accounts, how is the net realizable value computed?
Multiply the gross accounts receivable by the percent uncollectible.

Subtract accounts written off from total accounts receivable
Compute the present value of the accounts receivable using an appropriate discount rate.
Multiply the gross accounts receivable by the percent collectible.
Question #13
At the middle of the current year, an entity received a one-year note receivable bearing interest at the market
rate. The face amount of the note receivable and the entire amount of the interest are due in one year. When
the note receivable was initially recorded, which of the following was debited?
I Interest receivable
II Unearned discount on note receivable
Neither I nor II
II only
Both I and II
I only
Question #14
Question #14
Which of the following events does not necessarily provide objective evidence that a receivable is impaired?
A downgrade of the debtors credit rating

Significant financial difficulty of the debtor
Bankruptcy proceedings undertaken by the debtor
Default on delinquency in interest or principal payment
CPA Financial Accounting - Receivable (Difficult)
Question #15
Receivables denominated in foreign currency shall be translated using the exchange rate prevailing on:
The balance sheet date

The date of declaration
The date of transaction
The date of collection
Question #16
One of the major audit procedures for determining whether the allowance for doubtful receivables is adequate
is:
confirming any accounts receivable written-off during the year

confirming all receivable with a credit balance
preparing a list of aged accounts receivable
vouching and tracing the collection of a receivable written-off in a prior period
Question #17
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are
recorded?
the accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to
the accounts receivable control account monthly.
the billing department supervisor matches the pre-numbered shipping documents with entries in the sales
journal
the billing department supervisor sends copies of approved sales orders to the credit limits and current
customer account balances
the accounting department supervisor controls the mailing of monthly statements to customers and
investigates any differences reported by customers
Question #18
If the objective of a test of details is to detect understatement of sales, the auditor should trace transactions
from the:
accounting records to the source documents.

source documents to the accounting records

source documents to the accounting records
cash receipts journal to the sales journal
sales journal to the cash receipts journal
Question #19
Loans and receivables are non-derivative financial assets:
Without fixed or determinable payments that are quoted in an active market

Without fixed or determinable payments that are not quoted in an active market
With a fixed or determinable payments that are not quoted in an active market
With fixed or determinable payments that are quoted in an active market
Question #20
Long-term notes receivable which nominally bear no interest or an interest which is unreasonably low should
be recognized initially at:
Face value
Present value
Maturity value
Question #21
Which of the following is not permitted for accounting for material amounts of uncollectible accounts
receivable?
Percentage of sales, allowance method

Direct writeoff method
All of the choices are acceptable under PFRS
Percentage of receivables, allowance method
Question #22
After being held for 30 days, a 90-day 10% interest bearing note was discounted at a bank at 12%:Discount will
be based on:
30 days 12%
60 days at 12%
30 days at 10%
60 days at 10%
Question #23
ABC Company, a financing company, extended a loan to XYZ Corporation amounting to P10 million on January 1,
2011 receivable 5 years after. The loan bears 10% annual interest collectible at the end of each year starting

December 31, 2011. The Company paid direct origination cost amounting to P300,000 and charged XYZ
Corporation origination fees at P1,020,955. The yield on the loan under this arrangement was at 12%.
The 2011 to 2013 interests were collected as scheduled.
By the end of 2014, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual interest
as scheduled and ABC Company is doubtful as to the collectibility of the remaining interests and the principal.
After due consideration and correspondence with XYZ Company, ABC estimated that it will be able to recover
the following amounts at respective estimated dates:
Amount Expected delivery date

1,000,000 December 31, 2015
2,000,000 December 31, 2016
2,500,000 December 31, 2017
2,500,000 December 31, 2018
What is the correct net book value of the receivables as of December 31, 2014?
5,344,509
6,855,491
6,344,509
5,855,491
SOLUTION:
Amortization table, January 2011 to December 2014
Correct interest (Carrying value x 12%) Nominal interest (Principal x 10%)

Amortization Balance
January, 2011 9,279,045
December 2011 1,113,485 1,000,000 113,485 9,392,530
December 2012 1,127,104 1,000,000 127,104 9,519,634
December 2013 1,142,356 1,000,000 142,356 9,661,990
December 2014 1,159,439 1,000,000 159,439 9,821,429
Impairment loss
Loans and receivable, including interest (9,821,429 + 1,000,000)

10,821,429
Present value of future cash flows using the original effective rate 12%
(1,000,000 x 0.8929) 892,857
(2,000,000 x 0.7972) 1,594,388
(2,500,000 x 0.7118) 1,779,451
(2,500,000 x 0.6355) 1,588,795 5,855,491
Impairment loss 4,965,938
Amortization table, December 2014 onwards
Amortization Principal collection

(Carrying value x 12%) Balance
December, 2014 5,855,491
December 2015 702,659 1,000,000 5,558,150

December 2016 666,978 2,000,000 4,225,128
December 2017 507,015 2,500,000 2,232,143
December 2018 267,857 2,500,000 -
CPA Auditing Problems - Audit of Receivable (Uncategorized)
Question #24
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal
defalcation and be least likely to be detected by an auditor?
understating the cash receipts journal

overstating the accounts receivable subsidiary ledger
understating the sales journal
overstating the accounts receivable control account
Question #25
A financing agreement whereby one party formally transfers its rights to accounts receivable to another party
in consideration for a loan:
Pledge
Discounting
Factoring
Assignment
CPA Financial Accounting - Receivable Financing (Average)
Question #26
If financial assets are exchanged for cash and other consideration but the transfer does not meet the criteria
for a sale, the transferor and the transferee should account for the transaction as
(I) Secured borrowing and

(II) Pledge of collateral
II only
Neither I nor II
I only
Both I and II
CPA Financial Accounting - Receivable Financing (Difficult)
Question #27
The following information relates to Cashflow Ltd for the year ended 30 June 20X6.
Sales revenue P450,000

Opening balance of trade receivables (net of allowance) 100,000
Closing balance of trade receivables (net of allowance) 132,500
Doubtful debts expense 5,000
Increase in allowance for doubtful debts 2,000

Bad debts are written off against the allowance for doubtful debts. What is the amount of cash collected from
customers during the year ended 30 June 20X6?
487,500
481,500
412,500
418,500
SOLUTION:
The following formula may then be used: Sales revenue + Decrease in gross receivable - Increase in gross
receivables - Bad debts Bad debts written off are determined as follows: Doubtful debts expense + (-)
Decrease (increase) in allowance for doubtful debts =5,000 - 2,000 = 3,000 Another way of viewing the above
calculation is to consider what an increase in Allowance for doubtful debt implies. That is, an allowance for
doubtful debts is increased by doubtful debts expense and decreased as bad debts are written off. As the
allowance increased by P2,000, the doubtful debts expense must be P2,000 greater than the bad debt write-off.
The question data reveals a doubtful debts expense of P5,000. Hence, the bad debt write-off must be P3,000.
The change in gross receivables can be determined using the change in net receivables adjusted for the
change in the allowance for doubtful debts. The net receivables increased by P32,500 while the allowance for
doubtful debts increased by P2,000. The increase in allowance for doubtful debts would have reduced the
change in net receivables by P2,000 as it is deducted from gross receivables. Hence the change in gross
receivables is P34,500.
Question #28
The auditor finds a solution in which one person has the ability to collect receivable, make deposits, issue
credit memos, and record receipts of payments from cash receipts. Which of the following audit procedures
would be most effective in discovering fraud in this scenario?
perform a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding
cash posted to the cash receipts journal
send negative confirmations to all outstanding accounts receivables customers
take a sample of bank deposits and trace the detail in each bank deposit back the entry in the cash receipts
journal
send positive confirmations to a random selection of customers
Question #29
Equity in assigned accounts of an entity is the difference between:
Accounts receivable- unassigned and accounts receivable-assigned.

Accounts receivable - assigned and accounts receivable pledged.
Accounts receivable - unassigned and outstanding principal of bank loan.
Accounts receivable - assigned and outstanding principal of bank loan.
Question #30
If an entity employs the net method of recording accounts receivable from customers, the sales discounts not
taken should be:

taken should be:
Deducted from accounts receivable in the statement of financial portion

Reported as other income in the income statement
Reported as sales discount forfeited in the cost of sales section of the income statement
Deducted from sales in the income statement
Question #31
The following information relates to the affairs of Funny Money Ltd.
30 June 20X2 (P000) 30 June 20X3 (P000)

Trade receivables 150 Debit 120 Debit
Allowance for doubtful debts 8 Credit 12 Credit
Year ended 30 June 20X3
Sales revenue 500,000
Doubtful debts expense 15,000
Bad debts incurred during the year were written off against the allowance for doubtful debts. What is the
amount of cash collected from trade receivables during 20X3?
519,000
485,000
481,000
515,000
SOLUTION:
The amount may be obtained from reconstructing trade receivables and allowance for doubtful debts as shown
below. Alternatively, the formula provided at the end of the accounts may be used. The formula can be derived
from first principles or by examining the structure of the two ledger accounts. Trade receivables
Date Particulars P000 Date Particulars P000

20X2 20X2
30 June Opening balance 150 (3) Allowance for doubt. Debts (bad debts ) (a)
Various sales revenue 500 11
(4) Cash 519
20X3
30 June Closing balance 120
650 650
20X3
30 June Balance c/d. 120
(a) This figure is derived from reconstructing the Allowance for doubtful debts account below. Note: The
Allowance for doubtful debts increases for doubtful debts expense and decreases as bad debts are written off.
If you are unsure how to account for bad and doubtful debts, you should review a financial accounting text. In
relation to the Allowance for doubtful debts account, the question data provides the opening and closing
balances plus the doubtful debts expense. Hence the missing variable bad debt write-off can be determined
from this data. Allowance for doubtful debts

Date Particulars P000 Date Particulars P000
20X2 20X2
30 June Opening balance 8
(3) Trade receivables 11 (2) Profit & loss (Doubtful debts exp.) 15
30 June Closing balance 12
23 23
20X3
30 June Balance c/d. 12
Cash collected is:
Sales revenue + Decrease in gross receivables Bad debts

or
Increase in gross receivables
Note: The bad debt write-off must be determined from either reconstructing the Allowance for doubtful debts
account or by using the movement in the Allowance for doubtful debts account and doubtful debts expense
information. P500,000 + P30,000 P11,000 = P519,000
Question #32
A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the
discounting transaction, the note receivable discounted account should be:
Increased by the face amount of the note

Increased by the proceeds from the discounting transaction
Decreased by the face amount of the note
Decreased by the proceeds from the discounting transaction
Question #33
All of the following are characteristics of loans and receivables, except:
The holder has a demonstrated positive intention and ability to hold them to maturity
They have fixed or determinable payments
The holder can recover substantially all of its investment unless there has been a credit deterioration
They are unquoted
Question #34
ABC Company, a financing company, extended a loan to XYZ Corporation amounting to P10 million on January 1,
December 31, 2011. The Company paid direct origination cost amounting to P300,000 and charged XYZ
Corporation origination fees at P1,020,955. The yield on the loan under this arrangement was at 12%.
The 2011 to 2013 interests were collected as scheduled.
By the end of 2014, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual interest
as scheduled and ABC Company is doubtful as to the collectibility of the remaining interests and the principal.

the following amounts at respective estimated dates:
Amount Expected delivery date

1,000,000 December 31, 2015
2,000,000 December 31, 2016
2,500,000 December 31, 2017
2,500,000 December 31, 2018
What is the correct net book value of the receivables as of December 31, 2014?
5,344,509
6,855,491
6,344,509
5,855,491
SOLUTION:
Amortization table, January 2011 to December 2014
Correct interest (Carrying value x 12%) Nominal interest (Principal x 10%)

Amortization Balance
January, 2011 9,279,045
December 2011 1,113,485 1,000,000 113,485 9,392,530
December 2012 1,127,104 1,000,000 127,104 9,519,634
December 2013 1,142,356 1,000,000 142,356 9,661,990
December 2014 1,159,439 1,000,000 159,439 9,821,429
Impairment loss
Loans and receivable, including interest (9,821,429 + 1,000,000)

10,821,429
Present value of future cash flows using the original effective rate 12%
(1,000,000 x 0.8929) 892,857
(2,000,000 x 0.7972) 1,594,388
(2,500,000 x 0.7118) 1,779,451
(2,500,000 x 0.6355) 1,588,795 5,855,491
Impairment loss 4,965,938
Amortization table, December 2014 onwards
Amortization Principal collection

(Carrying value x 12%) Balance
December, 2014 5,855,491
December 2015 702,659 1,000,000 5,558,150
December 2016 666,978 2,000,000 4,225,128
December 2017 507,015 2,500,000 2,232,143
December 2018 267,857 2,500,000 -
CPA Auditing Problems - Audit of Receivable (Difficult)
Question #35
Question #35
Which of the following statements are correct?
1 Factoring with recourse provides insurance against bad debts

2 The expertise of a factor can increase the efficiency of trade receivables management for a company
1 only
Neither 1 nor 2
2 only
1 and 2
Question #36
A debit balance in the allowance for doubtful accounts:
Should never occur

May occur before year-end adjustment for uncollectibles
Is always the result of management not providing a large enough allowance in order to manage earnings
May exist even after year-end adjustment of uncollectibles
Question #37
Statement 1 Short term notes, interest bearing or non-interest bearing, are stated at face value
Statement 2 Interest bearing long term notes shall be stated at face value
Statement 3 Non-interest bearing long-term notes shall be stated at discounted value
Only statement I is true

Only statement I is false
Only statement II is true
All statements are true
Question #38
Vince Inc. factors P2,000,000 of its accounts receivables without guarantee (recourse) for a finance charge of
5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments.
What would be recorded by Vince as a gain (loss) on the transfer of receivables?
loss of P100,000
loss of P300,000
loss of P200,000
gain of P100,000
SOLUTION:
P2,000,000 x 0.05 = P100,000

Question #39
On December 31, 2011 balance sheet, a note receivable was reported as a noncurrent asset and its accrued
interest for eight months was reported as a current asset. Which of the following terms would best describe
the note receivable?
Principal is due April 30, 2013 and interests are due April 30, 2012 and April 30, 2013.
Both principal and interests are, due December 31, 2013
Principal is due April 30, 2013 and interests are due December 31, 2012 and December 31, 2013
Both principal and interests are payable April 30, 2012
Question #40
An entity uses the allowance method for recognizing doubtful accounts. The entry to record the writeoff of a
specific uncollectible accounts:
Affects neither net income nor accounts receivable

Decreases both net income and accounts receivable
Affects neither net income nor working capital
Decreases both net income and working capital
Question #41

1 only
Neither 1 nor 2
1 and 2
2 only
Question #42
Edwin Company records all transactions on the cash basis. The entity accountant prepared the following
income statement at the end of the entity's first year of operations:
Sales 252,000
Selling and administrative expense
Salaries expense 78,000
Rent expense 45,000
Commission expense 37,800
Equipment 30,000
Utilities expense 29,000
Insurance expense 6,000
Interest expense 3,000 228,800

Net income 23,200
An income statement should be prepared on the accrual basis. The following information is made available:
a Amounts due from customers at year-end were P28,000. Of this amount, P3,000 will probably not be collected.
b Salaries of P11,000 for December 2012 were paid on January 5, 2013.
c Edwin rents its building for P3,000 a month, payable quarterly in advance. The contract was signed on January
1, 2012.
d The bill for December's utility costs P2,700 was paid January 10, 2013.
e Equipment of P30,000 was purchased on January 1, 2012. The expected life is five years with no residual value.
Straight line depreciation is used.
f Commissions of 15% of sales are paid on the same day cash is received from customers.
g A 1-year insurance policy was issued on entity assets on July 1, 2012. Premiums are paid annually in advance.
h Edwin borrowed P50,000 for one year on May 1, 2012. Interest payments based on an annual rate of 12% are
made quarterly, beginning with the first payment on August 1, 2012.
i The income tax rate is 30%. No prepayments of income taxes were made during 2012.
What is the adjusting entry for accrued expenses except interest expense on December 31, 2012?
Debit salaries expense and credit accrued expenses for P11,000.

Debit salaries expense for P11,000, utilities expense for P2,700, commission expense for P4,200 and credit
accrued expense for P17,900.
Debit salaries expense for P11,000, utilities expense for P2,700, commission expense for P3,750 and credit
accrued expense for P17,450.
Debit salaries expense for P11,000, utilities expense for P2,700 and credit accrued expense for P13,700.
Question #43
In applying the aging method of estimating doubtful accounts, how is the net realizable value computed?
Multiply the gross accounts receivable by the percent collectible.

Multiply the gross accounts receivable by the percent uncollectible.
Subtract accounts written off from total accounts receivable
Compute the present value of the accounts receivable using an appropriate discount rate.
Question #44
Notes receivable discounted with recourse should be:
Included in total receivables with disclosure of contingent liability

Included in total receivables without disclosure of contingent liability
Excluded from total receivables without disclosure of contingent liability
Excluded from total receivables with disclosure of contingent liability
Question #45
In its financial statements, an entity uses the cost method of accounting for its 15% ownership of an investee.
The investor has a receivable from the investee at year-end. How should the receivable be reported in
investor's year-end statement of financial position?

investor's year-end statement of financial position?
The total receivable should be offset against the investee's payable to the investor, without separate
disclosure.
The total receivable should be included as part of the investment, without separate disclosure.
Eighty-five percent of the receivable should be reported separately, with the balance offset against the
investee's payable to the investor
The total receivable should be reported separately
Question #46
Which of the following is an advantage of using the net price method for recording cash discounts on credit
sales?
It simplifies recording of sales returns and allowances

It eases communication with customers about their balances
It properly reflects current period sales revenue
It requires less record-keeping efforts than the gross method
Question #47
Edwin Company records all transactions on the cash basis. The entity accountant prepared the following
income statement at the end of the entity's first year of operations:
Sales 252,000
Selling and administrative expense
Salaries expense 78,000
Rent expense 45,000
Commission expense 37,800
Equipment 30,000
Utilities expense 29,000
Insurance expense 6,000
Net income 23,200
An income statement should be prepared on the accrual basis. The following information is made available:
a Amounts due from customers at year-end were P28,000. Of this amount, P3,000 will probably not be collected.
b Salaries of P11,000 for December 2012 were paid on January 5, 2013.
c Edwin rents its building for P3,000 a month, payable quarterly in advance. The contract was signed on January
1, 2012.
d The bill for December's utility costs P2,700 was paid January 10, 2013.
e Equipment of P30,000 was purchased on January 1, 2012. The expected life is five years with no residual value.
Straight line depreciation is used.
f Commissions of 15% of sales are paid on the same day cash is received from customers.
g A 1-year insurance policy was issued on entity assets on July 1, 2012. Premiums are paid annually in advance.
h Edwin borrowed P50,000 for one year on May 1, 2012. Interest payments based on an annual rate of 12% are
made quarterly, beginning with the first payment on August 1, 2012.

i The income tax rate is 30%. No prepayments of income taxes were made during 2012.
What is the adjusting entry for all prepaid expenses on December 31, 2012?
Debit prepaid expenses for P12,000 and credit rent expense for P9,000, insurance expense for P3,000.
Debit rent expense for P9,000, insurance expense for P3,000 and credit prepaid expenses for P12,000.
Debit prepaid expenses for P9,000 and credit rent expense for P9,000.
Debit prepaid expenses for P3,000 and credit insurance expense for P3,000.
Question #48
Which of the concepts relates to using the allowance method in accounting for accounts receivable?
Bad debt expense is an estimate that is based only on an aging of the accounts receivable
Bad debt expense is an estimate that is based on historical and prospective information
Bad debt expense is management's determination of which accounts will be sent to the attorney for collection
Bad debt expense is based on the actual amounts determined to be uncollectible
Question #49
If a note receivable is discounted without recourse:
The contingent liability may be disclosed in either contra receivable or a note to the FS
The transaction should be accounted for as a borrowing as opposed to a sale
Liability for note receivable discounted should be credited
Note receivable should be credited
Question #50
Which of the following accounts is not in any way affected when a previously written-off receivable is
unexpectedly collected?
Cash
Bad debt expense
Accounts receivable
Allowance for bad debts
CPA Financial Accounting - Receivable (Easy)
Answer key
ACADDCBBCB
BDAAACBBCB
BBDCDDCADB
AAADCBDAAC
DCADDCABDB

RECEIVABLE FINANCING
Question #1
The assignor’s equity in assigned accounts that is required to be disclosed in the notes is equal to the:
Assigned accounts receivable minus the bank loan balance

Bank loan balance
Assigned accounts receivable
Bank loan balance minus the assigned accounts receivable
Question #2
JP Company received from a customer a one-year, P500,000 note bearing annual interest of 8%. After
holding the note for six months, JP discounted the note without recourse at Libra Bank at an effective
interest rate of 10%.
What is the loss on note receivable discounting?
7,000
12,000
27,000
20,000
SOLUTION:
Principal 500,000
Accrued interest receivable (500,000 x 8% x 6/12) 20,000
Book value of note receivable 520,000
Net proceeds 513,000
Book value of note receivable 520,000
Loss on note receivable discounting ( 7,000)
Maturity value = Principal plus interest for the "full" term of the note. Interest = Principal times interest rate
times the full term of the note. Discount = Maturity value times discount rate x discount period
Question #3
Pamela Company accepted from a customer a P4,000,000,90-day, 12% interest-bearing note dated August 31,
2014. On September 30, 2014, Pamela discounted the note with recourse at the Carrie State Bank at 15%.
However, the proceeds were not received until October 1, 2014.
The discounting with recourse is accounted for as a conditional sale with recognition of a contingent liability.
The proceeds from discounting amounted to:
4,017,000
4,103,000
3,965,500
4,120,000

SOLUTION:
Principal 4,000,000
Interest (4,000,000 x 12% x 90/360) 120,000
Maturity value 4,120,000
Less: Discount (4,120,000 x 15% x 60/360) 103,000
Net proceeds 4,017,000
The note is dated August 31, 2014 and it was discounted on September 30, 2014 and therefore, 30 days
already expired. Accordingly, the discount period or unexpired term is 60 days.
Question #4
On July 1, 2021, Henry Company sold goods in exchange for P2,000,000,8-month, noninterest-bearing note
receivable. At the time of the sale, the note's market rate of interest was 12%. What amount did Henry
receive when it discounted the note at 10% on September 1, 2021?
1,900,000
1,880,000
1,940,000
1,938,000
SOLUTION:
Principal 2,000,000
Less: Discount (2,000,000 x 10% x 6/12) 100,000
The note is noninterest-bearing. Therefore, the maturity value is equal to the principal or face value of the
note. The note is dated July 1, 2021 and it was discounted on September 1, 2021 and therefore, 2 months
already expired. Since the term of the note is 8 months, the unexpired term is 6 months.
Question #5
The amount of accounts receivable is included in total receivable with appropriate disclosures when:
Pledged (Yes); Assigned (Yes); Factored (Yes)

Pledged (Yes); Assigned (Yes); Factored (No)
Pledged (No); Assigned (No); Factored (No)
Pledged (Yes); Assigned (No); Factored (No)
Question #6

Neither 1 nor 2
1 and 2
2 only
1 only
Question #7
Min Company factored P6,000,000 of accounts receivable to Jin Company on October 1. Control was
surrendered by Min. Jin assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable.
In addition, Jin charged 15% interest computed on a weighted average time to maturity of the accounts
receivable of 54 days.
Min will receive and record cash of
5,476,850
5,556,850
5,296,850
5,386,850
SOLUTION:
Accounts receivable 6,000,000
Factor's holdback (6,000,000 x 5%) ( 300,000)
Factoring fee (6,000,000 x 3%) ( 180,000)
Interest (6,000,000 x 15% x 54/365) ( 133,150)
Cash received from factoring 5,386,850
Question #8
When accounts receivable are factored without recourse, what accounts does the transferor credit?
Liability
Accounts receivable
Sales
Accounts receivable assigned
CPA Financial Accounting - Receivable Financing (Easy)
Question #9
All but one of the following are required before a transfer of receivables can be recorded as a sale?
The transferor has not kept effective control over the transferred receivables through a repurchase
agreement.
The transferee can pledge or sell the transferred receivables.
The transferred receivables are beyond the reach of the transferor and its creditors.
The transferor maintains continuing involvement

Question #10
On July 1, 2013, Nestor Company sold equipment to Mando Company for P 1,000,000. Nestor accepted a 10%
note receivable for the entire sales price. This note is payable in two equal installments of P500,000 plus
accrued interest on December 31, 2013 and December 31, 2014.
On July 1, 2014, Nestor discounted the note at a bank at an interest rate of 12%. Nestor's proceeds from the
discounted note amounted to
503,500
517,000
493,500
484,000
SOLUTION:
Principal 500,000
Add: Interest (500,000 x 10%) 50,000
Maturity value 550,000
Less: Discount (550,000 x 12% x 6/12) 33,000
Only the balance of P500,000 on December 31, 2013 was discounted because the first installment of
P500,000 was paid on said date. This balance of P500,000 matures on December 31, 2014 and therefore the
corresponding interest is for one year from December 31, 2013 to December 31, 2014. However, the discount
period is only 6 months because the note was discounted on July 1, 2014
Question #11
Which of the following is used to account for probable sales discounts, sales returns and sales allowances?
Recourse liability only

Both due from factor and recourse liability
Neither due from factor nor recourse liability
Due from factor only
Question #12
On January 1, 2014, Luther Company sold land with carrying amount of P 1,500,000 in exchange for a 9-
month, 10% note with face value of P2,000,000. The 10% rate properly reflects the time value of money for
this type of note.
On April 1, 2014, Luther Company discounted the note with recourse. The bank discount rate is 12%. The
discounting transaction is accounted for as a secured borrowing.
On October 1, 2014, the maker dishonored the note receivable. Luther Company paid the bank the maturity
value of the note plus protest fee of P 10,000.
On December 31, 2014, Luther Company collected the dishonored note in full plus 12% annual interest on the
total amount due.
What is the interest expense to be recognized by Luther Company on April 1, 2014?
29,000

29,000
21,000
25,000
50,000
SOLUTION:
Principal 2,000,000
Interest (2,000,000 x 10% x 9/12) 150,000
Discount (2,150,000 x 12% x 6/12) 129,000
Principal 2,000,000
Accrued interest receivable (2,000,000 x 10% x 3/12) 50,000
Book value of note receivable 2,050,000
Less: Book value of note receivable 2,050,000
Interest expense ( 29,000)
Question #13
The amount of receivables that are hypothecated or pledged against borrowings should be
Included in total receivables with disclosure

Excluded from total receivables without disclosure
Excluded from total receivables with disclosure
Included in total receivables without disclosure
Question #14
Which of the following transfers of financial assets would qualify for derecognition?
A sale of a financial asset where the entity retains an option to buy the asset back at its current fair value on
repurchase date
A sale of a financial asset where the entity agrees to repurchase the asset in one year for a fixed price plus
interest
A loan of a security to another entity
A sale of a portfolio of current accounts receivable where the entity guarantees to compensate the buyer for
any losses in the portfolio
Question #15
Michael Company assigns P1,500,000 of its accounts receivable as collateral for a P1,000,000 loan with a
bank. The bank assesses a 3% finance fee and charges interest on the note at 6%. What would be the journal
entry to record this transaction?

Debit cash for P970,000, debit finance charge for P30,000, debit due from bank for P500,000, and credit
accounts receivable for P1,500,000.
Debit cash for P910,000, debit finance charge for P90,000, and credit note payable for P1,000,000.
Debit cash for P970,000, debit finance charge for P30,000, and credit note payable for P1,000,000.
Debit cash for P970,000, debit finance charge for P30,000, and credit accounts receivable for P1,000,000.
Question #16
On July 1, June Company sold P5,800,000 in accounts receivable for cash of P5,000,000. The factor withheld
10% of the cash proceeds to allow for possible customer returns and other adjustments. An allowance for
bad debts of P600,000 had previously been established by June in relation to these accounts. What was the
loss on factoring recognized by June Company?
700,000
200,000
500,000
800,000
SOLUTION:
Sales price 5,000,000
Carrying value of accounts receivable (5,800,000 - 600,000) 5,200,000
Loss on factoring ( 200,000)
Question #17
On December 1, 2021, Doo Company assigned specific accounts receivable totaling P2,000,000 as collateral
on a P 1,500,000, 12% note from a certain bank. Doo Company will continue to collect the assigned accounts
receivable. In addition to the interest on the note, the bank also charged a 5% finance fee deducted in
advance on the P 1,500,000 value of the note. The December collections of assigned accounts receivable
amounted to P 1,000,000 less cash discounts of P50,000. On December 31, Doo Company remitted the
collections to the bank in payment for the interest accrued on December 31 and the note payable.
How much cash was received from the assignment of accounts receivable on December 1?
1,900,000
1,500,000
1,425,000
2,000,000
SOLUTION:
Note payable 1,500,000
Finance fee (5% x 1,500,000) ( 75,000)
Cash received on December 1 1,425,000

Question #18
If financial assets are exchanged for cash and other consideration but the transfer does not meet the
criteria for a sale, the transferor and the transferee should account for the transaction as

I only
II only
Both I and II
Neither I nor II
Question #19
What should be reported as note payable on December 31 ?
550,000
500,000
730,000
565,000
SOLUTION:
Note payable 1,500,000
Principal payment:
Remittance 950,000
Interest (1,500,000 x 12% x 1/12) ( 15,000) 935,000
Note payable - December 31 565,000
Question #20

1 only
2 only
1 and 2
Neither 1 nor 2

Neither 1 nor 2
Question #21
If a note receivable is discounted without recourse
Note receivable should be credited

The contingent liability may be disclosed in either contra receivable or a note to the FS
The transaction should be accounted for as a borrowing as opposed to a sale
Liability for note receivable discounted should be credited
Question #22
Min Company factored P6,000,000 of accounts receivable to Jin Company on October 1. Control was
surrendered by Min. Jin assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable.
In addition, Jin charged 15% interest computed on a weighted average time to maturity of the accounts
receivable of 54 days.
Assuming all receivables are collected, Min Company's cost of factoring the receivables would be
180,000
433,150
313,150
613,150
SOLUTION:
Factoring fee 180,000
Interest 133,150
Total cost of factoring 313,150
Question #23
A financing agreement whereby one party formally transfers its rights to accounts receivable to another
party in consideration for a loan:
Pledge
Assignment
Discounting
Factoring
Question #24
On July 1, 2014, Henry Company sold goods in exchange for P2,000,000,8-month, noninterest-bearing note
receivable. At the time of the sale, the note's market rate of interest was 12%. What amount did Henry
receive when it discounted the note at 10% on September 1, 2014?

1,900,000
1,940,000
1,938,000
1,880,000
SOLUTION:
Principal 2,000,000
Less: Discount (2,000,000 x 10% x 6/12) 100,000
The note is noninterest-bearing. Therefore, the maturity value is equal to the principal or face value of the
note. The note is dated July 1, 2014 and it was discounted on September 1, 2014 and therefore, 2 months
already expired. Since the term of the note is 8 months, the unexpired term is 6 months.
Question #25
Raffy Corporation factored, with recourse, P300,000 of accounts receivable with Huskie Financing. The
finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances.
Raffy estimates the recourse obligation at P7,200. What amount should Raffy report as a loss on sale of
receivables?
16,200
31,200
0
9,000
SOLUTION:
(P300,000 × .03) + P7,200 = P16,200
Question #26
Pamela Company accepted from a customer a P4,000,000,90-day, 12% interest-bearing note dated August 31,
2014. On September 30, 2014, Pamela discounted the note with recourse at the Carrie State Bank at 15%.
However, the proceeds were not received until October 1, 2014.
The discounting with recourse is accounted for as a conditional sale with recognition of a contingent liability.
40,000
17,000
20,000
23,000
SOLUTION:
Principal 4,000,000

Question #27
Carrie Company accepted from a customer P1,000,000 face amount, 6-month, 8% note dated April 15, 2014.
On the same date Carrie discounted the note without recourse at Brass Bank at a 10% discount rate.
52,000
12,000
50,000
40,000
SOLUTION:
Book value of note receivable - equal to principal 1,000,000
Question #28
Carrie Company accepted from a customer P1,000,000 face amount, 6-month, 8% note dated April 15, 2014.
On the same date Carrie discounted the note without recourse at Brass Bank at a 10% discount rate.
How much cash was received by Carrie from the discounting?
988,000
1,040,000
972,000
990,000
SOLUTION:
Principal 1,000,000
Add: Interest (1,000,000 x 8% x 6/12) 40,000
Less: Discount (1,040,000 x 10% x 6/12) 52,000
Question #29
Garry Co. assigned P400,000 of accounts receivable to Victor Co. as security for a loan of P335,000. Kwik
Garry Co. assigned P400,000 of accounts receivable to Victor Co. as security for a loan of P335,000. Kwik
charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first
month, Garry collected P110,000 on assigned accounts after deducting P380 of discounts. Garry accepted
returns worth P1,350 and wrote off assigned accounts totaling P2,980.
Entries during the first month would include a
debit to Accounts Receivable of P114,710.

debit to Allowance for Doubtful Accounts of P2,980
debit to Cash of P110,380
debit to Bad Debt Expense of P2,980
Question #30
Raffy Corporation factored, with recourse, P300,000 of accounts receivable with Huskie Financing. The
Raffy estimates the recourse obligation at P7,200. What amount should Raffy report as a loss on sale of
receivables?
16,200
0
9,000
31,200
SOLUTION:
(P300,000 × .03) + P7,200 = P16,200
Question #31
Allan Company factored its receivables without recourse with Metro Bank. Allan received cash as a result of
this transaction which is best described as a:
Loan from Metro Bank to be repaid by the proceeds from Allan’s accounts receivable
Sale of Allan’s accounts receivable to Metro Bank, with the risk of uncollectible accounts transferred to
Metro bank
Loan from Metro Bank collaterized by ABC’s accounts receivable
Sale of Allan’s accounts receivable to Metro bank, with the risk of uncollectible accounts retained by Allan
Question #32
During its second year of operations, Karen Company found itself in financial difficulties. Karen decided to
use its accounts receivable as a means of obtaining cash to continue operations. On July 1, 2014, Karen sold
P1,500,000 of accounts receivable for cash proceeds of P1,390,000. No bad debt allowance was associated
with these accounts. On December 15, 2014, Karen assigned the remainder of its accounts receivable,
P5,000,000 as of that date, as collateral on a P2,500,000,12% annual interest rate loan from Finance
Company. Karen received P2,500,000 less a 2% finance charge. Additional information is as follows:
Allowance for bad debts before adjustment, 12/31/2014 65,000

3% of accounts receivable

3% of accounts receivable
Estimated uncollectible, 12/31/2014
Accounts receivable excluding factored and assigned accounts, 12/31 /2014
1,000,000
None of the assigned accounts had been collected by the end of the year. Karen Company shall recognize
bad debt expense for 2014 at
115,000
95,000
30,000
180,000
SOLUTION:
Accounts receivable - unassigned 1,000,000
Accounts receivable - assigned 5,000,000
Total accounts receivable 6,000,000
Required allowance - 12/31/2014 (3% x 6,000,000) 180,000
Allowance for bad debts before adjustment 65,000
Bad debt expense for 2014 115,000
Question #33
On June 30, 2014, Nori Company discounted at the bank a customer's P6,000,000, 6-month, 10% note
receivable dated April 30, 2014. The bank discounted the note at 12% without recourse.
The proceeds from the note receivable discounting amounted to:
6,048,000
6,174,000
5,760,000
5,640,000
SOLUTION:
Principal 6,000,000
Add: Interest (6,000,000 x 10% x 6/12) 300,000
Less: Discount (6,300,000 x 12% x 4/12) 252,000
The note is dated April 30, 2014 and it was discounted June 30, 2014. Therefore, two months already expired.
The original term is 6 months and accordingly, the unexpired term is 4 months
Question #34
On February 1, 2013, Gabriel Company factored receivables with a carrying amount of P300,000 to Agee
Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the

Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the
receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in
the income statement of Gabriel Company for February.
Assume that Gabriel factors the receivables on a with recourse basis. The recourse obligation has a fair
value of P1,500. The loss to be reported is:
15,000
9,000
10,500
25,500
SOLUTION:
(P300,000 × .03) + P1,500 = P10,500
Question #35
If receivables are hypothecated against borrowings, the amount of receivables involved should be
Excluded from the total receivables and a gain or loss is recognized between the face value and the:
amount of borrowings
Disclosed in the notes
Excluded from the total receivables, with disclosure
Excluded from the total receivables, with no disclosure
Question #36
A financing agreement whereby one party formally transfers its rights to accounts receivable to another
party in consideration for a loan
Assignment
Discounting
Factoring
Pledge
Question #37
Gar Company factored receivables without recourse with Ross Bank. Gar received cash as a result of this
transaction which is best described as a
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar
Loan from Ross to be repaid by the proceeds from Gar’s accounts receivable
Loan from Ross collateralized by Gar’s accounts receivable
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross
Question #38
It is a financing arrangement that is usually done on a “without recourse, notification basis”

Pledge
Assignment
Discounting
Factoring
Question #39
Joshua Company sold accounts receivable without recourse with face amount of P6,000,000. The factor
charged 15% commission on all accounts receivable factored and withheld 10% of the accounts factored as
protection against customer returns and other adjustments. Joshua Company had previously established an
allowance for doubtful accounts of P200,000 for these accounts. By year-end, the entity had collected the
factor's holdback there being no customer returns and other adjustments.
How much cash was initially received from factoring?
6,000,000
4,500,000
5,400,000
5,100,000
SOLUTION:
Factor's holdback (10% x 6,000,000) ( 600,000)
Commission (15% x 6,000,000) ( 900,000)
Cash received 4,500,000
Question #40
Amel Company provides financing to other entities by purchasing their accounts receivable on a non
recourse basis. Amel charges its clients a commission of 15% on all receivables factored. In addition, Amel
withholds 10% of receivables factored as protection against sales returns and other adjustments. Amel
credits the 10% withheld to Clients Retainer account and makes payments to clients at the end of each
month so that the balance in the retainer is equal to 10% of unpaid receivables at the end of the month.
Experience has led Amel to establish an allowance for doubtful accounts of 4% of all unpaid receivables
purchased.
On December 1, Amel purchased receivables from Motorway Company totaling P3,000,000. Motorway had
previously established an allowance for doubtful accounts for these receivables at P 100,000. By December
31, Amel had collected P2,500,000 on these receivables.
What is the loss on factoring to be recognized by Motorway Company?
650,000
350,000
450,000
750,000
SOLUTION:

Commission ( 450,000)
Net sales price 2,550,000
Carrying value of accounts receivable (3,000,000- 100,000) 2,900,000
Actually, the entry on the books of Motorway Company on the dale of factoring is:
Cash 2,250,000
Allowance for doubtful accounts 100,000
Loss on factoring 350,000
Due from factor 300,000
The entry on the books of the factor, Amel Company, is:

Cash 2,250,000
Commission income 350,000 450,000
Clients retainer 300,000
Question #41
Equity in assigned accounts of an entity is the difference between
Accounts receivable - unassigned and outstanding principal of bank loan.Accounts receivable - assigned
and outstanding principal of bank loan.Accounts receivable - assigned and accounts receivable
pledged.Accounts receivable- unassigned and accounts receivable-assigned.
Question #42
On June 30, 2014, Nori Company discounted at the bank a customer's P6,000,000, 6-month, 10% note
receivable dated April 30, 2014. The bank discounted the note at 12% without recourse.
252,000
152,000
48,000
52,000
SOLUTION:
Principal 6,000,000

Question #43
Josh Corporation factored, with recourse, P100,000 of accounts receivable with Huskie Financing. The
Josh estimates the recourse obligation at P2,400. What amount should Josh report as a loss on sale of
receivables?
10,400
0
3,000
5,400
SOLUTION:
(P100,000 × .03) + P2,400 = P5,400.
Question #44
Julie Inc assigns P2,000,000 of its accounts receivables as collateral for a P1 million 8% loan with a bank.
Julie Inc. also pays a finance fee of 1% on the transaction upfront. What would be recorded as a gain (loss)
on the transfer of receivables?
Loss of P20,000
Loss of P180,000
Loss of P160,000
0
Question #45
If financial assets are exchanged for cash and other consideration but the transfer does not meet the
criteria for a sale, the transferor and the transferee should account for the transaction as

II only
Both I and II
I only
Neither I nor II
Question #46
On August 31, 2014, Rognak Company discounted with recourse a customer's note at its bank at discount rate
of 15%. The note was received from the customer on August 1, is for 90 days, has a face value of P5,000,000,
and carries an interest rate of 12%. The customer paid the note to the bank on October 30, 2014, the date, of
maturity.

maturity.
I f the discounting is accounted for as a secured borrowing, what is the interest expense to be recognized on
August 1, 2014?
50,000
28,750
25,000
21,250
SOLUTION:
Principal 5,000,000
Interest (5,000,000 x 12% x 90/360) 150,000
Discount (5,150,000 x 15% x 60/360) 128,750
Principal 5,000,000
Less: Book value of note receivable 5,050,000
Interest expense 28,750
Question #47
Which of the following is a method to generate cash from accounts receivable?
Factoring only
Neither assignment nor factoring
Both assignment and factoring
Assignment only
Question #48
How much is the equity of Doo Company in assigned accounts on December 31?
270,000
450,000
435,000
500,000

SOLUTION:
Accounts receivable - assigned (2,000,000 - 1,000,000) 1,000,000
Note payable ( 565,000)
Equity of Doo Company in assigned accounts 435,000
Question #49
Amel Company provides financing to other entities by purchasing their accounts receivable on a
nonrecourse basis. Amel charges its clients a commission of 15% on all receivables factored. In addition,
Amel withholds 10% of receivables factored as protection against sales returns and other adjustments. Amel
credits the 10% withheld to Clients Retainer account and makes payments to clients at the end of each
month so that the balance in the retainer is equal to 10% of unpaid receivables at the end of the month.
Experience has led Amel to establish an allowance for doubtful accounts of 4% of all unpaid receivables
purchased.
On December 1, Amel purchased receivables from Motorway Company totaling P3,000,000. Motorway had
previously established an allowance for doubtful accounts for these receivables at P 100,000. By December
31, Amel had collected P2,500,000 on these receivables.
What is the loss on factoring to be recognized by Motorway Company?
450,000
350,000
750,000
650,000
SOLUTION:
Commission ( 450,000)
Net sales price 2,550,000
Carrying value of accounts receivable (3,000,000- 100,000) 2,900,000
Actually, the entry on the books of Motorway Company on the dale of factoring is:
Cash 2,250,000
Allowance for doubtful accounts 100,000
Loss on factoring 350,000
Due from factor 300,000
The entry on the books of the factor, Amel Company, is:

Cash 2,250,000
Commission income 350,000 450,000
Clients retainer 300,000

Question #50
Julie Company sold accounts receivable without recourse for P5,300,000. Julie received P5,000,000 cash
immediately from the factor. The remaining P300,000 will be received once the factor verifies that none of
the accounts receivable is in dispute. The accounts receivable had a face amount of P6,000,000. Julie had
previously established an allowance for bad debts of P250,000 in connection with these accounts. What is
the loss on factoring that will be recognized by Julie Company?
450,000
750,000
700,000
300,000
SOLUTION:
Sales price 5,300,000
Carrying value of accounts receivable (6,000,000 - 250,000) 5,750,000
ANSWER KEY
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INVENTORIES
Question #1
When the periodic inventory system is used:
Ending inventory is treated as expense and beginning inventory is treated as assets

Two entries must be made when goods are purchased
A 'purchases' account is not used; all inventory purchase entries are debited to the
inventory account
Cost of goods sold is a residual amount, rather than an account
CPA Financial Accounting - Inventories (Average)
Question #2
If an entity incorrectly includes consignment items in the inventory, the effect on the
next period's cost of goods sold and net income is
Overstatement, understatement
Overstatement, overstatement
Understatement, overstatement
The next period's account will be correct
Question #3
Which one of the following is not a risk associated with property, plant, and equipment?
Incomplete recording of disposals

Sum-of-years digits depreciation
Impairment of assets
Obsolescence of assets
CPA Auditing Theory - Evidence Inventories and PPE (Average)
Question #4
Which statement is not valid about the gross profit method?
It may be used by auditors

It may be used to estimate inventory for annual statements
It is an acceptable accounting procedure
It may be used to estimate inventory for interim statements
Question #5
Question #5
How should sales staff commission be dealt with when valuing inventories at LCNRV?
Added to cost
Deducted in arriving at NRV
Ignored
Deducted from cost
CPA Financial Accounting - Inventories (Easy)
Question #6
A Company keeps its inventory records using a perpetual system. On December 31,
2018, the unadjusted balance in the inventory account was P64,000. Through a physical
count on December 31, 2018, the Company determines that its actual merchandise
inventory at year-end is P62,500. Which of the following is true regarding the
statement of financial position and the income statement of the Company on December
31, 2018?
inventory is increased, and cost of goods sold is increased by P1,500

inventory is decreased, and the cost of goods sold is reduced by P1,500
inventory is increased, and cost of goods sold is decreased by P1,500
inventory is decreased, and the cost of goods sold is increased by P1,500
SOLUTION:
62,500 - 64,000 = (1,500) decrease in inventory and increase in cost of goods sold
Question #7
If an item of inventory that was written down to net realizable value in a prior period
subsequently recovers, then:
Carrying amount of the inventory cannot be adjusted

Value adjustment can be recognized immediately in equity
Adjustment must be recognized in a 'provision for future inventory write-downs'
account
Previous amount of the write-down cab be reversed
Question #8
Carter Corporation acquired two inventory items at a lump-sum cost of P50,000. The
acquisition included 3,000 units of product LF, and 7,000 units of product 1B. LF
normally sells for P15 per unit, and 1B for P5 per unit. If Carter sells 1,000 units of LF,
what amount of gross profit should it recognize?

1,875
10,000
5,625
11,875
SOLUTION:
LF: 3,000 x P15 = 45,000/80,000 x P50,000 = P28,125 1B: 7,000 x P5 = 35,000 + 45,000 =
P80,000 (1,000 x P15) - (28,125 x (1,000/3000) = P5,625
Question #9
All of the following are related parties, except:
Two manufacturing entities having a common director

Affiliates
Spouse of the individual
A shareholder holding 10% of an entity's shares but is a member of the entity's board of
directors
Question #10
On December 31, 2013, Paquito Company's inventory per physical count was valued at
P1,500,000. The entity revealed the following items:
Goods in transit by December 31, 2013, purchased FOB Buyer, total price P28,000
including freight of P3,000
Goods held on consignment included in the count, costing P30,000
Goods in transit by December 30, 2013 sold FOB Destination, costing P40,000 including
freight of P2,000
Goods purchased in transit by December 31, 2013, "Free Alongside", costing P50,000
Goods purchased in transit by December 31, 2013, "Cost, Insurance, Freight", costing
P75,000
What is the correct amount of inventory on December 31, 2013?
1,633,000
1,583,000
1,635,000
1,661,000
Question #11
When determining the unit cost of inventory, which of the following should not be

When determining the unit cost of inventory, which of the following should not be
included?
Foreign exchange differences

Depreciation of machinery used in manufacturing goods
Nonrefundable purchase taxes
Storage cost of work-in process goods
Question #12
How should import duties be dealt with when valuing inventories at the lower of cost
and net realizable value (NRV) according to PAS 2 Inventories?
Ignored
Deducted from cost
Added to cost
Question #13
The purchase of inventories is always recorded net of:
Cash discounts
Both cash and trade discounts
Trade discounts
Cash, trade and bargaining discounts
Question #14
A consignee paid the freight costs for goods shipped from a consignor. These freight
costs are to be deducted from the consignee’s payment to the consignor when the
consignment goods are sold. Until the consignee sells the goods, the freight costs
should be included in the consignee’s:
Cost of goods sold

Selling expenses
Freight out
Accounts receivable
Question #15
The purchase of inventories is always recorded net of:

Cash, trade and bargaining discounts
Trade discounts
Cash discounts
Question #16
The specific identification method can be used only:
When the individual items in inventory are similar in terms of cost, function and sales
value
When the actual acquisition costs of individual units can be determined from the
accounting records
In income tax returns
For financial reporting purposes but not in the income tax returns
Question #17
Entities must allocate the cost of all the goods available for sale between:
All of the choices are correct.

The income statement and the statement of financial position.
The cost of goods on hand at the end of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
The cost goods on hands at the beginning of the period as reported on the statement of
Question #18
Which is not a mandated disclosure in relation to inventory?
The amount of inventory recognized as expense during the period.

The carrying amount of each item of inventory
Accounting policy in measuring inventory including cost formula used.
The carrying amount of inventory carried at fair value less cost to sell
Question #19
Under the periodic inventory system, the opening stock is the
Total goods available for sale minus the total goods sold
Net purchases minus the closing stock
Total goods available for sale minus the net purchases
Net purchases minus total goods sold

Question #20
Entities must allocate the cost of all the goods available for sale between:
The income statement and the statement of financial position.
Question #21
The costing of inventory must be deferred until the end of the accounting period under
which of the following method of inventory valuation?
Weighted average
Moving average
FIFO perpetual
LIFO perpetual
Question #22
Which statement is incorrect with respect to inventories under PAS 2?
Inventories shall be measured at the lower of cost and net realizable value.
The cost of inventories of a service provider consists primarily of labor and other cost
of personnel directly engaged in providing the service, including supervising personnel
and attributable overhead.
The allocation of fixed production overhead to the cost of production is based on actual
level of production.
The cost of inventories shall comprise all costs of purchase, costs of conversion and
other cost incurred in bringing the inventories to their present location and condition.
Question #23
Lower of cost or net realizable value as it applies to inventory is best described as the
Reporting of a loss when there is a decrease in the future utility below the original cost
Assumption to determine inventory flow
Method of determining cost of goods sold
Change in inventory value to net realizable value

Question #24
The valuation of inventory on a prime cost basis
Would achieve the same results as direct costing

Is always achieved when the FIFO cost flow assumption is adopted
Would exclude all overhead from reported inventory cost
Is always achieved when standard costing is adopted
Question #25
Which is incorrect concerning the maritime term FAS (free alongside)?
Title passes to the buyer when the carrier takes possession of the goods
The seller must bear all expenses and risk in delivering the goods to the dock next to
the vessel on which they are to be shipped
Title passes upon receipt of the goods by the buyer
The buyer bears the cost of loading and cost of shipment
Question #26
Which is incorrect concerning the maritime term CIF (cost, insurance and freight)?
The seller must deliver the goods to the carrier and pay for the cost of loading only
Title passes to the buyer upon delivery of the goods to the carrier
The buyer agrees to pay in a lump sum the cost of goods, insurance and freight charge
The seller must deliver the goods to the carrier and pay for the cost of loading and cost
of shipment
Question #27
In a perpetual inventory system, recording a sale on account involves debiting which of
the following accounts?
Accounts Receivable and Inventory

Only Accounts Receivable
Accounts Receivable and Cost of Goods Sold
Accounts Receivable and Cost of Goods Sold and Inventory
Question #28
Net realizable value is the general rule for valuing which of the following types of

Net realizable value is the general rule for valuing which of the following types of
inventory?
Inventories priced on an item by item basis but not those priced on a total inventory
basis.
All of the choices are held at NRV
Commodities held by broker-traders
Computer components held for sale to manufacturers
Question #29
Under PAS 2, commodities of broker-traders are measured at
Fair value less cost to sell

Cost
Fair value
Question #30
Under both the periodic and perpetual inventory system, which account is constantly
updated during the year?
Inventory
Cost of goods sold
Cost of goods available for sale
Sales
Question #31
The credit balance that arises when a loss on purchase commitment is recognized
should be
Presented as a current liability

Subtracted from ending inventory
Presented in the income statement
Presented as an appropriation of retained earnings
Question #32
When inventory is misstated, its presentation lacks
Comparability
Faithful representation
Faithful representation
All of the choices are correct
Relevance
Question #33
How is a significant amount of consignment inventory reported in the statement of
financial position?
The inventory is reported separately on the consignees statement of financial position
The inventory is combined with other inventory on the consignors statement of
financial position
The inventory is reported separately on the consignors statement of financial position
The inventory is combined with other inventory on the consignees statement of
financial position
Question #34
How is the gross profit method used as it relates to inventory valuation?
Verity the accuracy of the physical inventory

Verify the accuracy of the perpetual inventory records
To estimate cost of goods sold
To provide an inventory value of LIFO inventories.
Question #35
All of the following are related parties, except
Two manufacturing entities having a common director

A shareholder holding 10% of an entity's shares but is a member of the entity's board of
directors
Affiliates
Spouse of the individual
Question #36
Which one of the following is included in the scope of PAS 2 but excluded from the
measurement rule?
Biological assets held for regular sale

Damaged merchandise inventory of a retailer
Land held for sale by subdivision company or real estate developer
Finished goods produced

Question #37
Valuation of inventories requires the determination of all of the following, except
The physical goods to be included in inventory

The costs to be included in inventory
The cost flow assumption to be adopted
The cost of goods held on consignment from other entities
Question #38
An overstatement of ending inventory in one period will result in
An overstatement of net income of the next period

An understatement of the beginning inventory of the next period.
An understatement of net income of the next period
No effect on net income of the next period
Question #39
Determine the correct statement regarding cash discount
Purchase discount lost is recorded under the net price method when the cash discount
is not taken
Purchase discount is recorded under the net price method when the cash discount is
taken
Purchase discounts lost is recorded under gross price method when the cash discount
is not taken
Purchase discount is recognized under the gross price method at the time of purchase
of goods
Question #40
In 2012, Jane Company experienced a decline in the value of its inventory resulting in a
writedown of its inventory from P2,400,000 to P2,000,000. The entity used the loss
method in 2012 to record the necessary adjustment and uses an allowance account to
reduce inventory to NRV. In 2013, market conditions have improved dramatically and
the inventory increases to an NRV of P2,600,000. Which of the following will Jane
record in 2013?
A credit to Allowance to Reduce Inventory to NRV of P600,000

A debit to Allowance to Reduce Inventory to NRV of P400,000
A credit to Recovery of Inventory loss for P600,000
A debit to Recovery of Inventory Loss for P400,000
Question #41
The recognition of loss and gain on purchase commitment is an application of
Predictive value
Fair value method
Objectivity
Lower of cost or net realizable value
Question #42
Which of the following is true regarding inventory writedown and recovery of a
writedown?

PFRS requires entities to record writedown in a separate loss account.
PFRS requires separate reporting of reversal of inventory writedown.
Recovery of inventory writedown is prohibited under IFRS.
Question #43
In 2012, Matthew Company experienced a decline in the value of its inventory resulting
in a writedown of its inventory from P2,400,000 to P2,000,000. The entity used the loss
method in 2012 to record the necessary adjustment and uses an allowance account to
reduce inventory to NRV. In 2013, market conditions have improved dramatically and
Matthew's inventory increases to an NRV of P2,600,000. Which of the following will
Matthew record in 2013?

A credit to Allowance to Reduce Inventory to NRV of P600,000
A debit to Allowance to Reduce Inventory to NRV of P400,000
A debit to Recovery of Inventory Loss for P400,000
Question #44
Which of the following statements is incorrect regarding LCNRV?
Entities use an allowance account, the "allowance to reduce inventory to net realizable
value."
In most situations, entities price inventory on a total inventory basis.
Net realizable value is the selling price less estimated costs to complete and
Net realizable value is the selling price less estimated costs to complete and
estimated costs to make a sale.
One of two methods may be used to record the income effect of valuing inventory at
net realizable value.
Question #45
A company's inventory cost was lower in FIFO that it would have been using LIFO.
Assuming no beginning inventory, in what direction did the cost of purchases move
during the period?
Up
Steady
Cannot be determined
Down
Question #46
Which statement is false?
Depreciation creates a fund to replace the asset at the end of its useful life.
The cost of a plant asset minus accumulated depreciation equals the asset's carrying
amount.
Depreciation is a process of allocating the cost of a plant asset over its useful life.
Depreciation is based on the matching principle because it matches the cost of the
asset with the revenue generated over the asset's useful life.
Question #47
Entities must allocate the cost of goods available for sale between
financial position and the cost of goods acquired or produced during the period
All of the choices are correct
The income statement and the statement of financial position
financial position and the cost of goods acquired or produced during the period
Question #48
Variable production overheads are allocated to each unit of production on the basis of
the
Neither the normal capacity nor the actual use of production facilities
Actual use of production facilities
Actual use of production facilities
Normal capacity of the production facilities
Either the normal capacity or the actual use of production facilities
Question #49
Which of the following is not affected by the inventory valuation method used by a
business?
Amounts paid to acquire merchandise

Net income of the business
Costs of goods sold
Amount owed for income taxes
Question #50
An inventory method which is designed to approximate inventory valuation at the
lower of cost or net realizable value is
Specific identification
Last-in, first-out
First-in, first-out
Conventional retail method
Question #51
Reporting inventory at the lower of cost and net realizable value is departure from
Consistency
Full disclosure
Historical cost
Conservatism
Question #52
Under PAS 2, they are “individuals who buy or sell commodities for others or on their
own account.”
Seekers
Commission agents
Finders
Brokers traders

Question #53
An entity is a retailer specializing in selling computers and related equipment. Which of
the following would not be reported in the merchandise inventory account reported on
the statement of financial position at year-end?
All are included in the merchandise inventory account at year-end.

Computer purchased for resale during November of the year.
Freight costs related to the computers purchased in November.
Shelving materials purchased during December of the year
Question #54
During the periods of rising prices, when the FIFO inventory cost flow method is used,
a perpetual inventory system would
Not be permitted
Result in the same ending inventory as a periodic inventory system
Result in a lower ending inventory than a periodic inventory system
Result in a higher ending inventory than a periodic inventory system
Question #55
All of the following will result in realized holding gains or losses using current cost
accounting concept, except
Inventory on hand
Cost of sales
Amortization of patent
Depreciation
Question #56
Theoretically, freight and warehousing costs incurred in the transfer of consigned
goods form the consignor to the consignee should be considered
Inventoriable by the consignor

An expense by the consignee
An expense by the consignor
Inventoriable by the consignee
Question #57
Question #57
The following provide the details of a sales and purchases cut-off rendered by your
audit staff in line with your audit of Grace Corporations financial statements as of and
for the period ended December 31, 2016. The inventories reported per books amounting
to P339,900 was as a result of a physical count conducted on the clients warehouse on
December 30, 2016. All customers are within a 3-5 days delivery area. Gross profit on
sales is at 40%.
The following is a summary of the cut-off made on sales transactions:
December 2016 entries on the sales journal
Invoice No. Invoice date Shipment date Amount Remarks

19817 Dec. 19 Dec. 20 38,250 FOB shipping point
19818 Dec. 21 Dec. 21 40,450 FOB destination (to consignee)
19819 Dec. 27 Dec. 29 45,250 FOB destination (in transit)
19820 Dec. 29 Dec. 31 25,300 FOB shipping point (in transit)
January 2017 entries on the sales journal
Invoice No. Invoice date Shipment date Amount Remarks

19821 Dec. 31 Dec. 31 43,400 FOB shipping point (in transit)
19822 Jan. 2 Jan. 2 40,450 FOB destination
19823 Jan. 4 Jan. 5 45,250 FOB shipping point
The following is a summary of the cut-off made on purchases transactions:
December 2016 entries on the purchase journal
Receiving Report No. Receiving Report Date Amount Remarks

2813 Dec. 15 18,100 FOB shipping point
2814 Dec. 26 25,250 FOB destination (to consignee)
2815 Dec. 31 14,950 FOB destination
2816 Jan. 2 15,400 FOB destination (in transit)
January 2017 entries on the purchases journal
Receiving Report No. Receiving Report Date Amount Remarks

2817 Jan. 2 12,750 FOB shipping point (in transit)
2818 Jan. 4 16,250 FOB destination
2819 Jan. 5 20,700 FOB shipping point
The unadjusted balance of the accounts receivable account and accounts payable
accounts as of December 31, 2016 were at P395,300 and P210,700, respectively.
What is the adjusted balance of inventories as of December 31, 2016?
352,550
337,600
339,800
367,730

SOLUTION:
Accounts receivable Accounts payable
Inventory Net income
Unadjusted balances 339,900 395,300 210,700
December sales entries:
SI 19818 to consignee 24,270 (40,450) (16,180)
SI 19819 in transit FOB Dest. 27,150 (45,250) (18,100)
SI 19820 in transit FOB SP (15,180) (15,180)
January sales entries:
SI 19821 in transit FOB SP (26,040) 43,400 17,360
December purchase entries:
RR 2814 from consignor (25,250) (25,250)
RR 2815 14,950 14,950
RR 2816 in transit FOB Dest. (15,400) 15,400
January purchase entries
RR 2817 in transit FOB SP 12,750 12,750
352,500 353,000 182,800 (1,750)
CPA Auditing Problems - Audit of Inventories (Difficult)
Question #58
At certain stages of production, inventories of agricultural, forest and mineral products
are measured at

Relative sales price
Standard cost
Cost
Question #59
How should trade discounts be dealt with when valuing inventories at the lower of cost
and net realizable value (NRV) according to PAS 2 Inventories?
Added to cost
Ignored
Deducted from cost

Question #60
The retail inventory method would include which of the following in the calculation of
the goods available for sale at both cost and retail?
Markups
Markdowns
Freight in
Purchase returns
Question #61
Generally accepted accounting principles require the selection of an inventory cost
flow method which
Most closely approximates lower of cost and net realizable value for the ending
inventory
Matches the actual physical flow of goods from inventory with sales revenue
Most clearly reflects the periodic income
Yields the most conservative amount of reported income
Question #62
Which of the following statements is false under PAS 2 (Inventories)?
Specific identification of cost is appropriate when there are large numbers of items of
items of inventory that are ordinarily interchangeable.
The FIFO formula assumes that the items of inventory that were purchased or
produced first are sold first, and consequently the items remaining in inventory at the
end of the period are those most recently purchased or produced.
Specific identification of cost means that specific costs are attributed to identified
items of inventory.
The cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects shall be assigned by using
specific identification of their individual costs.
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INVENTORY ESTIMATION
Question #1
Sam Company uses the FIFO retail method of inventory valuation. The following
information is available for the current year:
Cost Retail
Beginning inventory 600,000 1,500,000
Net purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns 1,000,000
Net sales 4,500,000
What would be the estimated cost of the ending inventory?
1,040,000
1,000,000
960,000
1,200,000
SOLUTION:
Cost Retail
Inventory, January 1 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio (3,000,000/5,000,000) 60%
Goods available for sale 3,600,000 6,500,000
Sales (4,500,000)
Ending Inventory 2,000,000
FIFO Cost 1,200,000
CPA Financial Accounting - Inventory Estimation (Difficult)
Question #2
What condition is not necessary in order to use the retail method to provide inventory
results?
Retailer keeps a record of the total costs and retail value of goods available for sale
Retailer keeps a record of sales for the period
Retailer keeps a record of the total costs of products sold for the period

Retailer keeps a record of the total costs of products sold for the period
Retailer keeps a record of the total costs and retail value of goods purchased
CPA Financial Accounting - Inventory Estimation (Average)
Question #3
The use of the gross profit method assumes
The relationship between selling price and cost of goods sold is similar to prior years
Inventory values have not increased from previous years
The amount of gross profit is the same as in prior years
Sales and cost of goods sold have not changed from previous years
CPA Financial Accounting - Inventory Estimation (Easy)
Question #4
Under the retail inventory method, freight in would be included in the calculation of the
goods available for sale for which of the following?
1 Cost
2 Retail
I only
Neither I nor II
Both I and II
II only
Question #5
What is the effect of net markups on the cost-retail ratio when using the conventional
retail method?
Depends on the amount of the net markdowns

Decreases the cost-retail ratio
Increases the cost-retail ratio
No effect on the cost-retail ratio
Question #6
Which statement is not true about the gross profit method of inventory valuation?
None of these
It may be used to estimate inventories for annual statements
It may be used by auditors
It may be used to estimate inventories for interim statements

It may be used to estimate inventories for interim statements
Question #7
Under the gross profit method, if the gross profit rate is based on cost, the cost of
sales is computed as
Net sales divided by sales ratio

Net sales times cost ratio
Gross sales times cost ratio
Gross sales divided by sales ratio
Question #8
Which instance will not require inventory estimation?
Year-end reporting for inventory shown on the face of the statement of financial
position
Inventory destroyed by a major fire incident in the production facility
Proof of the reasonable accuracy of the physical inventory account
External and internal interim financial statements are prepared
Question #9
Paul Co. uses the retail inventory method to estimate its inventory for interim
statement purposes. Data relating to the computation of the inventory at July 31, 2013,
are as follows:
Cost Retail
Inventory, 2/1/13 200,000 250,000
Purchases 1,000,000 1,575,000
Markups, net 175,000
Sales 1,750,000
Estimated normal shoplifting losses 20,000
Markdowns, net 110,000
Under the lower-of-cost-or-market method, Paul's estimated inventory at July 31, 2013
is
96,000
84,000
72,000
120,000

SOLUTION:
(P200,000 + P1,000,000) ÷ (P250,000 + P1,575,000 + P175,000) = 0.6 (P250,000 +
P1,575,000 + P175,000 – P20,000 – P110,000 –P1,750,000) × 0.6 = P72,000.
Question #10
A flood recently destroyed many of the financial record of Yakal Company. The entity
uses an average cost inventory valuation system. Yakal makes a physical count at the
end of each month in order to determine monthly ending inventory value. By examining
various documents, the following data are gathered:
Ending inventory at July 31 60,000 units

Total cost of units available for sale in July 1,452,100
Cost of goods sold during July 1,164,100
Cost of beginning inventory, July 1 4.00 per unit
Gross proit on sales for July 935,900
July purchases:
Units Unit cost Total cost

July 5 55,000 5,10 280,500
July 11 53,000 5.00 265,000
July 15 45,000 5,50 247,500
July 16 47,000 5.0 249,100
200,000 1,042,100
What is the number of units on July 1?
102,500
76,500
60,000
140,000
SOLUTION:
Cost of units available for sale fro July 1,452,100
Purchases for July (1,042,100)
Cost of inventory - July 1 410,000
Number of units - July 1 (410,000/P4) 102,500
Question #11
Question #11
A flood recently destroyed many of the financial record of Yakal Company. The entity
uses an average cost inventory valuation system. Yakal makes a physical count at the
end of each month in order to determine monthly ending inventory value. By examining
various documents, the following data are gathered:
Ending inventory at July 31 60,000 units

Total cost of units available for sale in July 1,452,100
Cost of goods sold during July 1,164,100
Cost of beginning inventory, July 1 4.00 per unit
Gross proit on sales for July 935,900
July purchases:
Units Unit cost Total cost

July 5 55,000 5,10 280,500
July 11 53,000 5.00 265,000
July 15 45,000 5,50 247,500
July 16 47,000 5.0 249,100
200,000 1,042,100
How many units were sold during the month of July?
260,000
302,500
140,000
242,500
SOLUTION:
July 1 inventory 102,500
Purchases for July 200,000
Total units available for sale for July 302,500
July 31 inventory (60,000)
Units sold during the month of July 242,500
Question #12
One of the basic assumptions of the conventional retail method is that
the cost to retail percentage is unchanged from that of prior years.

net markdowns apply to the total goods available for sale
net markups apply to the cost of goods sold
net markdowns apply only to the goods sold

Question #13
Which of the following is not required when using the retail inventory method?
A record of the total cost and retail value of goods purchased

A record of the total cost and retail value of the goods available for sale.
All inventory items must be categorized according to the retail markup percentage
which reflects the item’s selling price
Total sales for the period.
Question #14
JJ Co. uses the retail inventory method. The following information is available for the
current year.
Cost Retail
Beginning inventory 78,000 122,000
Purchases 295,000 415,000
Freight-in 5,000 -
Employee discounts - 2,000
Net markups - 15,000
Net markdowns - 20,000
Sales - 390,000
The ending inventory at retail should be
144,000
140,000
150,000
160,000
SOLUTION:
P122,000 + P415,000 – P2,000 + P15,000 – P20,000 – P390,000 = P140,000
Question #15
Drake Corporation had the following amounts, all at retail:
Beginning inventory 3,600 Purchases 120,000

Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800

Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Drake’s ending inventory at retail?
54,400
56,000
57,600
58,400
SOLUTION:
P3,600 + P120,000 - P6,000 + P18,000 - P2,800= P132,800 - P4,000 - P2,600 - P1,600 =
P124,600 - (P72,000 - P1,800) = P54,400
Question #16
The gross margin method of estimating ending inventory may be used for all of the
following, except:
Internal as well as external year-end reports

Estimate of inventory destroyed by fire or other casualty
Internal as well as external interim reports
Rough test of the validity of an inventory cost determined under either periodic or
perpetual system
Question #17
Which of the following is not a basic assumption of the gross profit method?
The beginning inventory plus the purchases equal total goods to be accounted for
If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand
Goods not sold must be on hand
The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period
Question #18
This is often used for convenience for measuring inventories of large number of
rapidly changing items with similar margins for which it is impracticable to use other
costing method.
Relative sales price method

Relative sales price method
Retail method
Standard cost method
Gross profit method
Question #19
Which will not require inventory estimation?
Proof of the reasonable accuracy of the physical inventory count

Year-end reporting for inventory shown on the face of the statement of financial
position
External and internal interim financial statements are prepared
Inventory destroyed by a major fire incident in the production facility
Question #20
Under the gross profit method, if the gross profit rate is based on cost, the cost of
sales is computed as:
Gross sales divided by sales ratio

Net sales divided by sales ratio
Net sales times cost ratio
Gross sales times cost ratio
Question #21
The retail inventory method would include which of the following in the calculation of
the goods available or sale at both cost and retail?
Markdowns
Freight in
Markups
Purchase returns
Question #22
The retail inventory method is based on the assumption that the
proportions of markups and markdowns to selling price are the same

final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods
ratio of cost to retail changes at a constant rate
ratio of gross margin to sales is approximately the same each period
ratio of gross margin to sales is approximately the same each period
Question #23
Which of the following is not a basic assumption of the gross profit method?
If the sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand
Goods not sold must be on hand
The beginning inventory plus the purchases equal total goods to be accounted for
The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period
Question #24
Which statement is true about the retail inventory method?
It may not be used to estimate inventories for annual statements

It may not be used to estimate inventories for interim statements
It may not be used by auditors
None of these
Question #25
JJ Co. uses the retail inventory method. The following information is available for the
current year.
Cost Retail
Beginning inventory 78,000 122,000
Purchases 295,000 415,000
Freight-in 5,000 -
Employee discounts - 2,000
Net markups - 15,000
Net markdowns - 20,000
Sales - 390,000
If the ending inventory is to be valued at approximately lower of average cost or
market, the calculation of the cost ratio should be based on cost and retail of
P378,000 and P552,000

P300,000 and P430,000
P300,000 and P428,000
P373,000 and P550,000

SOLUTION:
Cost: P78,000 + P295,000 + P5,000 = P378,000.
Retail: P122,000 + P415,000 + P15,000 = P552,000.
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CONCEPTUAL FRAMEWORK

Asset substitution increased the risk borne by lenders.

result in higher interest rates being imposed on the borrowers.

Assets, liability and fund balance

All of the options are correct.

Shareholder - lender relationships.

agents are rational wealth maximizers.

shareholders are not able to diversify their risk.

having a debt covenant.

CPA DIAGNOSTICS Page 2

requires that the financial statements be consistent and comparable

Opening PFRS statement of financial position

Depreciated equipment was sold in exchange for a note receivable

prescribe what should be the case based on a specific objective.

CPA DIAGNOSTICS Page 3

it is not based on observed actions.

Timeliness and materiality

cost of setting up company's code of conducts.

CPA DIAGNOSTICS Page 4

There are costs incurred in order to control agents behavior.

Its cost can be measured reliably

CPA DIAGNOSTICS Page 5

At the time of cash collection

CPA DIAGNOSTICS Page 6

Only statement I is false

Definitions/Actions - Principles - Assumptions - Objectives.

PFRS financial statements

CPA DIAGNOSTICS Page 7

The Code of Ethics for CPAs

Gains and losses should not appear in the income statement

Freedom from bias

Philippine Institute of Certified Public Accountants (PICPA)

CPA DIAGNOSTICS Page 8

Current cost/nominal peso and current cost/constant peso

Provisional PFRS statement of financial position

Smaller entities are more likely to be the target of lobby groups.

CPA DIAGNOSTICS Page 9

Quantitative characteristics of financial information

a maximum interest cover of 2.5 times.

CPA DIAGNOSTICS Page 10

CPA Financial Accounting - Notes to Financial Statements (Average)

A ledger for cash disbursements

The shareholders approve the financial statements at their annual meeting.

None of the above.

CPA DIAGNOSTICS Page 12

Current liability, unless specific refinancing criteria are met

Interpret summarized data

CPA DIAGNOSTICS Page 13

It is the basis for any adjustments to the account balances.

Depreciation method followed

The entry to record supplies used during the period.

CPA DIAGNOSTICS Page 14

Major backlogs of inventory orders

Destruction of a major production plant by fire

CPA DIAGNOSTICS Page 16

Determining the amount of dividends an entity should pay.

Cost of goods available for sale

Cash basis accounting is preferred over accrual based accounting.

CPA DIAGNOSTICS Page 17

Investment capital multiplied by the capital employed turnover rate.

Cashbook and subsidiary ledger

Selling inventory on account

Occurred prior to issuance of the financial statements.