CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

Theory of Accounts Final Pre-board Examination

1. The enhancing qualitative characteristics of financial reporting are

a. Relevance, reliability and faithful representation
b. Cost-benefit and materiality
c. Comparability, verifiability, timeliness and understandability
d. Completeness, neutrality and freedom from error

2. The process of reporting an item in the financial statements is

a. Allocation
b. Matching
c. Realization
d. Recognition

3. It is defined as increase in economic benefits during the accounting period in the form of inflows or enhancements
of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from
equity participants?
a. Revenue
b. Income
c. Profit
d. Gain

4. The underlying theme of the Conceptual Framework is

a. Decision usefulness
b. Understandability
c. Comparability
d. Timeliness

5. The fundamental qualitative characteristic of faithful representation has the components of

a. Predictive value and confirmatory value
b. Comparability, consistency and confirmatory value
c. Understandability, predictive value and reliability
d. Completeness, neutrality and freedom from error

6. Which of the following statements is false regarding adjusting entries?

a. Cash is neither debited nor credited as a result of adjusting entries.
b. Each adjusting entry affects one statement of financial position account and one income statement account.
c. Each adjusting entry affects one revenue account and one expense account.
d. Adjusting entries involve accruals or deferrals.

7. The closing process

a. Is done each time a transaction takes place and is journalized.
b. Transfers all income statement items to their related statement of financial position account.
c. Posts all closing entries to the appropriate general ledger account.
d. All of the choices are correct regarding the closing process.

8. One element of the objective of financial reporting is to provide

a. Information about the investors in the entity.
b. Information about the liquidation value of the resources held by the entity.
c. Information that is useful in assessing cash flow prospects.
d. Information that will attract new investors.

9. The IASB employs a due process system which

a. Is an efficient system for collecting dues from members.
b. Enables interested parties to express their view on issues under consideration.
c. Identifies the accounting issues that are the most important.
d. Requires that all accountants must receive a copy of financial accounting standards.

10. Financial accounting standard-setting

a. Can be described as a social process which reflects political actions of various interested user groups as well
as product of research and logic.
b. Is based solely on research and empirical findings.
c. Is a logistic process based on rules promulgated by governmental agencies.
d. Is democratic in the sense that a majority of accountants must agree with a standard before it becomes
enforceable.

11. The statement of financial position is useful for all of the following, except
a. Assessing risk
b. Evaluating liquidity
c. Evaluating financial flexibility
d. Determining free cash flows
12. When classifying assets as current and noncurrent
a. The amount at which current assets are carried and reported must reflect realizable value.
b. Prepayments are included in other assets rather than as current assets.
c. The time period by which current assets are distinguished from noncureent assets is determined by the
seasonal nature of the business.
d. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the
normal operating cycle.

13. Which item is not a current liability?

a. Unearned revenue
b. Stock dividend distributable
c. The currently maturing portion of long term debt
d. Trade accounts payable.

14. Which of the following is not an acceptable major asset classification?

a. Current assets
b. Investments
c. Property, plant and equipment
d. Deferred charges

15. The occurrence that most likely would have no effect on net income is
a. Sale in the current year of an office building contributed by a shareholder in a prior year.
b. Collection in the current year of a dividend from an investment.
c. Correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d. Inventory purchased deemed worthless in the current year.

16. The income statement would help in which of the following?

a. Evaluate liquidity
b. Evaluate solvency
c. Estimate future cash flows
d. Estimate future financial flexibility

17. Which of the following would appear first in a statement of retained earnings?
a. Net income
b. Prior period error
c. Cash dividends declared
d. Share dividends issued

18. What is the purpose of reporting comprehensive income?

a. To report changes in equity due to transactions with owners.
b. To report a measure of overall entity performance.
c. To replace net income with a better measure.
d. To combine income from continuing operations with income from discontinued operations.

19. Comprehensive income excludes changes in equity resulting from which of the following?
a. Loss from discontinued operations
b. Prior period error correction
c. Dividends paid to shareholders
d. Unrealized loss on investments classified as available for sale.

20. The full disclosure principle is best described by which of the following?
a. All information related to the business and operating objectives is required to be disclosed in the financial
statements.
b. Information about each account balance appearing in the financial statements is to be included in the notes to
financial statements.
c. Enough information should be disclosed in the financial statements so a person wishing to invest in the entity
can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an informed user.

21. Which of the following is not a related party of an entity?

a. A shareholder owning 30% of the ordinary shares
b. An entity providing banking for facilities to the entity
c. An associate of the entity
d. Key management personnel of the entity

22. Which of the following statements is correct regarding accounting changes that result in financial
statements that are in effect the statements of a different reporting entity?
a. Cumulative-effect adjustments should be reported as separate item in the financial statements pertaining to
the year of change.
b. No restatements or adjustments are required if the changes involve consolidation method of accounting for
subsidiaries.
c. No restatements or adjustments are required if the changes involve the cost or equity methods of accounting
for investments.
d. The financial statements of all prior periods presented are adjusted retrospectively.
23. Changes in accounting policy are reported
a. On a prospective basis
b. On a retrospective basis
c. By restating the financial statements
d. By cumulative adjustment in the income statement

24. Changes in accounting policy

a. Permitted if the change will result in a more reliable and more relevant presentation of the financial statements
b. Permitted if the entity encounters new transactions, events or conditions that are substantively different from
existing or previous transactions.
c. Required for all material transactions.
d. Required if an alternate policy gives rise to a material change in assets, liabilities or the current year net
income.

25. Corrections of error are reported in

a. Other comprehensive income
b. Other income
c. Retained earnings
d. Shareholders equity

26. When a component of a business has been discontinued, the loss on disposal should
a. Include operating loss of the current period.
b. Exclude operating loss during the period
c. Be reported as an extraordinary item.
d. Be reported as an operating item.

27. Which information should be disclosed in the summary of significant accounting policies?
a. Refinancing of debt subsequent to the end of reporting period.
b. Guarantee of indebtedness of others.
c. Criteria for determining which investments are treated as cash equivalents.
d. Adequacy for pension plan assets relative to vested benefits.

28. Which is true statement regarding disclosure for subsequent events?

a. Recognize a loss for all recognized and unrecognized subsequent events in the current year financial
statements.
b. Recognize a gain or loss for any unrecognized subsequent event in the current year financial statements.
c. Recognize a loss for a recognized subsequent event in the financial statements in the year when the
subsequent event occurs.
d. Recognize a loss for a recognized subsequent event in the current year financial statements.

29. The notes to financial statements should not be used to

a. Describe significant accounting policies
b. Describe depreciation method employed
c. Describe the principles and methods peculiar to the industry
d. Correct an improper presentation in the financial statements.

30. Which of the following may not be disclosed in the income statement?
a. Gain or loss
b. Tax expense
c. Gain or loss from extraordinary items
d. Gain or loss from discontinued operations

31. A segment of business is to be reported separately when the revenue of the segment exceeds the percent of the
a. Total combined revenue of all segments reporting profit
b. Total revenue of all the entitys industry segments
c. Total export and foreign sales
d. Combined net income of all segments reporting profit

32. For interim financial reporting, the income tax expense for the second quarter should be computed by using
a. Statutory tax rate for the year.
b. Effective tax rate expected to be applicable for the second quarter.
c. Effective tax rate expected to be applicable for the full year as estimated at the end of the first quarter.
d. Effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.

33. What is a compensating balance?

a. Saving account balance
b. Margin account held with brokers
c. Temporary investment serving as collateral for outstanding loan
d. Minimum deposit required to be maintained in connection with a borrowing arrangement
34. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amount of cash
and
a. Is acceptable as a means to pay current liabilities.
b. Has a current market value that is greater than original cost
c. Bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
d. Is so near maturity that it presents insignificant risk of change in interest rate.

35. Which of the following concepts relates to the allowance method in accounting for accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective information.
b. Bad debts expense is based on the actual amount determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an aging of accounts receivable.
d. Bad debt expense is management determination of which accounts will be sent to the attorney for collection.

36. Which of the following is a generally accepted method in determining the amount of the adjustment to bad debt
expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance.
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance.

37. Valuation of inventories requires the determination of all of the following, except
a. The costs to be included in inventory
b. The physical goods to be included in inventory
c. The cost of goods held on consignment from other entities.
d. The cost flow assumption to be adopted.

38. Which of the following is not an acceptable method in applying the lower of cost and net realizable value method
to inventory?
a. Inventory allocation
b. Major group of inventory
c. Individual item
d. Total of the inventory

39. When inventory declines in value below original cost, what is the maximum amount that the inventory can be
valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated cost of disposal

40. A major advantage of the retail inventory method is that it

a. Provides reliable results.
b. Hides costs from competitors and customers.
c. Gives a more accurate statement of inventory cost than other method
d. Provides a method for inventory control and facilitates determination of the periodic inventory.

41. Where there is a production cycle of more than one year for a biological asset, separate disclosure is
a. Required for physical change
b. Required for physical change and price change
c. Encouraged for physical change
d. Encouraged for physical change and price change

42. Which of the following is not an accurate statement concerning revenue recognition?
a. Revenue from selling products is recognized at the date of sale
b. Revenue from services rendered is recognized when cash is received or when services have been performed.
c. Revenue from permitting others to use entity assets is recognized as time passes or as the assets are used
d. Revenue from disposing of assets other than produces is recognized at the date of sale.

43. When activities involve production through natural growth or aging of biological asset, revenue is earned as the
plant or living animal grows.
a. Completion of production basis
b. Multiple-deliverable arrangements approach
c. Accretion approach
d. Cost-recovery or zero-profit approach
44. The criteria for recognition of revenue at the completion of production of precious metals include which of the
following?
a. Sale price is reasonably assured
b. No significant costs are involved in distributing the product
c. Units are interchangeable
d. All of these

45. Revenue from an artistic performance is recognized once

a. The audience register for the event online.
b. The tickets for the concert are sold.
c. Cash has been received from ticket sales
d. The event takes place

46. An entity has a 20% investment in another entity that it accounts for using the equity method. Which of the
following disclosures should be included in the annual financial statements?
a. The names and ownership percentages of the other shareholders in the investee.
b. The reason for the decision to invest in the investee.
c. The accounting policy for the investment
d. Whether the investee is involved in any litigation.

47. The basic purpose of derivative financial instruments is to manage some kind of risk such as all of the following
except?
a. Stock price movement
b. Interest rate variation
c. Currency fluctuation
d. Uncollectibility of accounts receivable

48. Which of the following is an underlying?

a. A credit rating
b. A security price
c. An average daily temperature
d. All of these could be underlyings

49. An example of a notional amount is

a. Number of barrels of oil
b. Interest rate
c. Currency swap
d. Stock price

50. Entities are required to measure financial asset based on all of the following, except
a. The business model for managing financial asset.
b. Whether the financial asset is a debt or equity investment
c. The contractual cash flow characteristics of the financial asset
d. All of the choices are required for proper measurement of financial asset.

51. Under the equity method of accounting for investments, an investor recognizes the share of the earnings in the
period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays a dividend
d. Earnings are reported by the investee in the financial statements.

52. Which of the following is not a financial asset?

a. Cash
b. An equity instrument of another entity
c. A contractual right to receive cash
d. Prepaid expense

53. Which of the following is not a financial instrument?

a. Convertible bond
b. Foreign currency contract
c. Warranty provision
d. Loan receivable
54. When the revaluation model is used for reporting property, plant and equipment, the gain or loss should be
included in
a. Income for the period
b. Gain from revaluation in the income statement
c. A revaluation surplus account in other comprehensive income
d. An extraordinary gain or loss in the income statement

55. Under the revaluation model for accounting for property, plant and equipment
a. Asset must be revalued quarterly
b. Asset must be revalued annually
c. Asset must be revalued biannually
d. There is no rule regarding the frequency of revaluation

56. When an entity chooses the revaluation model as the accounting policy for measuring property, plant and
equipment, which of the following statements is correct?
a. When an asset is revalued, the entire class of property, plant and equipment to which that asset belongs must
be revalued.
b. When an asset is revalued, individual asset within a class of property, plant and equipment to which that asset
belongs can be revalued.
c. Revaluation of property, plant and equipment must be made at least every three years.
d. Increase in an assets carrying amount as a result of the first revaluation must be recognized as a component
of profit or loss.

57. For a nonmonetary exchange, the configuration of cash flow includes which of the following?
a. The implicit rate, maturity date of loan and amount of loan
b. The risk, timing and amount of cash flows of the asset
c. The entity-specific value of the asset.
d. The estimated present value of the assets exchanged

58. Accounting recognition should be given to the gain realized on a nonmonetary exchange of plant asset, except
when the exchange has
a. No commercial substance and additional cash is paid
b. Commercial substance and additional cash is received
c. Commercial substance and additional cash is paid.
d. All of these cause recognition of a gain

59. Which of the following is not a capital expenditure?

a. Repair that maintains an asset in opening condition
b. An addition
c. A betterment
d. A replacement

60. Fence and parking lot are reported in the statement of financial position as.
a. Current assets
b. Land improvements
c. Land
d. Property, plant and equipment

61. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited
to the land account.
b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest
earned should be recorded as interest revenue
d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate
by the amount of average accumulated expenditures.

62. Which of the following statements is correct?

a. An asset is depreciated even if the fair value exceeds carrying amount
b. Land and building are not accounted for separately when acquired lump sum.
c. A noncurrent asset acquired as a result of an exchange is not recognized
d. A gain on disposal of a noncurrent asset as classified as revenue.

63. Dividends representing a return of capital to shareholders are not uncommon among the entities which
a. Use accelerated depreciation method
 b. Use straight line depreciation method
c. Recognize both functional and physical factors in depreciation
d. None of these

64. Value in use is

a. The market value
b. The discounted value of future cash flows from the use and disposal of the asset.
c. The higher between fair value less cost of disposal and market value
d. The amount t which the asset is recognized

65. What is required with respect to accounting for goodwill?

a. Goodwill should be amortized over a five year period
b. Goodwill should be amortized over the expected useful life
c. Goodwill should be recorded and never adjusted
d. Goodwill should be recorded and periodically evaluated for impairment

66. An entity has determined that the fair value of a cash generating unit exceeds carrying amount. Which of the
following statements is correct concerning this test of impairment?
a. Impairment is not indicated and no additional analysis is necessary.
b. Goodwill should be written down as impaired
c. The assets and liabilities should be valued to determine if there has been an impairment of goodwill
d. Goodwill should be retested at the entity level.

67. An entity should recognize goodwill at which of the following points?

a. Costs have been incurred in the development of goodwill
b. Goodwill has been created in the purchase of a business
c. The entity expects a future benefit from the creation of goodwill
d. The fair value of assets exceeds the carrying amount

68. Which of the following research and development related costs should be capitalized and depreciated over
current and future periods?
a. Research and development general laboratory building which can be put to alternative use in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased to aid a particular research project currently in process.

69. Which of the following would not be considered an R and D activity?

a. Adaption of an existing capability to a particular requirement or customer need
b. Application of research findings or other knowledge to a plant for a new product or process
c. Laboratory research aimed at discovery of new knowledge
d. Conceptual formulation and design of possible product or process alternative.

70. Which of the following is not considered a characteristic of a liability?

a. Present obligation
b. Arises from past event
c. Results in an outflow of resources
d. Liquidation is reasonably expected to require use of current assets

71. Where is debt callable by the creditor reported in the debtors financial statements?
a. Non-current liability
b. Current liability if the creditor intends to call the debt within the year
c. Current liability if it is probable that creditor will call the debt within the year
d. Current liability

72. Which of the following is not considered when evaluating whether or not to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred
b. The type of litigation involved
c. The probability of an unfavorable outcome
d. The ability to make a reasonable estimate of the amount of the loss

73. Under IFRS, all of the following are true representation of the current liabilities, except
a. The non-current liabilities follow the current liabilities
b. Current liabilities may be listed in order of maturity, in descending order of magnitude or in order of liquidity
preference
c. Current liabilities are generally recorded at full maturity value
 d. Current liabilities should not be offset against assets to be used for liquidation

74. Income bonds

a. Are unsecured as to principal
b. Are bonds for which the owners names are not registered with the issuer
c. Pay no interest unless the issuer is profitable
d. Are high-risk and high yield

75. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization would
a. Increase if the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium.
c. Increase if the bonds were issued at a premium.
d. Increase if the bonds were issued at either a discount or a premium.

76. When a note payable is issued for property, goods or services, the present value of the note is measured by
a. The fair value of the property, goods or services.
b. The fair value of the note.
c. Using an imputed interst rate to discount all future payments on the note.
d. Any of these

77. Minimum lease payments may include a

a. Penalty for failure to renew
b. Bargain purchase option
c. Guaranteed residual value
d. Any of these

78. In computing depreciation of a leased asset, the lessee should subtract

a. A guarantee residual value and depreciate over the term of the lease.
b. An unguaranteed residual value and depreciate over the term of the lease.
c. A guaranteed residual value and depreciate over the life of the asset.
d. An unguaranteed residual value and depreciate over the life of the asset.

79. The lease liability account should be reported as

a. All current
b. All non-current
c. Current portion in current liabilities and remainder in non-current liabilities
d. Deferred credit

80. In a defined benefit plan, the process of funding refers to

a. Determining the projected benefit obligation.
b. Determining the accumulated benefit obligation.
c. Making the periodic contributions to a funding agency to ensure that funds are available to meet claims of
retirees.
d. Determining the amount that might be reported for pension expense.

81. Which measure requires the use of future salaries in the computation of pension obligation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Defined benefit obligations
d. Restructured benefit obligation

82. Plan assets include

a. Contributions made by the employer and contributions made by the employee when a contributory plan is
involved.
b. Plan assets still under the control of the entity.
c. Only asstes reported as pension fund.
d. None of these

83. What are compensated balances?

a. Unpaid time off
b. A form of healthcare
c. Payroll deductions
d. Paid time off

84. Entities use intraperiod tax allocation for all of the following, except
 a. Discounted operations
b. Prior period errors
c. Changes in accounting estimate
d. Income from continuing operations

85. Taxable income

a. Differs from accounting income due to differences in interperiod allocation between the two methods of income
determination
b. Differs from accounting income due to differences un interperiod allocation and permanent differences between
the two methods of income determination
c. Is based on IFRS
d. Is reported in the income statement

86. Which feature makes a preference share more like debt than an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Non-cumulative

87. The features frequently associated with preference shares include all the following, except
a. Callable at the option of the shareholder
b. Convertible into ordinary shares
c. Non-voting
d. Preference as to assets in the event of liquidation

88. Which dividends do not reduce equity?

a. Cash Dividends
b. Share dividends
c. Property dividends
d. Liquidating dividends

89. When bonds are issued with detachable warrants, what amount is recorded as share premium?
a. Zero
b. The excess of the proceeds over the face value of the bonds
c. The market value of the warrants
d. The excess of the proceeds over the fair value of the bonds

90. The distribution of share rights to existing ordinary shareholder s would increase share premium at
a. Date of issuance of rights
b. Date of exercise of rights
c. Date of expiration of rights
d. All of these are correct choices

91. Which of the following option valuation techniques should not be used as a measure of their value of share
options in the first instance?
a. Black-Sholes model
b. Binomial model
c. Monte-Carlo model
d. Intrinsic value

92. When there are two dilutive convertible securities, the one that should be used forst to recalculate earnings per
share is the security with the
a. Greater earnings adjustment
b. greater earnings per share adjustment
c. Smaller earnings adjustment
d. Smaller earnings per share adjustment

93. The earnings per share computation is not required for

a. Net income
b. Discounted operation
c. Income from continuing operations
d. Income from operations

94. The statement of cash flows helps users evaluate financial flexibility which is described as
a. The nearness to cash of assets and liabilities.
 b. The ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c. The ability to pay debts on maturity.
d. The ability to invest in a number of projects with different objectives and costs.

95. Which of the following is considered part of cash and cash equivalents?
a. Treasury bill
b. Blank overdraft
c. Commercial paper
d. Money market fund

96. An SME can recognize which of the following either as component of profit or loss or component of other
comprehensive income?
a. Translation gain or loss
b. Actuarial gain or loss
c. Change in fair value of hedging instrument
d. Revaluation surplus

97. Which of the following is true in relation to an SME?

a. Investment in associate shall be accounted for using any of the cost model, fair value model and equity method
and using the same accounting policy for all investments in associate.
b. Investment property is measured at fair value if the fair value can be measured reliably without undue cost or
effort on an on-going basis.
c. All intangible assets have finite useful life and must be amortized.
d. All these statements are true.

98. General income accounts of the government include all of the following, except
a. Filing fees in a court of law
b. Dividend income from investments
c. Grants and donations
d. Fines and penalties

99. What is the paramount objective of financial reporting by the local and national government?
a. Faithful representation
b. Comparability
c. Relevance
d. Accountability

100. Which of the following would result in an increase in unrestricted net assets for the currents year?
a. A private non-profit hospital earned interest on investments that were board-designated.
b. A non-profit organization received unconditional promises to give which will not be received until next year and
the donor placed no restriction on the use of donation.
c. A non-profit organization received cash contribution from a donor who stipulated that the money should not be
spent until next year.
d. A non-profit organization received cash contribution from a donor who stipulated that the money be spent for
equipment, none of which was acquired in the current year.

END