Theory of Accounts

1. It is an adjustment of the carrying amount of an asset or a liability or the

amount of the periodic consumption of an asset that results from the
assessment of the present status and expected future benefit and obligation
associated with the asset and liability.
a. Change in accounting estimate
b. Change in accounting p[olicy
c. Correction of a prior period error
d. Change in reporting entity
2. The effect of a change in accounting estimate shall be recognized
propectively by including it in profit or loss of
a. Current perior only
b. Future period only
c. Prior period only
d. Curent period and future period if the change affects both
3. The effect of a change in the expected pattern of consumption of economic
benefits of a depreciable asset shall be
a. Included in the determination of income or loss in the period of change
only
b. Included in the determination of income or loss in the period of change
and future periods
c. Included in the statement of retained earnings as an adjustment of the
beginning balance
d. Included as component of other comprehensive income
4. A change in measurement basis is
a. A change in accounting estimate
b. A change in accounting policy
c. A correction of an error
d. Not an accounting change
5. Which of the following statements is incorrect concerning accounting
estimate?
a. As a result of the uncertainties inherent in business activities, many
items in the financial statements cannot be measured with precision
but can only be estimated
b. The use of reasonable estimate is an essential part of the preparation
of financial statements and does not undermine their reliability
c. An estimate may need revision if changes occur in the circumstances
on which the estimate was based or as a result of new information or
more experience
d. By its very nature, the revision of an estimate relates to a prior period
and is a correction of an error.
6. Prospective recognition of the effect of a change in accounting estimate
means that the change is applied to transactions from the
a. Date of the change in estimate
b. End of the current reporting period
c. Beginning of the year of change
d. Date of issuance of financial statements

7. When it is difficult to distinguish between a change in estimate and a change

in accounting policy, an entity shall
a. Treat the entire change as a change in estimate with appropriate
disclosure
b. Apportion on a reasonable basis the relative amounts of change in
estimate and the change in accounting policy and treat each one
accordingly
c. Treat the entire change as a change in accounting policy
d. Ignore it in the year of the change and then wait for the following year
to see how the change develops and then treat it accordingly
8. Prior period errors are omissions from and misstatements in the financial
statements or one or more periods arising from a failure to use or misuse of
reliable information that
I.
Was available when financial statements for those period were
authorized for issue
II.
Could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements.
a. I only
b. II only
c. Either I or II
d. Both I and II
9. An entity shall correct material prior period errors retrospectively in the first
set of financial statements after their discovery by
I.
Restating the comparative amounts for the prior period presented in
which the error occurred
II.
Restating the opening balances of asset, liability and equity for the
earliest prior period presented if the error occurred before the earlist
prior period presented
a. I only
b. II only
c. Either I or II
d. Neither I nor II
10.Prior period errors include all of the following except
a. Effects of mathematical mistakes
b. Mistakes in applying accounting policies
c. Oversights or misinterpretation of facts and fraud
d. Effects of a change in the estimated useful life of an asset
Answers:
1.
2.
3.
4.
5.

A
D
B
B
D

6. A
7. A
8. D
9. C
10. D

1. These are the specific principles, bases, conventions, rules and practices
applied in the preparation and presentation of financial statements
e. Accounting policies
f. Accounting principles
g. Accounting standards
h. Accounting concepts
2. A change in accounting policy includes
I.
Adoption of an accounting policy for events or transactions that differ
in substance from previously occuring events or transactions
II.
The adoption of a new accounting poicy for events or transactions
which did not occur previously or that were immaterial
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. A change in accounting policy includes all of the following except
a. The initial adoption of a policy to carry assets at revalued amount
b. The change from cost model to revaluation model in measuring
property, plant and equipment
c. The change in inventory valuation from FIFO to weighted average
method
d. The change in depreciation method from sum or years digits to straight
line
4. A change in accounting policy shall be made when
I.
Required by an accounting standard or an interpretation of the
standard
II.
The change will result in more relevant or reliable information about
the financial position, financial performance and cash flows of the
entity
a. I only
b. II only
c. Either I or II
d. Neither I nor II
5. In the absence of an accounting standard that applies specifically to a
transaction, what is the most authoritatitve source in developing and
applying an accounting policy?
a. The requirement and guidance in the standard or interpretation dealing
with similar and related issue
b. The definition, recognition criteria and measurement of asset, liability,
income and expense in the Conceptual Framework
c. Most recent pronouncement of oehter standard-setting body
d. Accounting literature and accepted industry practice
6. The initial application of a policy to revalue assets is
a. A change in accounting policy
b. A change in accounting estimate
c. Correction of a prior period error
d. Not an accounting change

7. Which of the following statements is correct concerning application of a

change in accounting policy?
I.
An entity shall account for a change in accounting policy resulting from
the initial application of a standard or an interpretation in accordance with
the transitional provision, if any.
II.
When an entity changes an accounting policy upon initial application of a
standard or an interpretation that does not include specific transitional
provision applying to that change, the change shall be applied
retrospectively.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
8. This means applying a new accounting policy to transactions, other events
and conditions as if that policy had always been applied.
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
9. This means correcting the recognition, measurement, and disclosure of
amounts of elements of financial statements as if a prior period error had
never occurred.
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
10.This means applying a new accounting policy to transactions and events
occurring after the date at which policy is changed.
a. Retrospective application
b. Prospective application
c. Retrospective restatement
d. Retrospective restatement
Answers:
1. A

6. A

2. D

7. C

3. D

8. A

4. C

9. B

5. A

10. B

1. A public entity that changed an accounting policy voluntarily should

a. Inform shareholders prior to taking the decision
b. Account for the change retrospectively

2.

3.

4.

5.

6.

7.

c. Treat the effect of the change as a component of other comprehensive

income
d. Treat the change propectively and adjust the effect of the change in
the current period and future period.
An entity that changed the method of inventory valuation from weighted
average to FIFO shall account for the change as
a. A change in estimate and account for it prospectively
b. A change in accounting policy and account for it prospectively
c. A change in accounting policy and account for it retrospectively
d. A correction of an error and account for it retrospectively
When an independent valuation expert advised an entity that the residual
value of the plant and machinery had drastically changed and the change is
material, the entity should
a. Retrospectively change the depreciation charge based on the revised
residual value
b. Change the depreciation charge and treat it as a correction of an error
c. Change the annual depreciation for the current year and future years
d. Ignore the effect of the change on annual depreciation because change
in residual value would normally affect the future only since this is
expected to be recovered in the future
Which of the following statements in relation to a change in accounting
estimate is true? I.Changes in accounting estimate are accounted for
restrospectively
II Changes in accounting estimate result from new information or new
development
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Which of the following statements best describes prospective application?
a. Recognizing a change in accounting policy in the current and future
periods affected by the change
b. Correcting the financial statements as if a prior period error had never
occurred
c. Applying a new accounting policy to transactions occurring after the
date at which the policy is changed
d. Applying new accounting policy to transactions as if that policy had
always been applied
Which of the following terms best describes applyign a new accounting policy
to transactions as if that policy had always been applied?
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
Which of the following changes should be treated restrospectively?
I. A change is made in the method of calculating the provision for
uncollectible accounts receivable

II. Investment properties are now measured at fair value, having previously
been measured at cost
a. I only
b. II only
c. Both I and II
d. Neither I nor II
8. Which of the following should be treated as a change in accounting policy?
I. A new accounting policy of capitalizing development costs as a project has
become eligible for capitalization for the first time
II. A new policy resulting from the requirements of a new PFRS
III. To provide more relevant information. Items of property, plant and
equipment are now being measured at fair value, whereas they had
previously been measured at cost
IV. An entity engaging in construction contracts for the first time needs an
accounting policy to deal with this
a. I, II, III and IV
b. I and II only
c. II and III only
d. I and IV only
9. The draft financial statements of an entity for the current year have been
prepared. A final review of the draft revealed that closing inventory at the
end of the prior year included items which had been sold in the later part of
the prior year.
What is the effect of the adjustment to be made to the profit for the current
year and to the profit for the prior year presented as the comparative figure
in the financial statements of the current year?
Profit for current year
a.

Increase

b.

Increase

c.

Decrease

d.

Decrease

10.An entity changes an accounting policy if

Profit for prior year

Decrease
Increase
Increase
Decrease

I. it is required by law
II. The change wil result in providing reliable and more relevant information
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Answers:
1. B

6. A

2. C

7. B

3. C

8. C

4. B

9. A

5. C

10. B

1. How should the effect of a change in accounting estimate be accounted for?

a. By restating amounts reported in financial statements of prior periods
b. By reporting proforma amounts for prior periods
c. As a prior period adjustment to beginning retained earnings
d. In the period of change and future periods if the change affects both
2. Which of the following is charateristic of a change in an accounting estimate?
a. It usually need not to be disclosed
b. It does not effect the financial statements of prior period
c. It should be reported through the restatement of the financial
statement
d. It makes necessary the rporting of proforma amounts for prior periods
3. The estimated life of a building that has been depreciated 30 years of an
originally estimated life of 50 years has been revised to a remaining life of 10
years. What is the treatment of the accounting change?
a. Continue to depreciate the building over the original 50-year life

b. Depreciate the remaining carrying amount over the remaining life of

the asset
c. Adjust accumulated depreciation to its appropriate balance, through
net income, based on a 40-year life and then depreciate the adjusted
carrying amount as though the estimated life had always been 40
years
d. Adjust accumulated depreciation to its appropriate balance, through
retained earnings, based on a 40-year life and then depreciate the
adjusted carrying amount as though estimated life had always been 40
years
4. A change in the periods benefited by a deferred cost because additional
information has been obtained is
a. An accounting change that should be reported in the period of change
and future period if the change affects both
b. An accounting change that should be reported by restating the
financial statements of all prior periods presented
c. A correction of an error
d. Not an accounting change
5. A change in the residual value of an asset arising because additional
information has been obtained is
a. An accounting change that should be reported in the period of change
and future periods if the change affects both
b. An accounting change that should be reported by restating the
financial statements of all prior periods presented
c. A correction of an error
d. Not an accounting change
6. During the current year, an entity increased the estimated quantity of copper
recoverable from its mine. The entity used the units of production depletion
method. As a result of the change, which of the following should be reported
in the entitys financial statements?
I. Cumulative effect of change in accounting policy
II. Retroactive application of new depletion base.
a. I only

b. II only
c. Both I and II
d. Neither I nor II
7. The effect of a change in accounting policy that is inseparable from the effect
of a change in acounting estimate shall be reported
a. By restating the financial statements of all prior periods presented
b. As a correction of an error
c. As a component of income from continuing operations, in the period of
change and future periods if the change affects both
d. As a separate disclosure after income from continuing operations,in the
period of change and future periods if the change affects both
8. When an entity changed from straight line method of depreciation for
previously recorded assets to the double declining balance method, which of
the following should be reported?
a. Cumuative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting
prospectively

change

that

should

be

reported

currently

and

9. When an entity changed the expected service life of an asset because

additional information has been obtained, which of the following should be
reported?
a. Cumuative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported in the period of change
and future periods if the change affects both
10.A change in the estimated warranty liability requires
a. Correcting prior period retained earnings

b. Presenting the effect of proforma data on income and earnings per

share for all prior periods presented
c. Restating the financial statements of all prior periods presented
d. Reporting current and future financial statements on the new basis
Answers:
1. D

6. D

2. B

7. C

3. B

8. D

4. A

9. D

5. A.

10. D

1. Accounting changes are often made and the monetary impact is reflected in
the financial statements of an entity even though, in theory, this may be a
violation of accounting concept of
a. Materiality
b. Consistency
c. Prudence
d. Objectivity
2. Which of the following is not classified as an accounting change?
a. Change in accounting policy
b. Change in accounting estimate
c. Error in the financial statements
d. All of these are classified as an accounting change
3. Which of the following is the best explanation why accounting changes are
classified into change in accounting policy and change in accounting
estimate?
a. The materiality of the change involved
b. Each change involves different method of reconition in the financial
statements
c. The fact that some treatments are considered GAAP and some are not

d. The need of managers to provide a favorable profit picture

4. Which of the following is the proper time period to record the effect of a
change in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively
d. Current period
5. Why is retrospective treatment of changes in accounting estimate prohibited?
a. Changes in accounting estimate are normal recurring corrections and
adjustments which are the natural result of the accounting process
b. The retrospective treatment for any type of presentation is not allowed
c. Retrospective treatment of changes
prohibited because PFRS requires it

in

accounting

estimate

is

d. PFRS does not prohibit retrospective treatment of changes in

accounting estimate but is silent on this issue
6. Which of the following would be a reason why an entity is permitted to
change accounting policy?
a. The change would allow the entity to present a more favorable profit
picture
b. The change would result in the financial statements providing more
reliable and relevant information about financial position, financial
performance and cash flows.
c. The change is made by th internal auditor
d. The change is long-term
7. A change in accounting policy requires what kind of adjustment to the
financial statements?
a. Current period adjustment
b. Prospective adjustment
c. Retrospective adjustment
d. Current and prospective adjustment

8. A change in accouning policy requires that the cumulative effect of the

change for prior period should be reported as an adjustment to
a. Beginning retained earnings for the earliest period presented
b. Net income for the period in which the change occurred
c. Comprehensive income for the earliest period presented
d. Shareholders equity for the period in which the change occurred
9. Which of the following is not treated as a change in accounting policy/
a. A change from average cost to FIFO for inventory valuation
b. A change to a different method of depreciation for plant assets
c. A change from full cost to successful effort method in the extractive
industry
d. A change from cost recorvery to percentage of completion
10.Which of the following is accounted for as a change in accounting policy?
a. A change in the estimated useful life of plant assets
b. A change from the cash basis of accounting to the accrual basis of
accounting
c. A change from expensing immaterial expenditures to deferring and
amortizing them when material
d. A change in inventory valuatiion from average cost to FIFO
Answers:
1. B

6. B

2. C

7. C

3. B

8. A

4. A

9. B

5. A

10. D