PROBLEM 3-1 MULTIPLE CHOICE

1. What is the purpose of notes to financial statements?

Answer: D - All of these can be considered purpose of the notes
Explanation:
PAS 1, paragraph 112, provides that the notes to financial statements shall:
a. Present information about the basis of presentation of the financial statements and
the specific accounting policies
b. Disclose the information required by the Philippine Financial Reporting Standards
that is not presented in the financial statements
c. Provide additional information which is not presented in the financial statements
but is relevant to an understanding of the financial statements
All of the choices given are mentioned above, thus letter d is the correct answer.
2. What is the first item in presenting the notes?
Answer: A – Statement of compliance with PFRS
Explanation:
PAS 1, paragraph 114, provides that an entity normally presents notes in the following
order to assist users to understand the financial statements and to compare them with
financial statements of other entities:
a. Statement of compliance with PFRS
b. Summary of significant accounting policies used
c. Supporting information or computation for line items presented in the financial
statements
d. Other disclosures, such as contingent liabilities, unrecognized contractual
commitments and nonfinancial disclosures.
3. An entity whose financial statements comply with PFRS shall
Answer: C – Make an explicit and unreserved statement of compliance in the notes
Explanation:
PAS 1, paragraph 16, provides that an entity whose financial statements comply with
Philippine Financial Reporting Standards shall make an explicit and unreserved
statement of compliance in the notes.
4. An entity is required to disclose all of the following nonfinancial information, except
Answer: D – Names and addresses of directors and officers
Explanation:
PAS 1, paragraph 138, provides that an entity shall disclose the following:
a. The domicile and legal form of the entity, its country of incorporation and the
address of the registered office or principal place of business.
b. A description of the nature of the entity’s operations and its principal activities.
c. The name of the parent and the ultimate parent of the group
5. Notes to financial statements
Answer: C – are an integral part of financial statements
Explanation:
The notes to financial statements are an integral part of financial statements, it provides
additional information and help clarify the items presented in the financial statements.
Letter a is wrong because it is a relatively important fact since it helps the users
understand financial statements, letter d is wrong because it is relevant and material.
PROBLEM 3-2 MULTIPLE CHOICE
1. The presentation of the notes to financial statements in a systematic manner
Answer: C – Is mandatory, as far as practicable
Explanation:
The notes to the financial statements are a required, integral part of a company’s external
financial statements. They are required since not all relevant financial information can be
communicated through the amounts shown (or not shown) on the face of the financial
statements.
2. The cross – reference between each line item in the financial statements and any
related information disclosed in the notes to financial statements
Answer: B – Is mandatory
Explanation:
Cross-referencing is a technique used to enhance a user’s understanding of the financial
statement. It is appropriate when two line items on the financial statement have a direct
relationship and reporting the two accounts separately might be misleading, and thus
mandatory.
3. Disclosure information about key sources of estimation uncertainty
Answer: B – Is mandatory
Explanation:
PAS 1, paragraph 125, provides that an entity shall disclose information about the
assumptions it makes about the future and other major sources of uncertainty at the end of
the reporting period that have a significant risk of resulting in a material adjustment to the
carrying amount of assets and liabilities within the next financial year.
The disclosure of information about key sources of information uncertainty is mandatory
4. Disclosure of information about judgements
Answer: B – Is mandatory
Explanation:
PAS 1, paragraph 122, provides that an entity shall disclose in the summary of significant
accounting policies the judgements that management has made in the process of applying
accounting policies and that have a significant effect on the amounts recognized in the
financial statements.
The disclosure of information about judgement is mandatory
5. Which best describes the standard of adequate disclosure?
Answer: D – The notes to financial statements
Explanation:
The principle of adequate disclosure demands full disclosure of all material matters that can
affect financial statements and are of interest to users of accounting information. Letter a, b
and c doesn’t demonstrate adequate disclosure but these are the reports that needs notes
to disclose appropriate changes that can be useful and not misleading to users.
PROBLEM 3-3 MULTIPLE CHOICE
1. Which statement is incorrect regarding notes to financial statements
Answer: C – IFRS requires that all notes should be clear, simple to understand and
nontechnical in nature
Explanation:
IFRS does not require that all notes should be clear, simple and nontechnical, but it requires
specific note disclosure on inventories that are disaggregated into classifications and a
maturity analysis for receivables
2. Notes to financial statements
Answer: C – Amplify items presented in financial statements
Explanation:
The notes to financial statements generally amplify or explain the items presented in the
main body of the statements. If the main body of the financial statements gives an
incomplete picture of the performance and position of the company, the notes should
provide the additional information needed. Information in the notes does not have to be
quantifiable nor does it need to qualify as an element. Notes can be partially or totally
narrative.
3. Which is a method of disclosing pertinent information?
Answer: D – All of these are methods of disclosing pertinent information
Explanation:
Companies may use parenthetical explanations, notes, cross references and supporting
schedules to disclose pertinent information.
4. The disclosure of accounting policies is important to financial statement users in
determining:
Answer: B – whether accounting policies are consistently applied from year to year.
Explanation:
The disclosure of accounting policies will help users to know if the accounting policies are
consistently applied, such disclosure should identify and describe the accounting principles
that materially affect the determination of financial position, results of operations and
changes in cash flows. Letter a, c and d does not need the disclosure of accounting policies
in order to be known
5. The standard of full disclosure is best described by which of the following?
Answer: D – Disclosure of any financial facts significant enough to influence the
judgement of the primary user.
Explanation:
The full disclosure principle does not necessarily mean that it requires the release of every
piece of information to the public, the principle urges the disclosure of information that can
have a material impact on the company’s financial results or financial position, it urges to
disclose information that is significant enough to influence the judgement of the primary
user.
6. Application of the use of the full disclosure principle
Answer: C – is demonstrated by the use of supplementary information presenting the
effects of changing prices.
Explanation:
Having a supplementary information means that you may include details or amounts that
present a different perspective from that adopted in the financial statements, thus
disclosing information that the users may need to fully understand the statements.
7. Accounting policies disclosed in the notes to financial statements typically include all of
the following except
Answer: B – The depreciation method
Explanation:
Accounting policies disclosed in the notes to financial statements are the cost flow
assumption, significant estimates, and significant inventory purchasing policies
8. Significant accounting policies may not be
Answer: D – Omitted from financial statement disclosure
Explanation:
Financial statement must be prepared with a true and fair view. All the relevant information
which is of the interest of the owner, investors, creditors should be fully disclosed. All the
significant policies should also be disclosed
9. An inventory accounting policy that should be disclosed in a summary of significant
policies is
Answer: C – Method used for pricing inventory
Explanation:
Certain items are commonly required disclosures in a summary of significant accounting
policies, the basis of consolidation, depreciation methods, amortization of intangible assets
excluding goodwill), inventory pricing recognition of profit on long-term construction type
contracts and recognition of revenue from franchising and leasing operations.
10. Which of the following should be disclosed in a summary of significant accounting
policies?
Answer: D – Depreciation method
Explanation:
Depreciation method is required to be disclosed by providing them in the summary of
significant accounting policies
PROBLEM 3-3 MULTIPLE CHOICE
1. What is the purpose of information presented in the notes to financial statements?
Answer: A – To provide disclosures required by generally accepted accounting policies
Explanation:
The information presented in the notes cannot be used to correct improper presentation in
the financial statements, as it needs an adjustment, it is not used to present management
response to auditors but is used to provide disclosures required by generally accepted
accounting policies
2. Which of the following information should be disclosed in a summary of significant
accounting policies?
Answer: C – Criteria for determining which investments treated as cash equivalents
Explanation: criteria for determining which investments treated as cash equivalents is a
significant accounting policy, the entity needs to disclose this to know which investments
are highly liquid
3. Which of the following is not a required disclosure of accounting policies?
Answer: B – Key management personnel involved in drafting the summary of significant
accounting policies
Explanation: the personnel involved in drafting the summary of significant accounting
policy need not be disclosed since it is not a material information, a, c and d are all
required to be disclosed
4. The notes to financial statements should not be used to
Answer: D – Correct an improper representation in the financial statements
Explanation: The note must present information about the basis of preparation of the
financial statements and the specific accounting policies used, it is used to disclose any
information required by IFRs that is not presented elsewhere in the financial statement. It
shall not be used to correct an improper representation in the financial statement because
that event is an adjusting event.
5. An entity shall disclose in the summary of significant accounting policies
Answer: C – the measurement basis used in preparing the financial statements and the
accounting policies used
Explanation: IAS 1, paragraph 112 states that the note must present information about the
basis of preparation of the financial statements and the specific accounting policies used, it
is used to disclose any information required by IFRs that is not presented elsewhere in the
financial statement
6. The summary of significant accounting policies should disclose
Answer: B – basis of profit recognition on long term construction contracts
Explanation:
The summary of significant accounting policies conveys information regarding the
important accounting methods and policies chosen by the firm, when a choice is available.
Knowledge of the methods is critical to an understanding of the amounts disclosed in the
financial statements. The method of accounting for long- term contracts may be the
percentage of completion or completed contract method. Disclosure of this method assist
the user in understanding the meaning of reports revenue and gross profit
The other alternatives give data on specific accounts or the result of applying specific
accounting principles. They do not indicate what choices the firm has made for accounting
and reporting
7. The summary of significant accounting policies should disclose
Answer: C – The depreciation method used only
Explanation:
The summary of significant accounting policies should disclose the fact that property, plant
and equipment are depreciated in what method they used. The property plant and
equipment need not be disclose since it is already in the financial statement.
8. Which of the following should be included in a summary of significant accounting
policies?
Answer: A - Property, plant and equipment recorded at cost with the depreciation
computed principally by straight line method
Explanation:
Letter b, c and d are events that are not to be disclosed since it already reflects in the
financial statement thus A is the answer.