INCOME STATEMENT - THEORIES

1. The definition of income encompasses

a. Revenue only
b. Gains only
c. Revenue and Gains
d. None of the above
Answer: C

2. Which statement in relation to expense is true?

a. Expenses encompasses both expenses and losses
b. Expenses encompasses losses only
c. Expenses encompasses expenses only
d. None of the above
Answer: A

3. The income statement and statement of comprehensive income shall include the
following items, except:
a. Finance Cost
b. Provision
c. Income Tax Expense
d. A single amount comprising discontinued operations
Answer: B

4. Which of the following is an example of other expenses?

a. Traveling and Marketing expenses
b. Office Salaries
c. Casualty loss - flood, earthquake and fire
d. Expenses of general executives
Answer: C

5. This form of presentation of income statement classifies expenses according to their

function as part of cost of goods sold, distribution costs, administrative expenses and
other expenses.
a. Digital Presentation
b. Functional Presentation
c. Natural Presentation
d. Traditional Presentation
Answer: B

6. Which is true about the statement of comprehensive income?

I. The statement of comprehensive income starts with the profit or loss as shown in the
income statement plus or minus the components of other comprehensive.
II. It is use to evaluate such factors such as liquidity, solvency and the need of the entity
for additional financing.
a. I and II are true.
b. Neither of them are true.
c. Only I is true.
d. Only II is true.
Answer: C

7. Other Comprehensive Income that will be reclassified to profit or loss includes:

I. Unrealized gain or loss on debt investment measured at fair value through other
comprehensive income.
II. Gain or loss from translating financial statement of a foreign operation.
III. Unrealized gain or loss on derivative contracts designated.
a. I, II, III
b. I and II
c. I and III
d. II and III
Answer: A

8. Which of the following components of OCI should be reclassified to retained

earnings?
a. Re-measurement of defined benefit plan
b. Revaluation Surplus
c. Gain or loss attributable to credit risk of a financial liability designated at Fair Value of
Profit or Loss
d. All of these components of OCI should be reclassified to retained earnings.
Answer: D

9. This term comprises items of income and expense including reclassification

adjustments, that are not recognized in profit or loss as required or permitted by PFRS.
a. Retained Earnings
b. Comprehensive Income
c. Other Comprehensive Income
d. Profit or Loss
Answer: C

10. Under IFRS, the extraordinary item presentation

a. Has been eliminated from the net of tax presentation
b. Has been eliminated from EPS reporting
c. Has not changed from current rules
d. Has been eliminated
Answer: D

11. It is the total of income less expenses, excluding other comprehensive income.
a. Share Capital
b. Comprehensive Income
c. Accounting Income
d. Profit or loss
Answer: D
12. Items of other comprehensive income should be analyzed
a. By nature
b. By function
c. Either by nature or by function
d. Neither by nature nor by function
Answer: C

13. Which is true about natural presentation?

I. It is also known as the cost of goods sold method.
II. Under this form, expenses are aggregated according to their nature and not allocated
among the various functions within the entity.
a. Only I is true
b. Only II is true
c. Both of them are true
d. Neither of them are true
Answer: B

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

a. Evaluate solvency
b. Evaluate liquidity
c. Estimate future financial flexibility
d. Estimate amount, timing and uncertainty of future cash flows
Answer: D

15. Which of the following is not an acceptable option of reporting other comprehensive
income?
a. In the notes
b. In a statement of changes in equity
c. In a separate statement of comprehensive income
d. In a single statement of comprehensive income
Answer: A

16. Corrections of errors in prior period are included in:

a. Net Income
b. Share Premium
c. Other comprehensive income
d. Retained Earnings
Answer: D

17. An entity shall measure a noncurrent asset or disposal group classifies as held for
sale at:
a. Carrying amount
b. Lower of carrying amount and fair value less cost of disposal
c. Higher of carrying amount and fair value less cost of disposal
d. Fair value less cost of disposal
Answer: B
18. Total comprehensive income for the period is presented:
a. Showing separately an analysis of expenses by nature
b. Showing separately an analysis of expenses by function
c. Showing separately profit or loss and the total of other comprehensive income
d. Showing separately the total amount attributable to owners of the parent and the non-
controlling interest.
Answer: D

19. Separate line items in an analysis of expenses by function include:

a. Depreciation, purchases, transport costs, employee benefits and advertising costs
b. Cost of goods sold, administrative and distribution costs
c. Purchases, transport costs, employee benefits, depreciation, extraordinary items
d. Purchases, distribution costs, administrative costs, employee benefits, depreciation
taxes
Answer: B

20. When an entity discontinued an operation and disposed of the discontinued

operation, the transaction should be reported in the income statement as:
a. An amount after income from continuing operations and before net income
b. A prior period error
c. Other income and expense item
d. A bulk sale of plant assets included in income from continuing operations
Answer: A

21. When a component of a business has been discontinued during the year, the loss
on disposal should:
a. Include operating loss of the current period
b. Exclude operating loss during the period
c. Be classified an extraordinary item
d. Be classified an operating item
Answer: A

22. Which is incorrect concerning the presentation of the discontinued operation in the
statement of financial position?
a. Depreciable assets of the component held for sale shall not be depreciated
b. Liabilities of the component held for sale are presented separately from all other
liabilities of the entity
c. Assets of the component held for sale are measured at the higher between fair value
less cost of disposal and carrying amount
d. Assets of the component held for sale are presented separately from all other assets
of the entity
Answer: C

23. What is the purpose of reporting comprehensive income?

a. To report 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
Answer: B

24. All of the following are a component of other comprehensive income, except
a. Foreign currency translation adjustment
b. Unrealized gain and loss on financial asset held for trading
c. Deferred loss on derivative financial instrument designated as cash flow hedge
d. Change in revaluation surplus
Answer: B

25. It is the monetary amount of the net assets contributed by shareholders and the
amount of the increase in net assets resulting from retained by the entity
a. Investment
b. Financial Capital
c. Net Income
d. Financial Cost
Answer: B

26. The financial capital concept requires that net assets shall be measured at
a. Current cost
b. Historical Cost
c. Historical cost adjusted for changes in purchasing power
d. Current cost adjusted for changes in purchasing power
Answer: B

27. Which of the financial approaches to income measurement underlies financial

reporting?
a. Transaction Approach
b. Economic Approach
c. Valuation Approach
d. Capital maintenance approach
Answer: A

28. The physical capital maintenance concept requires the adoption of which
measurement basis?
a. Current cost
b. Present Value
c. Current cost
d. Realizable value
Answer: C
29. Under the financial capital maintenance concept, a profit is earned only
I. If the monetary amount of the net assets at the end of the period exceeds the
monetary amount of the net assets at the beginning of the period, after excluding any
distributions to and contributions from owners.
II. If the physical productive capacity at the end of the period exceeds the physical
productive capacity at the beginning of the period, after excluding any distributions and
contributions from owners.

a. I only
b. II only
c. Both I and II
d. neither I and II
Answer: A

30. This approach is the direct result of the application of the principle of matching costs
with revenue that is why, this procedure is also called the matching approach:
a. Economic approach
b. Valuation approach
c. Capital maintenance approach
d. Transaction approach
Answer: D

31. The shareholders invest in entity to earn:

a. Net income
b. Return on capital
c. Return of capital
d. Financial capital
Answer: B

32. Conceptually, physical capital means:

a. The amount of the excess of total assets over total liabilities
b. The conventional or traditional preparation of income statement
c. The quantitative measure of the physical productive capacity to produce goods and
services
d. Appear as a part of discontinued operation
Answer: C

33. All of the following are sources of income except:

a. Sales of merchandise to customers
b. Disposal of resources other than products
c. Distribution costs
d. Rendering of services
Answer: C

34. Which of the following are under distribution cost?

a. Sales commissions
b. Direct labor
c. Cost of goods sold
d. Goods available for sale
Answer: A

35. Unusual and frequent items of income and expenses are considered component of
income from:
a. Continuing operations
b. Other expenses
c. Discontinued operation
d. Other income
Answer: A

36. Which of the following are not treated as "natural" expenses?

a. Purchases
b. Advertising cost
c. Depreciation
d. Dividend
Answer: D

37. If the net income of the prior period is understated, the following amount of error is
added to:
a. Retained earnings
b. Net income
c. Expenses
d. Dividends
Answer: A

38. The expenses are classified according to their function, as part of cost of sales,
distribution costs, administrative activities and other operating activities.
a. Nature of expense method
b. Account form
c. Cost of sales method
d. Report form
Answer: C

39. This is defined as "holders of instruments classified as equity".

a. Shareholders
b. Investors
c. Owners
d. Equity holders
Answer: C
40. The income statement reveals:
a. Resources and equity at a point in time
b. Resources and equity at a period of time
c. Net earnings at a point in time
d. Net earnings for a period of time
Answer: D

41. This income includes interest, rent, royalty, and dividend income.
a. Use of entity resources
b. Rendering of services
c. Disposal of resources other than products
d. Sales of merchandise to customers
Answer: A

42. This expenses constitute cost of administering the business and include all
operating expenses not related to selling and cost of goods sold.
a. Cost of goods sold
b. Administrative expense
c. Other expense
d. Selling expense
Answer: B

43. These are expenses that are not directly related to primary or principal operations
but nevertheless are part of the operating activities of the entity.
a. Other expenses
b. Selling expenses
c. Retained earnings
d. Distribution costs
Answer: A

44. All of the following are items of income and expense requiring disclosure except:
a. Disposal of investment
b. Discontinued operation
c. Litigation settlement
d. Finance cost
Answer: D

45. They are the amounts reclassified to profit or loss in the current period that were
recognized in other comprehensive income in the current or previous periods
a. Correction of errors
b. Effect of changes in accounting policies
c. cash flow hedge
d. Reclassification adjustments
Answer: D
46. The financial performance is also known as
a. Results of the entity's profit-directed activities
b. Return of capital
c. Results of operation
d. Nominal invested capital
Answer: C

47. These are the amounts reclassified to profit or losses in rhe current period that were
recognized in other comprehensive income in the current or previous period.
a. Prior period errors
b. Reclassification of adjustments
c. Unusual and irregular items
d. Correcting entries
Answer: B

48. When a full set of general-purpose financial statements is presented,

comprehensive income and its components should
a. Be displayed in a statement that has the same prominence as other financial
statements
b. Appear as a part of discontinued operations
c. Be reported net of related income tax effect, in total and individually
d. Appear in a supplemental schedule in the notes to the financial statements
Answer: A