REVIEW QUESTIONS ON

NEW CONCEPTUAL FRAMEWORK

1. Accounting concepts are not derived from:

a. Inductive reasoning
b. Experience
c. Pragmatism
d. Laws of nature
2. The primary qualitative characteristics of accounting information include which of the following:
a. Comparability (including consistency)
b. Understandability
c. Faithful Representation
d. Materiality
3. If accounting information is timely and has predictive and feedback value, then it can be characterized
as:
a. Verifiable b. Relevant c. Reliable d. Faithful Representation
4. Comparability is sometimes sacrificed for:
a. Reliability b. Conservatism c. Objectivity d. Relevance
5. Which of the following accounting concepts states that before a transaction is recorded, sufficient
evidence must exist to allow two or more knowledgeable individuals to reach essentially the same
conclusion about the transaction?
a. Continuity assumption c. Cost principle
b. Separate entity assumption d. Reliability Quality
6. Which of the following characteristics does the cost principle primarily support?
a. Predictive value c. Verifiability
b. Conservatism d. Timeliness
7. If, in Year 1, a company used LIFO; Year 2, FIFO; and in Year 3, MOVING AVERAGE cost for inventory
valuation, which of the following assumptions, constraints, or principles would be violated?
a. Consistency b. Time period c. Matching d. Comparability
8. A firm signs a major contract in December to construct custom machinery for a client. No work is
begun the current year yet the footnotes to the firm’s financial statements discuss the nature and peso
amount of the contract. This is an example of:
a. Reliability b. Full Disclosure c. Historical cost d. Conservatism
9. Which of the following would most likely be found in an adjusting entry?
a. Prepaid expenses c. Cash dividend paid
b. Accounts receivable d. Cash dividend declared
10. At the date of purchase of a service which is not immediately used up, the cost of such unused service
is a(n):
a. Revenue b. Liability c. Asset d. Expense
11. Increases in equity (net assets) from peripheral or incidental transactions of an entity are called:
a. Revenues b. Dividends c. Comprehensive income d. Gains
12. Which one of the following is the secondary qualitative characteristic of accounting information?
a. Continuity b. Relevance c. Comparability d. Faithful Representation
13. Relevance is not a function of:
a. Feedback value b. Verifiability c. Timeliness d. Predictive value
14. The going concern or continuity assumption is critical to financial accounting. The assumption
a. Is always maintained for all firms for all years
b. Supports the use of historical cost valuation for assets rather than market values
c. Means that a corporation has a definite ending date.
d. Requires that we immediately expense prepaid accounts because they do not represent a
future cash inflow
15. The objective of general-purpose financial statements is:
a. To provide the market value of a firm at a point in time
b. To provide the total market value of its common stock
c. To provide information useful for decision making by investors and creditors
d. To require all companies to comply with PFRS
16. A company reports only its total account receivable balance in its balance sheet, as opposed to a
complete listing of its individual customer balances. This is an example of:
a. Consistency b. Materiality c. Cost/benefit d. Conservatism
17. A firm’s accounting policy is to immediately expense the cost of metal wastebaskets it purchases for
use by its employees at their desk. The total cost of wastebaskets in any year is P1,000 and the firm has
P6 billion in total assets. The firm expects the wastebaskets to last indefinitely. The firm
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 a. Is violating PFRS
b. Is invoking the relevance principle constraint
c. Is invoking the materiality constraint
d. Is violating the materiality constraint
18. The sales manager of a firm has the use of a blue company-owned automobile to use to visit potential
customers. The sales manager owns her own identical car except that it is red. The manager paid for
the red car with funds earned from her employment as sales manager. The firm will report the cost of
the blue automobile in its balance sheet, but not the red auto. This is an example of
a. Reliability b. Matching c. Separate entity d. Going concern
19. The recognition of periodic depreciation expense on company-owned automobiles requires estimating
both salvage or residual value, and the useful life of the vehicles. The use of estimates in this case is an
example of
a. Conservatism
b. Maintaining consistency
c. Invoking the materiality constraint rather than the cost benefit constraint
d. Providing relevant data at the expense of faithful representation
20. A firm does not know exactly how long its equipment will last. The firm decides to use shorter rather
than long useful lives for depreciating the equipment. This is an example of
a. Reliability b. Prudence c. Materiality d. Stable monetary unit
21. When assets are acquired, they should be recorded in the accounts in conformity with the:
a. Full-disclosure principle c. Cost principle
b. Materiality constraint d. Separate entity assumption
22. A firm purchased P40,000 of supplies in its first year of operations but used up only P30,000 of the
supplies during the year. Therefore,
a. Under the relevance characteristic, the firm should expense P40,000
b. Because the firm is a going concern, the firm should record P40,000 of supplies in the balance
sheet at the end of the year
c. Under the materiality constraint, it makes no difference what the firm does with respect to
accounting for supplies
d. Under the matching concept, the firm should report P30,000 of expense
23. Financial accounting is concerned with
a. General-purpose reports on financial position and financial performance
b. Specialized reports for inventory management and control
c. Specialized reports for income tax computation and recognition
d. General-purpose reports on changes in stock prices and future estimates of market position.
24. Financial accounting is the area of accounting that emphasizes reporting to
a. Management c. Internal auditors
b. Regulatory bodies d. Creditors and investors
25. Managerial accounting is the area of accounting that emphasizes
a. Reporting financial information to external users
b. Reporting to the Securities & Exchange Commission
c. Combining accounting knowledge with an expertise in data processing
d. Developing accounting information for use within an entity
26. What is the law regulating the practice of accountancy in the Philippines?
a. R. A. NO. 9298 b. R. A. No. 9198 c. R. A. No. 9928 d. R. A. No. 9892
27. It is the accounting standard setting body created by PRC upon the recommendation of the Board of
Accountancy to assist the Board of Accountancy in carrying out its powers and functions under
Philippine Accountancy Law.
a. Accounting Standards Council c. Philippine Accounting Standards Board
b. Auditing and Assurance Standards Council d. Financial Reporting Standards Council
28. Which of the following statements best describes GAAP?
a. They have been formulated in the public sector
b. They have been developed on the basis of such factors as usage and practical necessity
c. They are the same as laws within our legal system
d. They do not apply to small entities
29. The new conceptual framework specifically mentions two underlying assumptions, namely
a. Accrual and going concern c. Going concern and time period
b. Accrual and accounting entity d. Time period and monetary unit
30. The accrual basis of accounting is based primarily on
a. Conservatism and revenue realization c. Consistency and matching
b. Conservatism and matching d. Revenue realization and matching
31. Which underlying concept serves as the basis for preparing financial statements at regular intervals?
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 a. Accounting entity c. Accounting period
b. Going concern d. Stable monetary unit
32. Which of the following is an internal user of an entity’s financial information?
a. Board of Directors c. Holder of the entity’s bonds
b. Shareholder in the entity d. Creditor with long-term contracts with the entity
33. These users need information on trends and recent developments were an entity makes a substantial
contribution to the local economy providing employment and using local suppliers.
a. The public c. Finance entities
b. Governments and their agencies d. Private entities
34. Which statement is correct regarding information needs?
I. All information needs of users cannot be met by financial statements
II. As investors are providers of risk capital to the entity, the provision of financial statements that
meet their needs will also meet most of the needs of other users that financial statements can
satisfy.
a. I only b. II only c. Both I and II d. Neither I nor II
35. Which of the following statements best describes the term “financial position”?
a. The net income and expenses of an entity
b. The net of financial assets less liabilities of an entity
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The assets, liabilities and equity of an entity
36. The overall objective of financial reporting is to provide information
a. That is useful for decision making
b. About an entity’s assets, liabilities, and equity
c. About an entity’s financial performance during the period
d. That allows owners to assess management performance
37. Information has the quality of relevance
I. When it influences the economic decision of users by helping them evaluate the past, present,
and future events or confirming or correcting their past evaluations
II. When it is free from material error and bias and can be depended upon by users to represent
faithfully that which it purports to represent or could reasonably be expected to represent
a. I only b. II only c. Both I and II d. Neither I nor II
38. It is the exercise of care and caution in dealing with uncertainties in measurement so as not to
overstate assets and income and not to understate liabilities and expenses
a. Completeness b. Prudence c. Faithful representation d. Neutrality
39. The elements directly related to the measurement of financial performance are
a. Income and expenses c. Assets and liabilities
b. Assets, liabilities and equity d. Income, expenses and equity
40. Which of the following is an application of the systematic and rational allocation principle?
a. Doubtful accounts c. Warranty costs
b. Research and development costs d. Amortization of intangibles
41. Under the stable monetary unit assumption
a. All assets and liabilities are translated to pesos of constant purchases power
b. Inflation adjustment are incorporated directly into the financial statements
c. The peso is assumed to have constant purchasing power, regardless of the time period
d. Interest rates are increased for expected inflation
42. The matching concept:
a. Requires that a debit is matched or posted for every credit
b. Is the name applied to the process of associating expenses with revenues
c. Treats all costs as being directly related to revenue generation
d. Treats al cost as expenses
43. Revenue is recognized when:
a. It is collected in cash
b. Service is rendered
c. Service is rendered and collection is probable
d. The contract is signed
44. J. Gonzales is the sole owner and manager of the Gonzales Lawn and Grass Services. Gonzales purchased a new
station wagon for personal use. Gonzales uses a dump truck in the business. Which of the following
assumptions, principles, or constraints would be violated if Gonzales recorded the cost of the station wagon as
an asset of the business?
a. Materiality constraint c. Conservatism constraint
b. Full-disclosure principle d. Separate entity assumption
45. Recording periodic depreciation on assets such as buildings or machinery is an application of the:
a. Cost principle c. Unit-of-measure assumption
b. Materiality constraint d. Matching principle
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46. The inclusion of footnotes and supporting schedules in the financial statements reflect application of the:
a. Time period assumption c. Full-disclosure principle
b. Industry peculiarities constraint d. Relevance quality
47. Certain costs of doing business are capitalized when incurred and then depreciated or amortized over
subsequent accounting periods to:
a. Aid management in decision-making
b. Match the costs incurred with revenues earned
c. Conform to the conservatism constraint
d. Conform to the comparability characteristic
48. Adjusting entries are needed because an entity:
a. Uses the accrual basis of accounting
b. Has earned revenue during the period by selling products from its central operations
c. Has expenses
d. Uses the cash basis of accounting rather than the accrual basis
49. Under which of the following will revenues and expenses most likely be reported in the period they are earned
or incurred?
a. Cash basis accounting
b. Accrual basis accounting
c. A combination of accrual and cash basis accounting
d. Single entry accounting
50. Which of the following is the incorrect basis for recognizing the expense indicated?
a. Sales commissions expense on the basis of relationship with sales
b. Administrative salaries expense recognized as incurred
c. Depreciation expense on the basis of time
d. Cost of goods sold expense on a subjective or arbitrary basis
51. A corporation needed a new warehouse; a contractor quoted a P250,000 price to construct it. The corporation
believed that it could build the warehouse for P215,000 and decided to use company employees to construct
the warehouse. The final construction cost incurred by the corporation was P240,000 but the asset was
recorded at P250,000. This is in violation of the:
a. Time period assumption c. Cost principle
b. Matching principle d. Revenue principle
52. Which of the following distinguishes the personal transactions of business owners from business transactions?
a. Unit-of-measure assumption c. Materiality constraint
b. Full-disclosure principle d. Separate entity assumption
53. When an P300 asset with a six-year estimated useful life is recorded as an expense at the date of purchase, this
is an application of the:
a. Matching principle c. Materiality constraint
b. Cost principle d. Separate entity assumption
54. A large international corporation immediately expenses the P500 cost of a small item of office equipment. This is
an example of:
a. Reliability c. Materiality
b. Conservatism d. An accounting error
55. Estimating bad debt expenses for the period is based primarily on the:
a. Cost principle c. Revenue principle
b. Conservatism constraint d. Matching principle
56. A corporation made the following entries:
1. Prepaid insurance x
Cash x
2. Wages payable x
Cash x

3. Depreciation expense x
Accumulated depreciation x
4. Inventory x
Accounts payable x
Which entry must have been made as a direct result of the matching principle?
a. 1 b. 2 c. 3 d. 4
57. The assumption that pesos will buy the same quantity of goods and services today as they would have five years
ago is the:
a. Revenue principle c. Separate entity assumption
b. Time period assumption d. Unit-of-measure assumption
58. Revenues and expenses often are recognized in income statement accounts even though no cash has been
received or paid. This is primarily a result of applying the:
a. Full-disclosure principle c. Continuity assumption
b. Accrual basis of accounting d. Revenue principle
59. The environmental assumptions of accounting include all of the following, except:
a. Unit-of-measure c. Time period
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 b. Separate entity d. Conservatism
60. The implementation constraints include all of the following, except:
a. Materiality c. Cost/benefit
b. Conservatism d. Industry peculiarities
61. The underlying concept that the value of accounting information must exceed the expenditures incurred to
provide it is called:
a. Primary characteristics of accounting information
b. Cost/benefit implementation constraint
c. Secondary qualitative characteristic of accounting information
d. Full-disclosure principle
62. The materiality constraint:
a. Is only relevant when preparing annual financial statements as opposed to quarterly statements
b. Is applicable only for low-cost items that cost less than, say, P500.
c. Is the only defense for gross negligence by a CPA
d. Does not necessarily imply that an immaterial amount can be ignored for accounting purposes
63. The list price of a new van was P300,000 at a local car dealership. However, a customer convinced the dealer to
sell the van for P250,000 (the van had cost the dealer P200,000). The amount of revenue that would be
recognized as a result of the sale is:
a. P300,000 b. P250,000 c. P100,000 d. P50,000
64. A bonding company will loan up to P500,000 per bail bond. The company charges 5% interest based on the face
value of the bond. However, due to the fact that they admired one of their clients, they loaned him P200,000
and charged only 3% interest. The amount of revenue that should be recognized in conformity with the revenue
principle is:
a. P25,000 b. P15,000 c. P10,000 d. P6,000
65. The continuity assumption is the basis for the rule that:
a. The income statement should not include material gains and losses that are both unusual and
infrequent
b. Treasury stock should not be reported in the balance sheet as an asset.
c. The cost of installing a machine should not be included in the recorded cost of the machine, but rather
expensed immediately
d. The cost of operational assets should be allocated to expense systematically over their useful lives.
66. Accounting traditionally has been influenced by conservatism because of the:
a. Probability of undetected errors in the financial statements
b. Difficulty in measuring net income on the accrual basis
c. Inherent uncertainties of many accounting measurements
d. Difficulty in making certain calculations
67. Preparation of consolidated financial statements is primarily based on the:
a. Time period assumption c. Cost/benefit constraint
b. Full-disclosure principle d. Separate entity assumption
68. Which of the following accounting concepts best justifies the use of accruals and deferrals?
a. Cost/benefit constraint c. Continuity assumption
b. Unit-of-measure assumption d. Materiality constraint
69. Gee Corporation exchanged 20,000 shares of its non-convertible preference shares for land owned by Bee
Corporation. A competing buyer previously had offered P150,000 cash for the land. Because of tax
consequences, the cash offer was not accepted and the lot was exchanged for the shares. Gee Corporation
previously had sold only 100 preference share at P9 per share several months ago. Based on PAS on PPE, what
amount should the land be reported on Gee’s financial statements?
a. P180,000 b. P165,000 c. P150,000 d. P160,000
70. A company incurred P60,000 in wages in the current year to produce 30 wooden desks. By the end of the year,
20 of the desks were sold. Of the P60,000 wages, P6,000 remained unpaid at the end of the year. Based on the
matching principle, total expenses recognized for the year will include what amount of wages?
a. P60,000 b. P54,000 c. P40,000 d. P34,000
71. A company exchanged an old truck that had been 2/3 depreciated for a new machine. The new machine had a
firm cash price of P17,000. The company had paid P60,000 for the old truck when it was new and although the
company had used a zero residual value for depreciation purposes, it was believed that the old truck could be
sold for P16,000. Based on PAS on PPE, at what amount should the company record the new machine?
a. P16,000 b. P17,000 c. P40,000 d. P60,000
72. The information provided by financial reporting pertains to:
a. Individual business enterprises and the economy as a whole, rather than to industries or to members of
society as consumers
b. Individual business enterprises, industries and the economy as a whole, rather than to members of
society as consumers
c. Individual business enterprises, rather than to industries of the economy as a whole or to members of
society as consumers
d. Individual business enterprises and industries rather than to the economy as a whole or to members of
society as consumers.

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73. Which of the following most clearly states the most important quality which expenditure must have to be
recognized as an asset on the balance sheet?
a. It must be both material and relevant
b. It must have reasonably certain future benefit to the business
c. It must be a physical object
d. It must be used in operation of the business
74. The process of formally including an item in the financial statements is termed:
a. Matching b. Relevance c. Recognition d. Realization
75. Which of the following most clearly demonstrates application of the conservatism constraint?
a. Depreciating the cost of wastebasket which has an estimated 10-year life
b. Stating an estimated liability at the lower end of the possible range
c. Capitalizing and amortizing the cost of a major advertising campaign, instead of expensing it at once.
d. Delaying recording of probable damages in a lawsuit until the amount is fixed.
76. When a corporation buys a share of its own stock, the recording must conform to the:
a. Matching principle c. Accrual principle
b. Revenue principle d. Cost principle
77. A corporation reports the sale of some of its shares to a shareholder in its financial statements, and the
shareholder reports the same transaction as an investment. Therefore,
a. The revenue principle has been violated
b. The separate entity assumption has been violated
c. The double-entry accounting concept has been violated
d. No accounting concept has been violated
78. Accruing net losses on non-cancelable purchase commitments for inventory is an example of the accounting
concept of:
a. Prudence b. Realization c. Consistency d. Materiality
79. A patent purchased in 2011 and being amortized over a ten-year life, was determined to be worthless in 2014.
The write-off of the asset in 2014 is an example of which of the following principle?
a. Associating cause and effect c. Systematic and rational allocation
b. Immediate recognition d. Objectivity
80. A accrued expense is an expense
a. Incurred but not paid c. Paid but not incurred
b. Incurred and paid d. Not reasonably estimable
81. Which of the following accounting concepts states that an accounting transaction should be supported by
sufficient evidence to allow two or more qualified individuals to arrive at essentially similar measures and
conclusions?
a. Matching b. Verifiability c. Periodicity d. Stable monetary unit
82. Which of the following is considered a pervasive constraint by the Framework for the Presentation and
Preparation of Financial Statements?
a. Benefit/Costs c. Timeliness
b. Conservatism d. Verifiability
83. The valuation of a promise to receive cash in the future at present value on the financial statements of a
company is valid because of the accounting concept of:
a. Entity b. Materiality c. Going concern d. Neutrality
84. Under the Framework for the Presentation and preparation of Financial Statements, which of the following in
the most precise sense, means the process of converting non-cash resources and rights into cash or claims to
cash?
a. Allocation b. Recordation c. Recognition d. Realization

END OF THE REVIEW QUESTIONS

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 ANSWER KEY TO
FINANCIAL ACCOUNTING 1
NEW CONCEPTUAL FRAMEWORK
1D 41C
2C 42B
3B 43C
4D 44D
5D 45D
6C 46C
7A 47B
8B 48A
9A 49B
10C 50D
11D 51C
12C 52D
13B 53C
14B 54C
15C 55D
16C 56C
17C 57D
18C 58B
19D 59D
20B 60D
21C 61B
22D 62D
23A 63B
24D 64D
25D 65D
26A 66C
27D 67D
28B 68C
29A 69C
30D 70C
31C 71A
32A 72C
33A 73B
34A 74C
35D 75C
36A 76D
37A 77D
38B 78A
39A 79B
40D 80A
81B
82A
83C
84D