CFAS

Chapter 2 Accounting Concepts and Principles

MULTIPLE CHOICE

1. It is the concept in accounting that requires economic data to be recorded in terms of

pesos.
a. going concern c. consistency
b. materiality d. unit of measure or stable monetary
unit

2. The amounts for recording properties and services purchased by a business are
determined using the
a. business entity concept c. matching principle
b. cost concept d. proprietorship principle

3. It is the concept of accounting that limits the economic data in the accounting
system to data related directly to the activities of the business.
a. business entity concept/ separate entity concept c. accrual basis
b. matching d. going concern

4. It is the authoritative body in the Philippines that has the primary responsibility
for developing accounting standards?
a. FASB c. FRSC
b. PFRS d. IASB

5. An accounting or reporting period is normally

a. 6 months. c. 2 years.
b. 1 year. d. 3 years.
 6. Under this concept, income is recognized in the period in which it is earned, rather
than when it is collected.
a. going concern c. historical cost
b. cash basis d. accrual basis of accounting

7. This concept supports the reporting of expenses in the same period in which the
related revenues are recognized.
a. materiality c. historical cost
b. matching d. entity concept

8. This accounting concept assumes that the economic life of the business can be
divided into several reporting periods.
a. fiscal year period c. calendar year period
b. accounting period d. division period

9. An annual accounting period that starts on a date other than January 1.

a. fiscal year period c. interim period
b. calendar year period d. first period

10. Which of the following statements is correct?

a. Under the accrual basis of accounting, income and expenses are reported in the
income statement in the period in which cash is received or paid.
b. The concept that expenses incurred in generating revenue should be matched
against the revenue in determining profit or loss is called the cost concept.
c. The concept of materiality prohibits the rounding-off of amounts when presenting
financial reports.
d. Most businesses use the accrual basis of accounting.

ANSWERS:
1. D
2. B
3. A
4. C
5. B
6. D
7. B
8. B
9. A
10. D

A soundly developed conceptual framework of concepts and objectives should

a. increase financial statement users' understanding of and confidence in financial
reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly soluble.
d. all of these.

2. The overall objective of financial reporting is to provide information

a. about an entity's assets, liabilities, and owners' equity.
b. about an entity's financial performance during a period.
c. that is useful in making economic decisions.
d. that allows owners to assess management's performance.

3. The two primary qualities that make accounting information useful for decision
making are
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a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. faithful representation and relevance.

4. Late information lacks this qualitative characteristic.

a. Tardiness
b. Verifiability
c. Timeliness
d. Comparability

5. Which of the following is considered a qualitative factor in making materiality

judgments?
a. the context of an item in relation to the current economic state of the environment
where the entity operates.

b. 10% of profit or loss, in absolute terms

c. 5% of total revenues
d. 1% of total assets

7. Which of the following does not provide evidence of future economic benefits
from a resource?
a. The resource cannot be used in the entity’s operations but has a resale value.
b. The resource has no use for the entity but it can be swapped for other resources.
c. The entity does not intend to sell or use the resource but instead distribute it to the
owners as dividends.
d. The resource is expected to be used only in the current period and that’s it.

Which of the following would most likely result to the recognition of a liability?
a. Customers become entitled to rebates for their past purchases.
b. Intention to acquire inventories in a future period.
c. Entering into a purchase contract for future delivery.
d. Agreeing on an irrevocable future commitment that is not burdensome at present.

The adage “Aanhin mo pa and kabayo pag patay na ang damo” relates to which of the
following qualitative characteristics?
a. Relevance
b. Timeliness
c. Faithful representation
d. Comparability

The Conceptual Framework classifies gains and losses based on whether they are
related to an entity's major ongoing or central operations. These gains or losses may
be classified as Non-operating Operating
a. Yes No
b. Yes Yes

11. Which of the following is considered a pervasive constraint by the Conceptual

Framework?
a. Cost-benefit relationship

b. Timeliness
c. Conservatism
d. Materiality

Decision makers vary widely in the types of decisions they make, the methods of
decision making they employ, the information they already possess or can obtain from
other sources, and their ability to process information. Consequently, for information to
be useful there must be a linkage between these users and the decisions they
make. This link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.

15. Accounting information is considered to be relevant when it

a. can be depended on to represent the economic conditions and events that it is
intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

The quality of information that gives assurance that it is reasonably free of error and
bias and provides a true, correct and complete depiction of what it purports to represent
is
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.

When information about two different entities has been prepared and presented in a
similar manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency.
d. comparability.

A decrease in net assets arising from peripheral or incidental transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.
19. Which of the following is not an element that is directly related to the
measurement of an entity’s financial position?
a. assets
b. liabilities
c. equity
d. income

21. General purpose financial statements are

a. those statements that cater to the common and specific needs of a wide range of
external users.
b. those statements that cater to the common needs of a wide range of external users
and internal users.
c. those statements that cater to the common needs of a limited range of external users.
d. those statements that cater to the common needs of a wide range of external users.

External users are those

a. who do have the authority to demand financial reports tailored to their specific needs.
b. who do not have the authority to demand financial reports tailored to their common
needs.
c. who do not have the authority to demand financial reports tailored to their specific
needs.
d. who belong to countries other than the domicile country of the reporting entity

When products or other assets are exchanged for cash or claims for cash, they
are said to be
a. allocated.
b. realized.
c. recognized.
d. earned.

26. Which of the following statements correctly refer to the accounting process?
I. Measuring is the accounting process of analyzing business activities
as to whether or not they will be recognized in the books.
II. Recognition refers to the process of including the effects of an event in
the totals of the statement of financial position or the statement of profit
or loss and other comprehensive income through memo entries.
III. Disclosure of events in the notes to financial statement without
including their effect in the totals of the statement of financial position
or statement of profit or loss and other comprehensive income is not
an application of the recognition principle.
 IV. An accountable event is an event that has an effect on the assets,
liabilities or equity of an entity and its effect can be measured reliably.
V. Sociological and psychological matters are within the scope of
accounting.
a. I, II, III, IV and V
b. I, II, III and IV
c. IV
d. III and IV

Accounting has been given various definitions, which of the following is not one of those
definitions
a. Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions.
b. Accounting is the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in part of at least, of
a financial character and interpreting the results thereof.
c. Accounting is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating
the results to interested users.
d. Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.

The accounting standards used in the Philippines are adapted from the standards
issued by the a.
Federal Accounting Standards Board (FASB).
b. International Accounting Standards Board (IASB).
c. Philippine Institute of Certified Public Accountants (PICPA).
d. Democratic People of Republic of Korea Accounting Standards Committee
(DPKRASC).

Which of the following statements is incorrect regarding the basic accounting concepts?
a. One of ABC Co.’s delivery trucks was involved in an accident. Although no lawsuits
have yet been filed against ABC, ABC recognized a liability for the probable loss on the
event. This is an application of the prudence or conservatism concept.
b. Under the consistency concept, the financial statements should be prepared on the
basis of accounting principles which are followed consistently.
c. Under the entity theory, the business is viewed as a separate entity. Therefore, the
personal transactions of the business owners are not recorded in the business’
accounting records.
d. The time period concept means that financial statements are prepared only at the
end of the life of a business.

It is the branch of accounting that focuses on the general purpose reports of financial
position and operating results known as financial statements.
a. Financial accounting
b. Auditing
c. Managerial accounting
d. Taxation

Which of the following are related to the qualitative characteristic of relevance under the
Conceptual Framework? I. Predictive value II. Confirmatory value III. Timeliness
IV. Materiality
a. IV. a. I and II
b. I, II and III
c. I, II and IV
d. I, II, III and IV

.Entity A had the following balances at December 31, 20x1:

Cash in checking account 35,000
Cash in 90-day money market account 75,000
Treasury bill, purchased 12/1/x0, maturing 5/31/x2 150,000
Treasury bill, purchased 12/1/x1, maturing 2/28/x2 200,000

How much cash and cash equivalents is reported in Entity A’s December 31, 20x1
statement of financial position?
a.110,000
b.235,000
c. 310,000
d. 460,000

5.Which of the following is presented under the investing activities section of a

statement of cash flows?
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a.Collection of accounts receivable
b.Cash purchases of inventories
c.Purchase of equipment through cash
d.Issuance of share capital through cash

Use the following information for the next five questions:

Entity A acquires equipment on January 1, 20x1.
Information on costs is as follows:
Purchase price, gross of trade discount 1,000,000
Trade discount available 10,000
Freight costs 20,000
Testing costs 30,000
Net disposal proceeds of samples generated during testing 5,000
Present value of estimated costs of dismantling the
equipment at the end of its useful life 6,209
6.How much is the initial cost of the equipment?
a.1,061,209
b.1,051,209
c.1,041,209
d.1,031,209

.The equipment with a carrying amount of P 1,041,209 has an estimated useful life of 10
years and a residual value of ₱200,000. Entity A uses the straight line method of
depreciation. How much is the carrying amount of the equipment on December 31,
20x3?
a.788,846
b.802,846
c.795,846
d.764,846

On December 31, 20x3, an equipment with a carrying amount of P 788, 846 was
revalued by Entity A at a fair value of ₱820,000. There is no change in the residual
value and the remaining useful life of the asset. How much is the revaluation surplus on
December 31, 20x3?
a.17,154
b.24,154
c.55,154
d.31,154

12.Which of the following is not one of the essential characteristics of a PPE?

a.tangible asset
b.used in business
c.primarily held for sale

d.long-term in nature

13.PAS 16 requires an entity to review the depreciation method and the estimates of
useful life and residual value at the end of each year-end. A change in any of these is
accounted for using
a.a specific transitional provision of a PFRS.
b.retrospective application.
c.prospective application.
d.any of these

14.If plotted on a graph (X-axis: time; Y-axis: ₱), the depreciation charges under the
straight-line method would show
a.a straight-line.
b.an upward line sloping to the right.
c.a downward line sloping to the left.
d.a curvilinear line sloping here and there.

17.Which of the following costs are included in the cost of inventories?

a.Transport costs for raw materials
b.Abnormal material usage
c.Storage costs relating to finished goods
d.Administrative and general overhead

Inventories are measured at

a.Lower of cost and fair value.
b.Lower of cost and net realizable value.
c.Lower of cost and nominal value.
d.Lower of cost and net selling price.
e.Choices b and d.

The Coronet Company has a cost card in relation to an item of goods manufactured as
follows: Materials 70
Storage costs of finished goods 18
Delivery to customers (Freight out) 4
Non-recoverable purchase taxes 6
According to PAS 2, at what figure should the item be valued in inventory?
a.88
b.76
c.98
d.94

15. You are the accountant of ABC Co. During the period, ABC Co. acquired short-
term investment in stocks, which of the following financial reporting standards would
most likely be relevant in accounting for the transaction?
a. PFRS 8
b. PFRS 9
c. PAS 28
d. b or c

Which of the following is not a financial instrument?

a. Accounts receivable
b. Investment in shares of stocks
c. Accounts payable
d. All of these are financial instruments

These are bonds that can be exchanged for shares of stocks of the issuer.
a. Exchangeable bonds
b. Callable bonds
c. Convertible bonds
d. Rock bonds
Entity A owns 25% of the voting rights in Entity B. However, Entity A has no
representation on the board of directors of Entity B. Which of the following statements
is correct?
a. Entity A cannot be presumed to have significant influence over Entity B because
Entity A does not have board representation.
b. Entity A is presumed to have signification influence over Entity B because it holds
25% or more of the voting rights in Entity B.
c. Entity A is presumed to have signification influence over Entity B because it holds
20% or more of the voting rights in Entity B.

d. Representation on an investee’s board of directors is never considered when

determining the existence of significant influence

According to PAS 36, an asset is impaired if

a. its carrying amount exceeds its recoverable amount.
b. its recoverable amount exceeds its carrying amount.
c. its carrying amount is less than its value in use.
d. its fair value less disposal costs exceeds its recoverable amount.

According to PAS 36, when measuring an asset’s value in use, the discount rate to be
used in discounting the estimated cash flows should be the
a. pre-tax rate that reflects current assessments of the time value of money and risks.
b. post-tax rate that reflects current assessments of the time value of money and risks.
c. pre-tax rate that reflects current assessments of market-based risks for similar
replacement assets.
d. post-tax rate that reflects current assessments of market-based risks for similar
replacement assets.

According to PAS 36, if an asset’s fair value less disposal costs cannot be determined,
its recoverable amount would be its
a. carrying amount.
b. replacement cost.
c. value in use.
d. current cost.
9. According to PAS 38, which of the following may be recognized as cost of intangible
asset?
Research costs incurred in self-generating an intangible asset
b. Costs of an internally generated customer lists
c. Purchase cost of an externally acquired publishing title
d. Abnormal amount of wasted labor in self-generating an intangible asset

10. Which of the following qualifies for classification as an investment property?

a. Property that is currently being developed for future use as investment property
b. Investment property that is currently being developed for future use as owner-
occupied
property
c. Property that is leased out to another entity under a finance lease
d. Building being rented from another entity and leased out under various operating sub-
leases

13. Which of the following intangible assets do not have the characteristic of
exchangeability?
A. Copyright
B. Franchise
C. Goodwill
D. Patent

14. Which statement in incorrect concerning “control” in the definition of an intangible

asset?
A. The skill of employees arising out of the benefits of training costs can be recognized
as an intangible asset.
B. The capacity of an entity to control the future economic benefits from an intangible
asset would normally stem from legal rights that are enforceable in a court of law.
C. Market and technical knowledge may give rise to future economic benefits, which
can be controlled by the entity if the knowledge is protected by legal right, such as a
copyright.
D. An entity controls an asset if the entity has the power to obtain future economic
benefits flowing from the underlying resource and to restrict the access of others to
those benefits.

A company is considered to be in the development stage if

A. 12 months of operations have not been complied.
B. The entity has not previously shown a profit from operations.
C. The entity has not obtained 50% of the initial planned activity level.
D. Planned principal operations have commenced but have not yet begun to produce
significant revenue.

If the payment of employees’ compensation for future absences is probable, the amount
can be reasonably estimated, and the obligation relates to rights that vest, the
compensation should be
Recognized when paid.
B. Accrued if attributable to employees’ services already rendered.
C. Accrued if attributable to employees’ service not already rendered.
D. Accrued if attributable to employees’ services whether already rendered or not.

Which of the following statements is true for defined contribution postemployment

benefit plan?
A.The employer is required to contribute a certain amount each period based on the
plan’s formula.
B. The employer bears the risk of the plan’s investment performance.
C. Postemployment benefits received by employees are defined by the plan’s formula.
D. The employer and the employees are required to contribute equal amounts to the
fund

An employee’s right to obtain postemployment benefits regardless of whether (s)he

remains employed is known as his/her
Past service cost.
B. Defined benefit plan.
C. Vested benefits.
D. Additional minimum liability.

On January 1, 20x1, Entity A acquires 30% interest in Entity B for ₱600,000. Entity B
reports profit of ₱200,000 and declares dividends of ₱50,000 in 20x1. How much is the
carrying amount of the investment in associate on December 31, 20x1?
600,000
b. 660,000
c. 645,000
d. 630,000

Many shares and most share options are not traded in an active market. Therefore, it is
often difficult to arrive at a fair value of the equity instruments being issued. Which of the
following option valuation techniques should not be used as a measure of fair value in
the first instance?
Black-Scholes model.
b. Binomial model.
c. Monte-Carlo model.
d. Intrinsic value

A first time adopter should prepare how many statements of financial position for two
comparative periods?
A,.Two
B. Three
C. Four
D. Five

Below is the shareholder’s equity of Kort Company on December 31, 2021:

Preference share, 7% P100 par value, 30,00 shares

Issued, total liquidation value, P3.2M P 3,000,000
Ordinary Share, no par, 50,000 shares issued 1, 500,000
Donated 500,000
Accumulated Profits 4, 500,000

All preference dividends have been fully paid.

How much is the book value per share of ordinary shares?
a. P125. 80
b. P126
c. P130
d. P300

The accounts shown below appear in the December 31, 2014 trial balance of H
Corporation:

Preference share, authorized, P50 par P10,000,000 ] less

]
Unissued preference share 3,600,000
Ordinary share, authorized, P20 par 4,000,000 ] less
]
Unissued ordinary share 2,000,000
Subscription receivable, preference share 380,000
Subscription ordinary, preference share 360,000
Subscribed preference share 600,000
Subscribed ordinary shares 440,000
Treasury share, preference, at cost 1, 360,000 - less
Share premium 1,700,000
Accumulated profits or losses 2,000,000

All subscription receivables are due in year 2015.

How much is the total shareholders’ equity of H Corporation?
A. P11,040,000
B. P11,780,000
C. P12,400,000
D. P13,760,000