Theory of Accounts Review Mr. Edgar D.

Dalumpines, CPA

Sunday Ms. Sakura L. Imai, CPA

TRUE/FALSE

1. All significant post-balance sheet events are reported is an example of completeness.

2. All payments less than P25 are expensed as incurred is an example of prudence.
3. A switch from accelerated depreciation to straight-line depreciation is a violation of consistency.
4. A machine, that cost P140,000, is reported at its current market value of P165,000 is a violation of
relevance.
5. Publishing yearly financial reports is a sample of the periodicity assumption.
6. Business enterprise assumed to have a long life is a violation of conservatism.
7. Information that helps users confirm or correct prior expectations has feedback value.
8. In establishing financial accounting standards the FRSC should be responsive to the needs and
viewpoints of the entire economic community, not just the accounting profession.
9. The information contained in the financial statements is faithfully represented when the information
is free from bias or error.
10. Comparability state that it is appropriate for an enterprise to leave its accounting policies unchanged
when more relevant and reliable alternative exist.
11. Information has the quality of relevance when it influences the economic decision of users by
serving them evaluate past, present, and future events.
12. Information about economic resources controlled by the enterprise and its capacity to modify these
resources is useful in predicting the ability of the enterprise to generate cash in the future.
13. Financial statements are prepared and presented at least annually and are directed toward the
specific information needs of a wide range of users.
14. Relevance and faithful representation are qualitative characteristics pertain to the content rather
than the presentation of the financial information.
15. If there is undue delay in the reporting of information, it may lose its relevance and faithful
representation.
16. Underlying assumptions embrace the conventions, rules, and procedures necessary to define what
are accepted accounting practice.
17. Going concern serves as the basis for preparing financial statements at regular intervals.
18. An item is material if its inclusion or omission would influence or change the judgment of a
reasonable person.
19. Relevance is the capacity of information to make a difference in a decision by helping users form
predictions about the outcome of past, present, and future events.
20. Accounting information must be both relevant and faithfully represented to be useful to decision
makers.
21. The going-concern assumption justifies the valuation of assets on a liquidation basis.
22. The economic entity assumption states that economic activity can be identified with a particular
unit of accountability.
 23. The periodicity assumption implies that the economic activities of an enterprise can be divided into
segments.
24. Revenue is generally recognized at point of collection.
25. Financial statements prepared on a cost basis provide business enterprise information having a
common, accepted basis from which each reader can make inferences, comparisons, and analyses.
26. An officer of SEIKO Corp. purchased a new home computer for personal use with company money,
charging miscellaneous expense, is a violation of materiality concept.
27. Notes as part of necessary information to a fair presentation applies the principle of full disclosure.
28. Some costs which give rise to future benefits cannot be directly associated with the revenues they
generate. Such costs are allocated in a rational and systematic manner to the periods expected to
benefit from the cost.
29. Expenses are recognized when the goods or services (efforts) make their contribution to revenue.
30. When no association with revenue is evident and no future benefits are expected, expenses are
recognized immediately.

MULTIPLE CHOICE

1. A complete set of financial statements include all of the following except the
A. Statement of Financial Position. C. Income Statement.
B. Statement of Cash Flows. D. Statement of retained earnings.

2. Which of the following statements is not an objective of financial reporting?

A. Provide information that is useful in investment and credit decisions.
B. Provide information about enterprise resources, claims to those resources, and changes to them.
C. Provide information on the liquidation value of an enterprise.
D. Provide information that is useful in assessing cash flow prospects.

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

A. That is useful for decision making.
B. About an enterprise's assets, liabilities, and owners' equity.
C. About an enterprise's financial performance during a period.
D. That allows owners to assess management's performance.

4. The information provided by financial reporting pertains to

A. Individual business enterprises, rather than to industries or an economy as a whole or to members
of society as consumers.
B. Business industries, rather than to individual enterprises or an economy as a whole or to members
of society as consumers.
C. Individual business enterprises, industries, and an economy as a whole, rather than to members
of society as consumers.
D. An economy as a whole and to members of society as consumers, rather than to individual
enterprises or industries.

5. Proper application of accounting principles is most dependent upon the

A. Existence of specific guidelines. C. Oversight of regulatory bodies.
 B. External audit function. D. Professional judgment of the
accountant.

6. Conservatism is best described as selecting an accounting alternative that

A. Understates assets and/or net income.
B. Has the least favorable impact on owners' equity.
C. Overstates, as opposed to understates, liabilities.
D. Is least likely to mislead users of financial information.

7. The financial statements that are prepared for the business are separate and distinct from the owners
according to the
A. Going concern principle. C. Matching principle.
B. Economic entity assumption. D. Full disclosure principle.

8. Recording the purchase price of a chalkboard eraser (with an estimated useful life of 10 years) as
an expense of the current period is justified by the
A. Going concern assumption. C. Materiality constraint.
B. Matching principle. D. Comparability principle.

9. According to the conceptual framework, the process of reporting an item in the financial statements
of an entity is
A. Realization. C. Recognition.
B. Matching. D. Allocation.

10. Which of the following elements of financial statements is not a component of profit or loss?
A. Revenues. C. Expenses.
B. Losses. D. Distributions to owners.

11. An item would be considered material and therefore would be disclosed in the financial statements
if
A. The expected benefits of disclosure exceed the additional costs.
B. The impact on earnings is greater than 3 percent.
C. The IASB definition of materiality is met.
D. The amount is deemed large enough to make a difference to the users.

12. What accounting concept justifies the use of accruals and deferrals?
A. Going concern assumption. C. Separate entity assumption
B. Timeliness assumption D. Relevance

13. Which of the following is not a purpose of the conceptual framework of accounting?
A. To provide definitions of key terms and fundamental concepts.
B. To provide specific guidelines for resolving situations not covered by existing accounting
standards.
 C. To assist accountants and others in selecting among alternative accounting and reporting
methods.
D. To assist the FRSC in the standard-setting process.

14. Which of the following is not an implication of the going-concern assumption?

A. The historical cost principle is credible.
B. Depreciation and amortization policies are justifiable and appropriate.
C. The current/noncurrent classification of assets and liabilities is justifiable and significant.
D. Amortizing research and development costs over multiple periods is justifiable and appropriate.
15. The overriding qualitative characteristic of accounting information is
A. Relevance. C. Understandability.
B. Faithful representation. D. Decision usefulness.

16. When financial reports from two different companies have been prepared and presented in a similar
manner, the information exhibits the characteristic of
A. Relevance. C. Faithful representation
B. Comparability. D. Consistency.

17. Accounting for inventories by applying the lower-of-cost-or-NRV is an example of the application
of
A. Conservatism. C. Comparability.
B. Consistency. D. Materiality.

18. The Conceptual Framework

A. Sets out the concepts that underlie the preparation and presentation of financial statements for
internal users.
B. Is a Philippine Financial Reporting Standard that defines standards for a particular measurement
or disclosure issue.
C. Is concerned with special purpose reports, for example, prospectuses and computations prepared
for taxation purposes.
D. Applies to the financial statements of all commercial, industrial and business reporting
enterprises, whether in the public or private sector.

19. Which statement is incorrect concerning the recognition principles?

A. An asset is recognized when it is probable that future economic benefits will flow to the
enterprise and the asset has a cost or value that can be measured reliably.
B. A liability is recognized when it is possible that an outflow of resources embodying economic
benefits will result from the settlement of a present obligation that can measured reliably.
C. Income is recognized when an increase in future economic benefits related to an increase in asset
or a decrease in liability has arisen that can be measured reliably.
D. Expenses are recognized when a decrease in future economic benefits related to an decrease in
asset or an increase in liability has arisen that can be measured reliably.
20. Information about economic resources controlled by the enterprise and its capacity to modify these
resources is useful in predicting the
A. Ability of the enterprise to meet its financial commitments in the near term.
B. Ability of the enterprise to generate cash and cash equivalents in the future.
C. Ability of the enterprise to meet its financial commitments over a longer term.
D. Future borrowing needs and how future profits and cash flows will be distributed among
interested users.

21. In respect to information included in financial statements, the accounting concept of ‘prudence’
ensures that:
A. The financial statements report what they purport to report.
B. A degree of caution in the exercise of judgements about estimates is made.
C. An appropriate balance is achieved between the relevance and the reliability of information that
has been included.
D. Information is provided to users within the time period in which it is most likely to bear on their
decisions.

22. Which statement is incorrect concerning financial statements?

A. Financial statements do not show the results of management’s stewardship of resources
entrusted to it.
B. Financial statements are prepared at least annually and are directed toward the common
information needs of a wide range of users.
C. The objective of general-purpose financial statements is to provide information about the
financial position, performance and cash flows of an enterprise that is useful to a wide range of
users in making economic decisions.
D. The management of an enterprise has the primary responsibility for the preparation and
presentation of financial statements.

23. An item cannot be recognized in the statement of financial position or the income statement unless
it meets the two criteria of:
A. Materiality; Relevance to the users
B. Completeness; Measurement reliability
C. Neutrality; Representational faithfulness
D. Probable economic benefits; Measurement reliability

24. The operating cycle

A. Measure the time elapsed between cash disbursement for inventory and cash collections of the
sales price
B. Refers to the seasonal variations experienced by business enterprise
C. Should be used to classify assets and liabilities as current if it is less than one year
D. Cannot exceed one year

25. In classifying the elements of financial statements, the primary distinction between revenues and
gains is
 A. The materiality of the amounts involved
B. The likelihood that the transactions involved will recur in the future
C. The nature of the activities that gave rise to the transactions involved
D. The costs versus the benefits of the alternative methods of disclosing the transaction involved

26. Preparation of consolidated financial statements when a parent-subsidiary relationship exist is an

example of the
A. Economic entity assumption C. Comparability characteristic
B. Relevance characteristic D. Neutrality characteristic

27. Which is correct regarding the overall considerations in preparation and presentation of financial
statements?
A. Assets and liabilities, and income and expenses, when material should be offset against each
other.
B. Financial statements should be prepared on liquidity concern basis.
C. Each material item should be presented separately in the financial statements. Immaterial
amounts of similar nature and function should be grouped or condensed as one line item in the
financial statements.
D. The presentation and classification of financial statement items should not be uniform from one
accounting period to the next.

28. Which statement is incorrect concerning the Conceptual Framework?

A. Nothing in the framework overrides any specific Statement of Financial Accounting Standards.
B. The framework deals with the objectives of the financial statements, the qualitative
characteristics that determine the usefulness of the information in financial statements, the
definition, recognition and measurement of the elements of the financial statements and concepts
of capital maintenance.
C. The framework sets out the concepts that underlie the preparation and presentation of financial
statements for internal and external users.
D. The framework is concerned with general purpose financial statements including consolidated
financial statements.

29. Financial information does not demonstrate comparability and consistency when

I. Firms in the same industry use different accounting methods to account for the same type
of transaction
II. A company changes its estimate of the salvage value of a fixed assets
III. A company fails to adjust its financial statements for changes in value of the measuring
unit.

A. I only C. I and II only

B. I and III only D. I, II and III

30. What is the primary difference in the treatment between the two concepts of capital maintenance?
 A. The treatment of the effects of changes in the prices of assets and liabilities of the entity
B. The treatment of the effects of changes in the prices of expense and revenue of the entity
C. The treatment of the effects of changes in foreign exchange rates
D. The treatment of the effect of changes in foreign subsidiary

31. Which is incorrect concerning the concept of materiality and aggregation?

A. Materiality depends on the size and nature of the item judged in the particular circumstances of
its omission or misstatement.
B. Materiality provides that the specific disclosure requirements of a PFRS must be met even if the
resulting information is not material.
C. Items of a dissimilar nature or function shall be presented separately unless they are immaterial.
D. Information is material if its nondisclosure could influence the economic decisions of users
taken on the basis of the financial statements.

32. Which of the following statements concerning equity is incorrect?

A. Although equity is defined as a residual, it may be sub-classified in the statement of financial
position.
B. The creation of reserves is sometimes required by statute or other laws in order to give the entity
and its creditors an added measure of protection from the effects of losses.
C. The existence and size of legal, statutory and tax reserves are information that can be relevant
to the decision-making needs of users, transfer from reserves are expense rather than appropriation
of retained earnings.
D. The amount at which equity is shown in the balance sheet is dependent on the measurement of
assets and liabilities.

33. According to the conceptual framework, which of the following statements conforms to the
realization concept?
A. Cash was collected on accounts receivable.
B. Product unit costs were assigned to cost of goods sold when the units were sold.
C. An impaired asset was sold for cash.
D. Equipment depreciation was assigned to a production department and then to product unit costs.

34. Per PAS 1, in the absence of a Standard or Interpretation that specifically applies to a transaction
or event, management shall develop and apply accounting policy that results in relevant and
faithfully represented information. Which of following is the least likely source of such alternative?
A. The requirements and guidance on Standards /Interpretations on similar and related issues
B. The definition, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Framework.
C. Most recent pronouncements of other standard setting bodies that use a similar conceptual
framework to develop accounting standards and accepted practice.
D. Textbooks and other accounting literature to the extent that these do not conflict with existing
Standards and Interpretations.

35. Which is not included in the category of comprehensive income of an accounting entity?
 A. Net income for the period
B. Revaluation surplus
C. Gain on sale of treasury shares
D. Increase in value of financial instruments classified through fair value

36. Which of the following statements is/are true about equity?

I. Equity is defined as the difference between assets and liabilities

II. Increases and decreases in equity (other than from transactions with owners of the enterprise)
represent income and expenses.

A. I only C. Both I and II

B. II only D. Neither I nor II

37. 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 C. Faithful Representation
B. Understandability D. Materiality

38. Under a lease where the lessee acquires the benefits of ownership of an asset, the lessee often
recognizes the present value of future rentals as an asset even though legal title to the property is
not acquired. This is an example of
A. Form over substance C. Verifiability
B. Substance over form D. Conservatism

39. Information about the sources and uses of an enterprise’s cash and cash equivalents is provided in
the:
A. Income statement C. Statement of changes in equity
B. Cash flow statement D. Statement of financial position

40. The measurement basis “net realizable value” is best described as:
A. Unamortized historical cost
B. An asset’s selling price or a liability’s settlement amount
C. Unadjusted initial cost
D. Time adjusted cash flow

PROBLEMS

1. Pampanga Company’s December 31, 2014 statement of financial position reported the following
current assets:

Cash 3,000,000
 Accounts receivable 5,200,000
Inventory 2,000,000
Prepaid expenses 700,000
Equipment used and held for resale 100,000
11,000,000

An analysis of the accounts receivable disclosed that accounts receivable comprised the following:

Trade accounts receivable 4,000,000

Allowance for doubtful accounts ( 300,000)
Selling price of Pampanga Company’s unsold goods sent to
XYZ Company on consignment at 125% of cost and excluded
from Pampanga’s ending inventory 1,500,000
5,200,000

At December 31, 2014, the total current assets should be

A. P10,600,000 C. P10,700,000
B. P 9,800,000 D. P 9,900,000

2. The trial balance of Arayat Company reflected the following liability account balances on
December 31, 2014:

Accounts payable 4,000,000

Bonds payable, due 2015 8,000,000
Discount on bonds payable 1,000,000
Deferred tax liability 1,500,000
Dividends payable 3,000,000
Income tax payable 500,000
Note payable, due 1/15/2016 2,500,000

In its December 31, 2014 statement of financial position, Arayat should report current liabilities
at
A. P16,000,000 C. P17,000,000
B. P14,500,000 D. P16,500,000

3. Candaba Company was incorporated on January 1, 2014, with proceeds from the issuance of
P15,000,000 in common stock and borrowed funds of P5,000,000. During the first year of
operations, revenue from sales and consulting amounted to P20,000,000, and operating costs and
expenses totalled P12,000,000. On December 15, Candaba declared a P2,000,000 cash dividend
payable to stockholders on January 15, 2015. No additional activities affected owners’ equity in
2014. Candaba’s liabilities increased to P7,000,000 by December 31, 2014. On December 31, 2014
statement of financial position, total assets should be reported at:
A. P30,000,000 C. P22,000,000
B. P21,000,000 D. P28,000,000
4. The following items were among those that were reported on Bulacan Company’s income statement
for the year ended December 31, 2014:

Legal and audit fees 2,000,000

Rent for office space 6,000,000
Interest on acceptances payable 1,000,000
Loss on abandoned data processing equipment 500,000
Insurance 200,000

The office space is used equally by the sales and accounting departments. What amount should be
classified as general and administrative expenses?
A. P8,200,000 C. P6,200,000
B. P5,200,000 D. P5,000,000

5. The following information pertains to Malolos Company’s 2014 cost of goods sold:

Inventory, January 1 10,000,000

Purchases 40,000,000
Writeoff of obsolete inventory 5,000,000
Inventory, December 31 3,000,000

What amount should Malolos report as cost of goods sold?

A. P42,000,000 C. P47,000,000
B. P45,000,000 D. P50,000,000

6. The following information was taken from Hagonoy Company’s accounting records for the year
ended December 31, 2014:

Decrease in raw materials inventory 1,000,000

Increase in goods in process inventory 3,000,000
Increase in finished goods inventor 2,000,000
Raw materials purchased 40,000,000
Direct labor payroll 10,000,000
Factory overhead 6,000,000
Freight out 4,000,000
Freight in 5,000,000

The cost of goods sold is

A. P59,000,000 C. P61,000,000
B. P57,000,000 D. P63,000,000

7. Clark Co.’s advertising expense account had a balance of P146,000 at December 31, 2014, before
any necessary year-end adjustment relating to the following:
  Included in the P146,000 is the P15,000 cost of printing catalogs for a sales promotional
campaign in January 2015.
 Ratio advertisements broadcast during December 2014 were billed to Clark on January 2, 2015.
Clark paid the P9,000 invoice on January 11, 2015.

What amount should Clark report as advertising expense in its income statement for the year ended
December 31, 2014?
A. P122,000 C. P140,000
B. P131,000 D. P155,000
8. An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 2014, revealed
the following:

 An opening balance of P1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an
annual premium of P3,000 on July 1, 2013.
 A P3,200 annual insurance premium payment made July 1, 2014.
 A P2,000 advance rental payment for a warehouse thrift leased for one year beginning January
1, 2015.

In its December 31, 2014 statement of financial position, what amount should Thrift report as
prepaid expenses?
A. P5,200 C. P2,000
B. P3,600 D. P1,600

9. On October 1, 2014, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at P3 per
gallon. Fifty thousand gallons were delivered on December 15, 2014, and the remaining 50,000
gallons were delivered on January 15, 2015. Payment terms were: 50% due on October 1, 2014,
25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue
should Acme recognize from this sale during 2014?

A. P 75,000 C. P225,000
B. P150,000 D. P300,000

10. The beginning of the year total equity for a firm was P40,000. During the year, the firm issued
ordinary shares for a total proceeds of P20,000, earned P20,000 net income, and paid P5,000 in
cash dividends. If ending total liabilities are P100,000, what is the ending total assets?
A. P165,000 C. P45,000
B. P175,000 D. P25,000