Manila x THEORY OF ACCOUNTS Saturday, July 25, 2015 First Preboard Examination am. to 9:30 am. ser A ‘MULTIPLE CHOICE ~ MARK FULLY with Penoil No. 2 the leter of your choice on the answer ‘sheet provided. Make the mark DARK but do not use foo much pressure. ERASURES ARE STRICTLY NOT ALLOWED. 1. Which ofthe following statements is false regerding adjusting entries? ‘4. Cash is neither debited nor credited as a result of adjusting entries. '. Each adjusting entry affects one statement of financial position account and one income sialement account. ce. Each adjusting entry affects one revenue account and one expense account. dd. “Adjusting entries involve accruals or deferral. 2, Which ofthe following statements is false? ‘2. Entities ean prepare the income statement and the statement of financial position directly from the adjusted trial balance. b. Entities can prepare the statement of cash flows directly from the adjusted trial balance. c. The adjusted trial balance proves the equality of total debits and total credits after all adjustments.) 4. Each adjusting entry affects one statement of financial position account and one income statement account, : 3, The closing entries - Must debit or eredit one income statement account and one statement of financial position ‘account. Include closing the dividends secount to income summary. «s. Are posted o the appropriate general ledger accounts. 4d, Allof the choices are correct regarding closing entries. 4, Which of he following statements regarding reversing entries is incorrect? ‘. Deferrals are generally entered in statement of financial position accounts, thus making reversing entries unnecessary. hae All accruals should be reversed. ‘Adjusting entries for depreciation and bad debs are never reversed. Reversing entries change amounts reported in the statement of financial position for the previous period, ‘5. Which is not true about a conceptual framework? Should increase financial statement uses’ understanding and confidence in financial reporting. , Should enhance comparability among entities’ nancial statements, ©. Should allow new and emerging practical problems to be more quickly solved. 4. Should be based on fundamental truth tat is derived from the law of nature. (6, The underlying theme of the conceptual framework is ‘Decision usefulness . Understandability ©. Reliability d. Comparability 17. What is the quality of information that enables users to better forecast future operations? a. Reliability b. Materialty ©, Comparability @. Relevance..& The major financial statements include all of the y ‘a. Statement of financial position = b,. Statement of changes in financial postion ay Statement of comprehensive income = 4. Statement of changes in equity _ $-What is a major objective of financial reporting? ( ‘To provide information that is useful to management in making decisions. . To provide information that clearly portrays nonfinancial transactions. | ¢. To provide information that is useful to assess the amounts, timing, and uncertainty of ‘perspective eash receipts. 4, To provide iformation hat excites lms ggsins the resources 0. The satement of iaancal postion information is sei forall ofthe following, except ‘a. Tocompute rate of return "a To analyze cash inflows and outflows for the petiod == ¢ Tocevaluate capital structure 4. Toassess future cash flows —— 11, The statement of financial position © a Omits many items that roof financial value . | Makes ver limited use ofjudgment andesite © { A= 3 Uses vue for mos ascs end bles. : GL Alforte choices are cores garding the saement of fans gion. p> Neti secon "Cap wish hs ern ewes int bsiess Onpeopiaedmemedemmap ‘c. Cash and receivables less current liabilities &. Comentasses es ure ihlies 13, Limitations ofthe income statement include all of the following, except y -} ess that canathe measured rely ae satrepoel Only actual amounts are reported in determining net income, Income measurement involves judgment. acon d._ Income numbers are affected by the accounting methods employed. 7 — (M4: The incon statement information would help in which ofthe following tasks? © | a Evaluate the liquidity ofan entity Evaluate the solvency of an entity ~ |e Estimate future cashflows |. Estimate future financial flexibility 15, Which method of income measurement is used in the preparation ofthe income statement? ‘a. Capital maintenance approach : ', Transaction approach es : ©. Cash-flow approach,17. Which of the following items will not appear in the statement of retained earnings? a. Net loss b. Prior period adjustment ¢. Discontinued operations 4d, Dividends 18. Which of the following is included in comprehensive income? a. Investments by owners b. Unrealized gains on available for sale securities . Distributions to owners . 4. Changes in accounting policy 19, Accounting policies disclosed in the notes to the financial statements typically include all of the ~~ following, except a. The cost flow assumption used b. The depreciation method used -~ $ ¢. Significant estimates made 4. Significant inventory purchasing policies 20, Which of the following statements is incorreet regarding notes to the financial statements? a. IFRS requires specific note disclosures including disaggregation of inventories into classifications such as merchandise, production supplies, work in process, and finished goods. b. TERS requires a maturity analysis for receivables. . IPRS requires that all notes be clear, simple to understand and nontechnical in nature. d. Alllof the choices are correct regarding notes to the financial statements, 21. Which of the following should fot be disclosed in the summary of sighificant accounting policies? 1a. Basis of profit recognition on long-term construction contract b. Criteria for measuring cash equivalents . Measurement basis d. Maturity dates associated with long-term debt 22, Ifa business entity entered into certain related party transactions, it would be required to disclose all of the following information, except 9 a. Nature of the relationship between the parties to the transactions. b. Nature of any future transactions planned between the parties and the terms involved. ¢. Peso amount of the transactions. d. Amounts due from orto related parties at the end of reporting period. 23. Which of the following events after the reporting period would require adjustment of the accounts before issuance of the financial statements? a, Loss of plant as a result of fire 'b, Changes in the quoted market prices of securities held as an investment ¢. Loss on inventory resulting from major flood loss ._ Loss on a lawsuit the outcome of which was deemed uncertain at year end. 24, Accounting changes are often mate and the monetary impact is reflected in the financial statements ‘even though, in theory, this may be a violation of the accounting concept of “! a. Materiality b. Consistency . Prudence 4. ObjectivityPage 4 26. Prioe years income statements are ot restated for fa. Changes in accounting policy 'b. Changes in accounting estimate €, Corrections of errors G._Allof these require restatement of prior years income 27, Which of the fotlowing isnot rested as change in eeounting Poli? i ee fam cost model to revaluation mode! for property, plant and eqwspr aca om dent writearatod to allowance method of ecognizing ha deb fA perventage of sles nk adjusted fs the balance in the allowance A Pejeenage of accounts receivable not aust forthe balance inthe stow nes A Perret fom aging cous receivable an not eu. for te alae in he allowance '32,The advantage of elaing bad deb epenseo outstanding accounts receivable i ht approach The ava a cores statment of reoivables in the siatement of financial poston 34. Which ofthe following statements true when scoountsreoeivable ate factored wit recourse? Which ote ion may be eseoured for ether asa seco borrowing oF as & sale depending ‘upon the substance of the transact earning aan are used a ollatrel for promissory note issued othe factor by the ovnes of the receivables, «eats aes the rk of cllcibilty and absorbs any credit lostes in collecting the eceivables. a. cates cost should be recognized ruably over the collection period of te roeiables34. Which of the follwing items shouldbe include in accounts resivable reported in te statement 8F financial position? 7 a. Notesreceivable "6 ie i. Interest receivable ~ ‘6 Allowance for doubtful accounts @ ‘Advances to related parties and officers 9 35. An entity that purchases goods from suppliers for resale to customers should recognize which inventory? {Finished goods inventory b. Work in process inventory ©. Merchandise inventory Ad. All ofthe choices are correct 36, Why are inventories included in the computation of net income? a. To determine cost of goods sold b, To determine sales revenue, ¢. To determine merchandise returns. 4. Inventories are not included in the computation of net income, 37, Which method of inventory pricing bes! epproximaies costs and units in most manufacturing stations? a. Average cost first-out ic identification of the actual flow of 4. Weighted average - 38, The IASB prohibits which of the followi a. LIFO Specific identification ©, Weighted average 4. Any of these cost flow assumptions is allowed as long asthe entity uses it consistently. ‘cost flow assumptions for inventory? 39. Lower of eost or net realizable value as it applies to inventory is best described as the Reporting of loss when there isa decrease in the future utility below the original cost-~ Method of determining cost of goods sold ‘Assumption to determine inventory flow. (Change in inventory value to net realizable value. 40-Whieh of the following is not an acceptable method of applying the lower of cost or net realizable 7 value method to inventory? 1. Inventory location b. Groups of inventory items ©. Individual item 4. Total of the inventory 41.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 ©. Historical cost 4. Sales price reduced by estimated cost of disposal 42, Which ofthe following statement is incorrect regarding LCNRV? a. Net realizable value isthe sell price less estimated cost to complete and estimated cost to make a sale ', In most situations, entities price inventory on a total inventory basis. * © One of two methods may be used to Tecord the income effect of valuing inventory at net realizable value 2 4 Entities use an allowance account, the “allowance to reduce inventory to net realizable value’se Page 6 13, Net realizable value isthe general rule for valuing which ofthe following types of inventory? a Commodities held by broker-traders, 'b. Computer components held forsale to manufacturers, Inventories priced on an item by item basis, but not those priced on a total inventory bass 4. Allof the choices are held at NRV. }4. If a material amount of inventory has been ordered through a formal purchase contract at the statement of financial position date for future delivery at firm prices ‘This fact must be disclosed, .. Disclosure is required only if prices have declined since the date ofthe order. «, Disclosure is required only ifprices have since risen substantially. ~~ 4. An appropriation of retained earnings is necessary. ~ 45. How is the gross profit method used as it relates to inventory valuatior [a Verify the accuracy of the perpetual inventory records . Verity the accuracy ofthe physical inventory. ©. Toestimate cost of goods sold.» |. To provide an inventory value of FIFO inventories. 46, Which of the following is not a basic essumption of the gross profit method? ‘The beginning inventory plus the purchases equal total oods to be accounted for. . Goods not sold must be om hand. ©. IP the sales, reduoed to the cost basis, are deducted from the sum of the opening inventory plus ‘purchases, the result isthe amount of inventory on hand. 4. The total amouat of purchases and the total amount of sales remain relatively unchanged from the comparable previous period. retsiant SF (Ome !7.amujor advange ofthe et nvenory eto ish 2 "Provides selble reals in ees where the dstsbton of tems in he inventory ie dest from thts Sold ting te period. bs Hides costs fom compettoe and esis, 0 Gielc nies ae! Lymtory: tom other utd. 4. Provider « method fr tvegary enol tad fulinesdteminnton of he period Inventory forcerin tye of ents |48. Which of the following is not a reason the etal inventory method is used widely? ‘2. Ase control measure in determining inventory shortages . For insurance information, ¢. Topermit the computation of net income without a physical count of inventory 4. To defer income wx liability 49, What is the effect of net markup on the eost-retil ratio when using the conventional retail method”? ‘a Increases the cost-retail ratio |b. Nocffect on the cost-retail ratio Depends on the amount of the net markdown dd, Decreases the cost-real ratio ‘50. What isthe effect of freight in on the cost-retal ratio when using the conventional retail method? ‘2, Increases the cost-retal ratio ‘ b. No effect on the cost-retal ratio ©. Depends on the amount of the net markup ‘4. Decreases the cost-retail ratio.51. Sales where the goods are delivered only when the Buyer makes ial payment are referred (0 a8 fa. Billand bold sales Sales subject to installation or inspection © Consignment sales 4. Layaway sales 52, Sales in which the buyer is not yet ready to take delivery but does take ttle are a. Barer sales ’. Bill and hold sales Layaway sales 4. Sales with buyback ‘53, Revenue is recognized by the consignor when the {Goods are shipped to the consignee. b. Consignee receives the goods. ©. Consignor receives an advance from the consignee. 4. Consignor receives an account sales notification from the consignee, 54. For which of the following products is it appropriate to recognize revenue al the completion of production even though ao sale has been made? a. Aufomobiles i. Large appliances ©. Single family residential units Precious metals 55. Debt investments that meet the business model and contractual eash flow tests are reported at a. Netrealizable value Fair value © Amortized cost The lower of amortized cost or fair value 56. Under IFRS, the fair value option ‘4. Must be applied to all instruments the entity holds, b. May be selected as valuation method by the entity at any time during the first ‘wo years of ownership. ‘© Reports all guns and losses in income, 4d. Allo the choices are correct. 57. A "passive interest” in another entity should be acvounted for ‘By using the equity method b. By using the fair value method c. By using the effective interest method ‘4. By consolidation '58) How will the receipt of dividends affect the investment account under the fui value method and equity method? a. No effect under far value method and decrease under equity method 'b. Inerease under fair value method and decrease under equity method ©. No effect under both fai value method and equity method. Decrease under fair value method and a0 effect under equity method, 59. Under the equity method of accounting for investments, an investor recognizes its share of the ‘earnings inthe period in which the ‘8, Investor sells the investment b. Investee declares a dividend, © Investee pays adividend. 4d. Earings ae reported by the investe inthe financial statementsy + a Page 8 1 ieee ‘a. Ignored completely. 1 ewe equity apart of ter conpretes © Reponed heaty h netieome 1 Repoed leat in eae ering. 1. An option to convert a convertible bond into ordinary shares is 8 Embedded derivative b. Host security ©, Hybrid security 4 Fairvalue hedge 12; Under IFRS, which of the following best describes investment property? 7, Held for rental income b. Tobesold at aquick profit 9 © Held for renal income or to be soldat quick profit Held for sale in the ordinary course of business. ~ | 6 ee I the entity elects the fair value model, no depreciation i taken. |: Be kid ass RPRIESPMERR ert Under n fl Yluc ve a repo i the | gome statement. ©. Ifthe entity elects the cost model, depreciation should be recognized. | 4. All ofthese statements are correct regarding investment property. Which is not a major characteristic of property, plant and equipment? With physical substance Acquired for use in operations Long-term in nature 4. All ofthese are major characteristics of property, plant and equipment? 3. An entity parchased a usable hotel and the land on which itis located with the plan to tear down immediately the hotel and build a new hotel The allocated fair value of the old hotel should be 1 Depreciated over the remaining useful life. b. Written off as loss in the year the hotel is tora down. © Capitalized as part of the cost of the land 4. Capitalized as part ofthe cost ofthe new hotel. 6. The cost of land typically incudes the purchase price and al ofthe following costs, except a Grading fling, draining and clearing cost. Special assessment for sites light, sewer and drainage sytem, Private driveway and parking lot. _ Assumption of any lien or mortgage on the property. | {57 A nonrecoverable purchase tex on the purchase of machinery should be charged 10 a. The machinery account b. A separate deferred charge account Miscellaneous tx expense 4. Accumulated depreciation. 68) Fence and parking lot ae reported in the statement of financial position as Current assets Land improvements Land Building improvements69, Which ofthe following statements is true regarding capitalization of interest? Interest cost capitalized in connection with the purchase of land 10 be used as a building site should be debited to the land account. '. The amount of interest capitalized during the period should not exceed the actual interest incurred ©. When excess specific borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be recorded as interest revenue. >. 4d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average expenditures, 70. The account deferced grant revenue is classified as “a, A separate component of shareholders’ equity b. Anoneurrent liability & Other income and expense 4. Revenue 71, Ifthe cost ofthe asset is recorded net of the government grant ‘Equity will likely be overstated. b. Liabilidy will likely be overstated. Asset will lkely be understated, 4d. Net income will likely be understated, 62 00 7 72. When a closely held entity isues preference shares for land, the land should be recorded at the 4 Total par value ofthe shares issued. ». Total book value of the shares issued. . ©, Total liquidating value of the shares issued 4. Fair value of the land, 73. Accounting recognition should be given to the gain realized on a nonmonetary exchange of plant ascet, exeept when the exchange has 4. No commercial substance and additional cash is paid, 'b. Commercial substance and additional cash is receive, ‘c Commercal substance and additional cash is pai, 4. Allof these cause recognition ofa gain, 74, An improvement made to a machine increased fair value and production capacity by 25% without extending the machine's useful life. The cost of the improvement should be Expensed. Debited to uecumulated depreciation. Capitalized inthe machine account. Allocated between accumulated depreciation andthe machine account, 75, Depreciation isa variable expense if the depreciation method used is Units of production b. Straight line © Sumof the years digits 4d. Declining balance 76. Which of following is nota similarity inthe testment for depreciation and depletion? 8. The estimated life is based on economic or productive Hite, ', Assets are reported in the same classification in the statement of financial position, ‘&. The rate may be changed upon revision ofthe estimated productive life 44. Both depreciation and depletion are based on time,Page 10 ‘77, The most commen method of recording depletion is the 1. Percentage depletion method bi. Diminishing charge method Straight line method 4. Units of production method 78, Which ofthe following does not describe an intangible asset? 1. Lacks physical existence bo, Monetary asset) c._ Provides long-term benefits 4, Classified as noncurrent asset 79, Which ofthe following is mot an intangibie ass? a, Trade name ', Research and development cost ©. Franchise 4. Copyright 80, Purchased goodwill should ‘Be waitten of as soon as possible against retained earnings. Be written off as soon as possible as other expense. ‘Be written off by systematic charges asa regular operating expense over the period benefited. ‘Not be amortized. peor S81, Recovery of impairment is recognized for el the following, exept 1 Patent beld forsale ‘Patent eld for use ©. Trademark 4. Goodwill 82. Which of the following research ané development related costs should be capitalized and depreciated over current and future periods? ‘a Research and development general Iaboratory building which can be put 1 alternative use in the future Inventory used fora specific research project ‘Administrative salaries allocated fo research and development ‘Research findings purchased to aid a research project curently in process { aes 83, Which of the following is not considered « characteristic of a lability? Present obligation ‘Arise frompast events ~~ ‘Results in an outflow of resources Liquidation is reasonably expected.to require use of existing resources classified as current asses epee 184, Which of the following is not considered when evaluating whether or not to record a liability for pending litigation? ‘Time period in which the underlying eause of action occurred. The type ofttigstion involved. ‘. The probability of an unfavorable outcome, 44. The ability to make a reasonable estimate ofthe amount of the loss. 85. Which of the folowing is mot accepiable fr the presentation of curent liabilities? 44 Listing curent liabilities n order of maturity 'b Listing curent liabilities aceording to amount , Offvetting current lnbilites against assets that are to be applied to their liquidation 4. Showing current abilities in onder of liquidation preference.86. Ifthe bonds were issued at a premium, this indicates The effective yield or market rte of interest stated rate 'b. The nominal rate of interest exceeded the market rate. ¢, The market and nominal rates coincided. 4. Nonecessary relationship exists between the two rates. 87, Bond issuance eost should be 1, Expensed inthe period when the bond payable is issued. 'b, Recorded asa reduction inthe carrying amount of bond payable. ‘e, Accumulated in a deferred charge account and amortized over the life of the bond, 4. Reported as an expense in the period the bond matures or is retired. ‘88. When a note payable is issued for property, goods or services, the present value of the note is ‘measured by The fair value ofthe property, goods or services. . The fair value ofthe note «, Using an imputed interest rate to discount all future payments on the note. & Any of these, £89, Which of the following best describes current practice in accounting for leases? Leases are not capit , Leases similar to installment purchases are capitalized, << ©” . All long-term leases are capitalized w 4. All leases are capitalized. 90, In Lease that is appropriately recorded as a direct financing lease by the lessor, unearned income 44 Should be amortized over the period of the lease using the effective interest method, 'b. Should be amortized over the peri of the lease using the straight-line method. © Does nor arise. 4. Should be recognized at the lease expiration. ‘91; The lease receivable in a direct financing lease is best defined as. “a. ‘The amount of funds the lessor has tied up in the assei which is the subject of the direct financing lease. ®, The difeence between the lease payments resivable ad the fi val ofthe leased propery The present value of minimum lease payments.» {The total eanying amount ofthe ast less any sccumulated depreciation recorded by the lessor priorto the lease agreement. 92, Which measure requires the use of future salaries in the computation of pension obligation? ‘Vested benefit obligation ‘Accumulated benefit obligation Defined benefit obligation 0 $ Restructured benefit obligation 93. A pension asset is reported when ‘8 The“accumalated benefit obligation exceeds the fir value of pension plan assets. '. The accumulated benefit obligation exceeds the fair value of pension plan assets but a past service cost exists. ‘Pension plan assets at fair value exceed the accumulated benefit obligation. ‘Pension plan assets at fair value exceed the defined benefit obligation. 94. What are compensated absences? a. Unpaid time off . A form of healthcare Payroll deductions Paid time off| Page 12 Is. Which temporary ference would resin dered a abi? 2 nts reve om fx exerpt municipal ons Accra of waranty expense” Excess tx depreciation over financial depe |. Subseiption revenue received in advance 6. Which temporary diffrence would result ina dsfecred wx eset? 4. Tax penaly orsurcherge Dividend received on share investment Excess ax depreciation over accounting depreciation 4. Rent received in advance incised in taxable income but deferred for financial secountng An operating segment is a reportable segment if J a The operating profit is 10% or more ofthe combined operating profit of profitable segments, ', The operating oss is 10% or more of the combined operating loss of unprofitable segments. ©. The operating profit or loss is 10% or more of the entity's combined operating profit of loss None ofthese si = 98, A segment of a business enterprise isto be reported separately when the revenue of the segment cexceats ten percent of the | Total combined revenue of all segments reporting profit. |b, Total revenue ofall the entity's industry segments Total export and foreign sales. 4 Combined net income of all segments reporting profit. All ofthe following statements are true regarding interim reporting, except ‘a. IFRS requires a complete set of financial statements atthe interim reporting date, '. IFRS requires entities expense interim amount like advertising expenditures that could benefit laterinterim periods | ©. IPRS does not mention the integral and independent view of interim reporting. 44. Noaceruals or deferrals in anticipating future events during the year should be reported. 100. The accounting profession indicates that ‘4. All eoities that issue an annual report should issue interim financial repors. '. The integral view is the more appropriate approach for interim financial repors. ‘c. A.complete set of financial statements must be presented for an interim period. * 4d. The same accounting principles used for the annual report should be employed for interim reports.