GORDON COLLEGE

COLLEGE OF BUSINESS AND ACCOUNTANCY

Financial Accounting Theories

Framework for Preparation and Presentation of FS, Accounting Process, Presentation of FS,
Events After Reporting Period, Related Party Disclosures, Accounting Policies, Estimates and
Errors, Statement of Cash Flows

Source: CPA Review Schools

1. Philippine Financial Reporting Standards include III. To assist preparers of financial statements in
all of the following, except applying accounting standards and in dealing with
topics those have yet to form the subject of
A. Philippine Financial Reporting Standards accounting standards.
equivalent to IFRS issued by IASB.
A. I and II only
B. Philippine Accounting Standards equivalent to B. I and III only
IAS issued by IASC. C. II and III only
D. I, II and III
C. Philippine Interpretations equivalent to IFRIC
4. Which is not within the scope of the
and SIC Interpretations, and Interpretations
Framework?
developed by PIC.
A. Generally accepted accounting principles
D. Framework for the Preparation and
Presentation of Financial Statements. B. Objective of financial statements
2. Which statement is incorrect concerning the C. Qualitative characteristics of financial
Framework? statements
A. The Framework is not a PFRS and therefore D. Recognition and measurement of basic
does not define standard for any particular elements
measurement or disclosure issue.
5. These users are interested in information about
B. The Framework is concerned with general the continuance of an entity, especially when they
purpose financial statements including have a long-term involvement with or are
consolidated financial statements. dependent on the entity.
C. In cases of conflict, the requirements of the A. Customers
Framework prevail over those of the relevant
PFRS. B. Employees

D. The Framework applies to the financial C. Trade unions

statements of all commercial, industrial and
business reporting entities, whether in public or D. Suppliers
private sector. 6. Which statement is true in relation to the
3. What is the basic purpose of the Framework? objective of financial statements?

I. To assist FRSC in developing accounting I. Financial statements meet the common and
standards those represent GAAP in the specific needs of most users.
Philippines. II. Financial statements provide all of the
II. To assist FRSC in reviewing and adopting information that users may need to make
existing international accounting standards. economic decisions since they largely portray the
financial effects of past events and do not
necessarily provide nonfinancial information.

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 III. Financial statements show the results of the to satisfy the economic decision-making needs of
stewardship of management or the accountability users.
of management for the resources entrusted to it.
B. The balance between benefit and cost is a
A. I and II only pervasive constraint rather than a qualitative
B. I and III only characteristic.
C. II and III only
D. III only C. The cost of providing information should
exceed the benefits derived from the
7. Information has the quality of relevance when
information.
I. It influences the economic decisions of users by
D. To provide information on a timely basis, it may
helping them evaluate past, present or future
often be necessary to report before all aspects of
events or confirming or correcting their past
transaction or event are known, thus impairing
evaluations.
reliability.
II. It is free from bias and error and can be
11. Which statement is incorrect concerning
depended upon by users to represent faithfully
materiality?
that which it either purports to represent or could
reasonably be expected to represent. A. Information is material if its omission or
misstatement could influence the economic
A. I only
decision of users taken on the basis of the
B. II only
C. Both I and II financial statements.
D. Neither I nor II
B. Materiality depends on the absolute size of
8. To be reliable (choose the correct one) the item or error judged in the particular
circumstances of its omission or misstatement.
A. The information must represent faithfully the
transactions it purports to represent. C. Materiality provides a threshold or cutoff point
for useful information rather than being a primary
B. Transactions are accounted for in accordance qualitative characteristic.
with their legal from and not with their
substance and economic reality. D. Materiality of items depends on their individual
or collective influence on the economic decision of
C. The information must be neutral, that is, free users.
from bias.
12. Which of the following statements is true in
D. The information must be complete within the relation to the term “understandability”?
bounds of materiality and cost.
I. An essential quality of information provided in
9. The exercise of prudence allows which of the financial statements is that it is readily
following? understandable by users.

A. The creation of hidden reserves or excessive II. Information about complex matters even if
provisions. relevant should be excluded from financial
statements merely on the grounds that it may be
B. The deliberate understatement of assets and
too difficult for certain users to understand.
income.
A. I only
C. The deliberate overstatement of liabilities and B. II only
expenses. C. Both I and II
D. Neither I nor II
D. Selecting an accounting alternative that has
the least favorable impact on owner’s equity. 13. An important implication of this qualitative
characteristic is that users are informed of the
10. Which statement is incorrect concerning accounting policies employed, changes in those
constraints on relevant and reliable information? policies and the effects of such changes.
A. In achieving a balance between relevance and A. Consistency
reliability, the overriding consideration is how best
B. Comparability

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 C. Full disclosure C. Financial statements, trial balance, ledger,
journal
D. Materiality
D. Ledger, journal, trial balance, financial
14. Which of the following statements in relation statements
to “comparability” is true?
18. Which financial statement covers a period of
I. The need for comparability should not be time?
confused with where uniformity and should not
be allowed to become an impediment to the A. Statement of financial position
introduction of improved accounting standards.
B. Income statement
II. It is appropriate for an entity to leave its
accounting policies unchanged when more C. Statement of cash flows
relevant and reliable alternatives exist.
D. Both income statement and statement of cash
A. I only flows
B. II only
19. It is the accounting device that is used to store
C. Both I and II
D. Neither I nor II the recorded monetary information from the
entity’s transactions and events.
15.Technically, this arises in the course of the
ordinary regular activities of an entity and is A. Account
referred to by a variety of different names
B. Journal
including sales, interest, dividends, royalties and
rent. C. Ledger

A. Income D. Source document

B. Gain 20. Accumulated depreciation is an example of

C. Profit A. Nominal and adjunct account

D. Revenue B. Real and adjunct account

16. Current cost is the C. Nominal and contra account

A. Amount of cash or cash equivalent paid or the D. Real and contra account
fair value of the consideration given at the time of
acquisition. 21. Which an example of a nominal and contra
account?
B. Amount of cash or cash equivalent that would
have to be paid if the same or an equivalent A. Freight in
asset was acquired currently.
B. Sales discount
C. Amount of cash or cash equivalent that could
C. Purchases
currently be obtained by selling the asset in an
orderly disposal. D. Allowance for doubtful accounts

D. Discounted value of the future net cash inflows 22. The debit and credit analysis of a transaction
that an item is expected to generate in the normal normally takes place
course of business.
A. Before an entity is recorded in a journal.
17. Which is the correct sequence for recording
transactions and preparing financial statements? B. When the entry is posted to the ledger.

A. Journal, ledger, trial balance, financial C. When the trial balance is prepared.
statements
D. At some other point in the accounting cycle.
B. Ledger, trial balance, journal, financial
23. Double entry system means
statements

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 A. Only two accounts are affected by each D. A debit to an asset and a credit to a liability
transactions recording.
29. Which of the following best defines an
B. A transaction is recorded twice, once in the accrual?
journal and the other in the ledger.
A. Adjusting entries where cash flows precedes
C. For every asset increased, a revenue or liability revenue or expense recognition
must also be increased.
B. Adjusting entries where revenue or expense
D. At least two accounts are affected by each recognition precedes cash flow
transaction recording.
C. Adjusting entries where cash flow and revenue
24. What function do accounting journals serve in or expense recognition are simultaneous
the accounting process?
D. Adjusting entries where revenue and expenses
A. Recording are recognized in the absence of cash flow

B. Classifying 30. The purpose of adjusting entries is to

C. Summarizing A. Prepare revenue and expense accounts for

recording the transactions of the next period.
D. Interpreting
B. Apply the realization principle and the
25. What function do general ledgers serve in the matching principle to transaction affecting two or
accounting process? more accounting periods.
A. Reporting C. Adjust daily the balances in asset, liability,
revenue, expense accounts for the effects of
B. Summarizing
business transactions.
C. Classifying
D. Adjust the capital account for the revenue,
D. Recording expense and withdrawal transactions which
occurred during the year.
26. Transposition is an
31. The adjusting entry for income collected in
A. Error of interchanging the figures advance which was credited originally to income
will
B. Error of placing the decimal point
A. Decrease liability
C. Error of not recording the transaction
B. Increase asset
D. Error, which if not detected, is automatically
compensated or corrected in the next accounting C. Decrease an income account
period.
D. Increase equity
27. The error of posting P100, 000 as P10,000 can
be detected by 32. The adjusting entry for income earned but not
yet collected will
A. Dividing the out-of-balance amount by 2.
A. Increase liability
B. Totaling each account’s balance in the ledger.
B. Increase asset
C. Dividing the out-of-balance amount by 9.
C. Decrease asset
D. Examining the chart of accounts.
D. Decrease liability
28. Which of the following would not be a correct
form for an adjusting entry? 33. If an expense has been incurred but not yet
recorded, the year-end adjusting entry would
A. A debit to revenue and a credit to liability involve
B. A debit to an expense and a credit to a liability A. A liability and an asset
C. A debit to a liability and a credit to revenue B. A liability and revenue
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 C. An expense and an asset B. An entity shall present separately material
items of a dissimilar nature or function.
D. A receivable and revenue
C. If a line item is not individually material, it is
34. Which of the following accounts is not closed aggregated with other items either in the financial
out? statements or in the notes.
A. Accumulated depreciation D. An entity shall provide a specific disclosure
required by PFRS even if the information is not
B. Depreciation expense
material.
C. Dividends
39. The line items in the statement of financial
D. Interest revenue position include all of the following, except

35. Reversing entries apply to A. Investment property

A. All adjusting entries B. Total of assets classified as held for sale

B. All deferrals C. Biological assets

C. All accruals D. Property, plant and equipment analyzed by

class
D. All closing entries
40. When an entity breaches an undertaking
36. Financial statements are structured under a long-term loan agreement on or before
representation of the financial position and the end of the reporting period with the effect
financial performance of an entity. To meet the that the liability becomes payable on demand
objective of providing information about financial
position, financial performance and cash flows of I. The liability is classified as current if the lender
an entity, financial statements should provide has agreed after the reporting period and before
information about all of the following, except the issuance of the statements no to demand
payment as a consequence of the breach.
A. Assets, liabilities and equity
II. The liability is classified as noncurrent if the
B. Income and expenses, including gains and lender agreed on or before the end of the
losses reporting period to provide a grace period for at
least twelve months after the reporting period
C. Contributions by and distribution to owners in
within which to rectify the breach.
their capacity as owners.
A. I only
D. Nature of the entity’s business activities
B. II only
37. Which statement is true concerning fair C. Either I or II
D. Neither I nor II
presentation of financial statements?
41. Other comprehensive income includes all of
I. Fair presentation requires the faithful
the following, except
representation of the effects of transactions, other
events and condition. A. Gain and loss arising from translating the
financial statements of a foreign operation.
II. In virtually all circumstances, an entity achieves
a fair presentation by compliance with applicable B. Gain and loss on remeasuring available for sale
SEC and tax regulations. financial asset.

A. I only C. The effective portion of gain and loss on

B. II only hedging instrument in a cash flow hedge.
C. Both I and II
D. Niether I nor II D. Dividend paid to shareholders.
38. Which statement is incorrect concerning 42. These are amounts reclassified to profit or loss
“materiality and aggregation”? in the current period that were recognized in
other comprehensive income in the current or
A. An entity shall present separately each material
previous period.
class of similar items.
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 A. Prior period errors statements resulting to a loss on a trade
receivable account.
B. Reclassification adjustments
C. The discovery of fraud or errors after reporting
C. Unusual and irregular items period and before issuance of statements that
show that the financial statements were incorrect.
D. Correcting entries
D. Determination after the reporting period and
43. What is the “first item” presented in the notes
before the issuance of the statements of the cost
to financial statements?
of assets purchased before the end of reporting
A. Statement of compliance with PFRS. period.

B. Summary of significant accounting policies. 47. Nonadjusting events after reporting period
include all of the following, except
C. Supporting information for items presented in
of the financial statements. A. A major business combination after the
reporting period.
D. Other disclosures, including contingent
liabilities, unrecognized contractual commitments B. Expropriation of major assets by government
and nonfinancial disclosures. after reporting period.

44. Nonfinancial disclosures include all of the C. Destruction of a major production plant by fire
following, except on or before the end of reporting period.

A. The unlimited life of the entity D. Announcing a plan to discontinue an operation

after reporting period.
B. The domicile and legal form of the entity, its
country of incorporation and registered office 48. A party is related to an entity if the party,
address. directly or indirectly through one or more
intermediaries
C. Description of the nature of the entity’s
operations and its principal activities. I. Controls, is controlled by or is under common
control with the entity.
D. The name of the parent and the ultimate parent
of the group. II. Has an interest in the entity that gives it
significant influence over the entity.
45. Under PAS 10, which of the following
statements is true regarding events after reporting III. Has joint control over the entity.
period?
A. A and II only
I. Adjusting events after reporting period are B. I and III only
events that provide evidence of conditions that C. II and III only
D. I, II and III
existed at the end of the reporting period.
49. Which of the following is not related party of
II. Nonadjusting events after reporting period are
an entity?
events that are indicative of conditions that arose
after the end of reporting period. A. A shareholder of the entity owning 30% of the
ordinary shares
A. I only
B. II only
B. An entity providing banking facilities to the
C. Both I and II
entity
D. Neither I nor II
C. An associate of the entity
46. Adjusting events after reporting period include
all of the following, except D. Key management personnel of the entity
A. The settlement of a court case after the 50. A related party transaction is a transfer of
issuance of the financial statements that resources, services or obligations between
confirms that the entity has a present obligation.
A. Related parties, regardless of whether a price
B. The bankruptcy of a customer which occurs is charged.
after the reporting period and before issuance of

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 B. Related parties only when a price is charged. A. Retrospective application

C. unrelated parties, regardless of whether a price B. Retrospective restatement

is charged.
C. Prospective application
D. unrelated parties only when a price is charged.
D. Prospective restatement
51. These are the specific principles, bases,
conventions, rules and practice applied by an 56. An entity changes its accounting policy if
entity in preparing and presenting financial
I. It is required by law.
statements.
II. The change will result in providing reliable and
A. Accounting policies
more relevant information about the entity’s
B. Accounting principles financial position financial performance and cash
flows.
C. Accounting standards
A. I only
D. Accounting concepts B. II only
C. Both I and II
52. It is an adjustment of the carrying amount of D. Neither I nor II
an asset or a liability or the amount of the periodic
57. A change in accounting policy includes
consumption of an asset that results from the
assessment of the present status and expected I. Adoption of an accounting policy for events
future benefit and obligation associated with the or transactions that differ in substance from
asset and liability. previously occurring events or transactions.
A. Change in accounting estimate II. The adoption of a new accounting policy for
events or transactions which did not occur
B. Change in accounting policy
previously or that were immaterial.
C. Correction of a prior period error
A. I only
D. Change in reporting entity B. II only
C. Both I and II
53. This means “applying a new accounting policy D. Neither I nor II
to transactions, other events and conditions as if
58. When it is difficult to distinguish a change
that policy had always been applied”.
in an accounting policy from a change in an
A. Retrospective application accounting estimate, the change is treated as

B. Retrospective restatement A. Change in accounting estimate with

appropriate disclosure
C. Prospective application
B. Change in accounting policy
D. Prospective restatement
C. Correction of an error
54. This means “applying a new accounting policy
to transactions occurring after that date at which D. Initial adoption of an accounting policy
the policy changed”.
59. An entity shall prepare a statement of cash
A. Retrospective application flows and present it as

B. Prospective application A. Supplementary financial statement

C. Retrospective restatement B. Note to financial statement

D. Prospective restatement C. Supporting schedule for the amount appearing

as cash and cash equivalent
55. This means “correcting the recognition,
measurement and disclosure of amounts of D. An integral part of the entity’s basic financial
elements of financial statements as if a prior statements.
period error never occurred.”

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 60. An entity purchased a three-month Treasury C. The conversion of debt to equity.
bill. In preparing the entity’s statement of cash
flows, this purchase would D. Noncash items such as depreciation
provisions, deferred taxes and unrealized foreign
A. Be treated as outflow from operating activities. currency gains and losses.

B. Be treated as outflow from investing activities 65. An entity shall report cash flows from
operating activities using
C. Be treated as outflow from financing activities
A. Direct method
D. Have no effect
B. Indirect method
61. Bank borrowing are generally considered
C. Either direct method or indirect method
A. Operating activities
D. Neither direct method nor indirect method
B. Investing activities
66. The direct method of presenting the operating
C. Financing activities activities is the method whereby
D. Borrowing activities I. The major classes of gross cash receipts and
gross cash payments are disclosed.
62. Operating activities include all of the following,
except II. Net income or loss is adjusted for the effects of
transactions of a noncash nature, any deferrals or
A. Cash receipts from royalties, fees, commissions
accruals of past of future operating cash receipts
and other revenue.
or payments, and items of income or expense
B. Cash payments to and in behalf of employees associated with investing or financing cash flows.

C. Cash receipts and cash payments of an A. I only

insurance entity for premiums and claims, B. II only
annuities and other policy benefits C. Both I and II
D. Neither I nor II
D. Cash receipts from sales of property, plant and
67. Cash advances and loans made by financial
equipment, intangible assets and other long-term
institutions are usually classified as
assets.
A. Operating activities
63. Financing activities include all of the following,
except B. Investing activities

A. Cash proceeds from issuing shares and other C. Financing activities

equity instruments.
D. Component of cash and cash equivalent
B. Cash payments to owners to acquire or redeem
the entity’s shares. 68. Interest payments to lenders and other
creditors are usually classified as cash outflows for
C. Cash payments by a lessee for the reduction of
the outstanding liability relating to a finance lease A. Operating activities

D. Cash advances and loans made to other B. Borrowing activities

parties, other than advances and loans made by
C. Lending activities
a financial institution.
D. Financing activities
64. Noncash investing and financing transactions
include all of the following, except 69. Dividend payments to owners are usually
classified as cash outflows for
A. The acquisition of asset either by assuming
directly related liability or by, means of a finance A. Operating activities
lease.
B. Investing activities
B. The acquisition of an entity by means of an
equity issue. C. Financing activities

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 D. Ordinary activities C. Deduction from net income in the adjustments
to reconcile net income to cash from operating
70. Alternatively, which of the following cash activities.
flows should be classified as operating cash flows?
D. Addition to net income in the adjustments to
A. Interest paid reconcile net income to cash from operating
activities.
B. Interest received
75. When preparing a statement of cash flows
C. Dividend received
using the direct method, amortization of goodwill
D. Dividend paid is

71. Dividends received from equity investee shall A. Shown as an increase in cash flows from
be presented in the statement of cash flows as operating activities

A. Deduction from cash flows from operating B. Shown as a reduction in cash flows from
activities operating activities

B. Addition to cash flows from operating C. Included with supplemental disclosures of

activities noncash transactions

C. Deduction from cash flows from investing D. Not reported in the statement of cash flows or
activities related disclosures.

D. Addition to cash flows from investing activities.

72. Which of the following cash flows does not

appear in a statement of cash flows using indirect
method?

A. Net cash flow from operating activities

B. Cash received from customers

C. Cash inflow from sale of equipment

D. Cash outflow for dividend payment

73. In a statement of cash flows, if used

equipment is sold at a gain, the amount shown as
a cash flow from investing activities equals the
carrying amount of the equipment

A. Plus the gain

B. Plus the gain and less the amount of tax

attribute to the gain

C. Plus both the gain and the amount of tax

attributable to the gain

D. With no addition or subtraction

74. The amortization of bond premium related to

long-term debt shall be presented in a statement
of cash flows prepared using the indirect method
as

A. Inflow and outflow of cash

B. Outflow of cash

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