FRAMEWORK OF ACCOUNTING

I – ACCOUNTING AND ACCOUNTANCY PROFESSION

1. Which accounting process is the recognition or nonrecognition of business activities as

accountable events?
(a) identifying (c) communicating
(b) measuring (d) summarizing A

2. These are events that affect the enterprise and in which other entities participate.
Internal External Internal External
(a) Yes Yes (c) No No
(b) Yes No (d) No Yes D

3. Which is an internal event?

(a) Casualty loss
(b) Exchange
(c) Nonreciprocal transfer between the enterprise and its owners.
(d) Nonreciprocal transfer between the enterprise and other entities. A

4. The basic purpose of accounting is:

(a) to measure periodic income of the economic entity.
(b) to provide quantitative financial information about a business enterprise that is useful in
making rational economic decision.
(c) to provide information that the creditors of an economic entity can use in deciding
whether to make additional loans to the entity.
(d) to provide information that the managers of an economic entity need to control its
operations. B

5. It focuses on general purpose reports on financial position, performance and cash flows.
(a) financial accounting (c) management advisory services
(b) managerial accounting (d) auditing A

6. Which area of public accounting means the examination of financial statements by a CPA for
the purpose of expressing as opinion as to the fairness of the statements?
(a) external auditing (c) management advisory services
(b) taxation (d) internal auditing A

7. Many accountants are employed in business enterprises in various capacity as accounting

staff, chief accountant or controller. These accountants are said to be engaged in:
(a) public accounting (c) government accounting
(b) financial accounting (d) private accounting D

8. They encompass the conventions, rules, and procedures necessary to define what is
accepted accounting practice.
(a) generally accepted accounting principles (c) qualitative characteristics
(b) accounting assumptions (d) recognition principles A
9. One of the basic features of financial accounting is the:
(a) direct measurement of economic resources and obligations and changes in them in
terms of money and sociological and psychological impact.
(b) direct measurement of economic resources and obligations and changes in them in
terms of money.
(c) direct measurement of economic resources and obligations and changes in them in
terms of money and sociological impact.
(d) direct measurement of economic resources and obligations and changes in them in
terms of money and psychological impact. B

10. Which is not part of the accounting standard setting process in the Philippines?
(a) preparation and approval by a Task Force of a draft of the proposed SFAS
(b) distribution of the exposure draft for comment to PICPA members, FINEX members and
other interested parties
(c) publication in the Official Gazette or in a newspaper of general circulation
(d) approval by the Professional Regulation Commission C

11. It is an independent private sector body with the objective of achieving uniformity in the
accounting principles which are used by business enterprises for financial reporting around
the world.
(a) International Accounting Standards Committee
(b) International Federation of Accountants
(c) Financial Accounting Standards Council
(d) Securities and Exchange Commission A

12. The ASC decided to move totally to International Accounting Standards by reason of
(choose the incorrect one):
(a) support of IASC standards by Philippine organizations such as SEC, Board of
Accountancy and PICPA
(b) increasing internationalization of business which has heightened interest in a common
language for financial reporting
(c) increasing recognition of IASC standards by the World Bank, Asian Development Bank
and World Trade Organization
(d) extreme pressure from the International Monetary Fund D

13. Which of the following statements regarding International Accounting Standards is not true?
(a) The purpose of IASC is to reduce the diversity of practices in financial reporting among
countries.
(b) Harmonization of international accounting standards will provide benefits to both
preparers and users of financial statements.
(c) As international trade and ownership barriers are removed, the need for harmonization
of international accounting standards will decrease.
(d) Since difference countries use financial statements for different purposes, some
countries will likely not adopt the international accounting standards. C

14. The purpose of International Accounting Standards is to:

 (a) issue enforceable standards which regulate the financial accounting and reporting of
multinational corporations.
(b) develop a uniform currency in which the financial transactions of companies throughout
the world would be measured.
(c) promote uniform accounting standards among countries of the world.
(d) arbitrate accounting disputes between auditors and international companies. C

15. Financial accounting is concerned with:

(a) general-purpose reports on financial position and results of operations
(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 A

16. Which of the following is not an important characteristic or limitation of the financial
statements that accountants currently prepare?
(a) the information in financial statements is expressed in units of money adjusted for
changing purchasing power
(b) financial statements articulate with one another because measuring financial position is
related to measuring changes in financial position
(c) the information in financial statements is summarized and classified to held meet users’
needs
(d) financial statements can be justified only if the benefits they provide exceed the costs
A

17. The branch of accounting that is concerned primarily with providing information for internal
users is called:
(a) auditing (c) financial accounting
(b) managerial accounting (d) income tax accounting B

18. Financial accounting can be broadly defined as the area of accounting that prepares:
(a) general purpose financial statements to be used by parties internal to the business
enterprise only
(b) financial statements to be used by investors only
(c) general purpose financial statements to be used by parties both internal and external to
the business enterprise
(d) financial statements to be used primarily by management C

19. The primary focus of financial accounting has been on meeting the needs of which of the
following groups?
(a) managers of an enterprise
(b) present and potential creditors of an enterprise
(c) national, and local taxing authorities
(d) independent auditors B

20. The most appropriate equation for portraying the relationship of assets, liabilities, and
owners’ equity of a corporation is:
(a) assets – liabilities = owners’ equity (c) assets = restriction of assets
 (b) assets = liabilities + owners’ equity (d) liabilities = assets – owners’ equity

21. Which of the following statements regarding the economic entity assumption is most
accurate?
(a) the economic entity assumption applies only to corporations and not to sole
proprietorships and partnerships
(b) the economic entity assumption does not apply to a segment of a firm (such as a
division)
(c) the economic entity assumption recognizes the fiduciary responsibility of management
to stockholders
(d) the economic entity assumption is irrelevant to decisions regarding the consolidation of
several interrelated firms C

22. The financial statements prepared under GAAP:

(a) do not articulate with one another
(b) reflect a single measurement basis which is historical cost
(c) are not highly precise because many estimates and judgments must be made
(d) contain a limited number of future projects, such as projected sale C

23. The primary measurement basis currently used to value assets in general purpose financial
statements of an enterprise is:
(a) the current market price if the assets currently held by an enterprise were sold on the
open market
(b) the current market price if the assets currently held by an enterprise were purchased on
the open market
(c) the present value of the cash flows assets are expected to general over their remaining
useful lives
(d) the market price of the assets at the date the assets were acquired D

24. Asset measurements in conventional financial statements:

(a) are confined to historical cost
(b) are confined to historical cost and current cost
(c) reflect several financial attributes
(d) do not reflect output values C

25. The GAAP also apply to:

(a) The Board of Accountancy (c) The Philippine Institute of CPAs
(b) The Bureau of Internal Revenue (d) The Professional Regulation Commission
D
III – ACOUNTING ASSUMPTIONS

1. These are the basic notions or fundamental premises on which the accounting process is
based.
(a) accounting assumptions (c) generally accepted accounting principles
(b) accounting standards (d) accounting concepts A

2. The ASC conceptual framework specifically mentions two underlying assumption. These are:
(a) accrual and going concern (c) going concern and time period
(b) accrual and accounting entity (d) time period and monetary unit A

3. The effects of transactions and other events are recognized when they occur and not as
cash or its equivalent is received or paid, and they are recorded and reported in the
financial statements of the period to which they relate.
(a) accrual (c) time period
(b) going concern (d) monetary unit A

4. Which of the following statements is incorrect?

(a) The accrual method, which builds directly on the revenue and matching principles,
ignores the timing of cash receipts or payments when determining when to recognize
revenue or expenses.
(b) Expenses are matched with revenue, not the reverse.
(c) In accordance with the unit of measure assumption, accountants normally revise the
amounts to reflects the changing purchasing power of money due to inflation or
deflation.
(d) In accordance with the going concern assumption, the life of a business is presumed to
be indefinite. C

5. If a business is not being sold or closed, the amounts reported in the accounts for assets
used in the business operations are based on the cost of the assets. This practice is justified
by:
(a) accrual (c) continuity assumption
(b) time period (d) accounting entity C

6. John Frivs is the sole owner and manager of Ace Services. John purchased a car for
personal use. He uses a van in the business. Which of the following is violated if John
recorded the cost of the car as an asset of the business?
(a) conservatism (c) full disclosure
(b) going concern assumption (d) separate entity assumption D

7. What is the traditional accounting period?

(a) three months (c) two years
(b) six months (d) twelve months D

8. Which underlying concept serves as the basis for preparing financial statements at regular
intervals?
(a) accounting entity (c) accounting period
 (b) going concern (d) stable monetary unit C

9. Revenue is expressed as the number of pesos received or the peso equivalent of the
commodities of services received. Cost is expressed as the number of pesos paid out of the
peso equivalent of the items given up. Fluctuations in value of the peso are ignored. The
above describes what accounting assumption?
(a) going concern (c) historical cost
(b) unit of measure (d) realization B

10. The financial statements should be stated in terms of a common financial denominator.
(a) accrual (c) time period
(b) going concern (d) monetary unit D

11. The concept of accounting entity is applicable:

(a) only to be legal aspects of business organizations.
(b) only to the economic aspects of business organizations.
(c) only to business organizations.
(d) whenever accounting is involved. D

12. When a parent and subsidiary relationship exists, consolidated financial statements are
prepared in recognition of:
(a) legal entity (c) stable monetary unit
(b) economic entity (d) time period B

13. The valuation of a promise to receive cash in the future at present value on the financial
statement of a business entity is valid because of the accounting concept of:
(a) entity (c) going concern
(b) time period (d) monetary unit C

14. Continuation of an accounting entity in the absence of evidence to the contrary is an

example of the basic concept of:
(a) accounting entity (c) going concern
(b) time period (d) accrual C

15. This accounting concept justifies the usage of accruals and deferrals.
(a) going concern (c) consistency
(b) materiality (d) stable monetary unit A

16. During the lifetime of an entity, accountants produce financial statements at arbitrary points
in time in accordance with which basic accounting concepts?
(a) accrual (c) unit of measure
(b) periodicity (d) continuity B

17. The relatively stable economic, political and social environment supports:
(a) conservatism (c) timeliness
(b) materiality (d) going concern D
IV – CONCEPTUAL FRAMEWORK

A. DEFINITION, PURPOSE, AND STATUS

1. A conceptual framework is:

(a) a statements of financial accounting standard.
(b) an underlying accounting assumption.
(c) a theoretical foundation which guides the ASC, preparers and users of financial
accounting information.
(d) a financial statement. C

2. Which is not a basic purpose of a conceptual framework?

(a) to assist ASC in developing accounting standards.
(b) to assist preparers of financial statements in applying ASC accounting standards.
(c) to assist ASC in reviewing and adopting International Accounting Standards.
(d) to assist the Board of Accountancy in promulgating rules and regulations affecting the
practice of accountancy in the Philippines. D

3. The ASC conceptual framework is intended to establish:

(a) generally accepted accounting principles in financial reporting by business enterprises.
(b) the meaning of “present fairly in accordance with generally accepted accounting
principles.”
(c) the objectives and concepts for use in developing standards of financial accounting and
reporting.
(d) the hierarchy of sources of generally accepted accounting principles. C
B. SCOPE – OBJECTIVES OF FINANCIAL STATEMENTS

1. Which is not included in the scope of the ACS conceptual framework?

(a) qualitative characteristics that determine usefulness of financial accounting information
(b) definition, recognition and measurement of the elements of financial statements
(c) objective of financial statements
(d) generally accepted accounting principles D

2. What is the objective of financial statements?

(a) to disclose the market value of the firm’s assets and liabilities
(b) to determine compliance with tax laws
(c) to make forecasts about the economy
(d) to help users makes decisions D

3. It is the financial flexibility of an enterprise.

(a) liquidity (c) financial structure
(b) solvency (d) capacity for adaptation D

4. It is the level if income earned by an enterprise through the efficient and effective utilization
of resources.
(a) financial position (c) positive cash flows
(b) performance (d) negative cash flows B

5. Liquidity is defined as the :

(a) ability of the enterprise to pay currently maturing obligations.
(b) ability of the enterprise to meet obligations over a longer term.
(c) invested capital of the enterprise.
(d) borrowed capital of the enterprise. A

6. The theory of accounting which best describes the accounting equation expressed “assets =
Liabilities + proprietorship” is the :
(a) entity theory (c) proprietary theory
(b) fund theory (d) residual equity theory A

7. What theory of ownership equity is enumerated by the following equation: assets minus
liabilities minus preferred stock equity equals common stock equity?
(a) fund (c) proprietary
(b) enterprise (d) residual equity D

8. Classifying preferred dividends as expense is an application of what concept?

(a) entity (c) residual equity
(b) proprietary (d) fund C

9. The primary accounting is fair presentation of the performance of the enterprise.

(a) entity (c) residual equity
(b) proprietary (d) fund A
10. Government or fiduciary accounting is an application of:
(a) entity (c) residual equity
(b) proprietary (d) fund D

11. Which of the following statements is incorrect?

(a) the accounting theory which explains well the accounting equation “assets minus
liabilities equals capital” is the proprietary theory
(b) under the entity theory, the major accounting effort is directed toward proper valuation
of assets rather than income determination
(c) strict adherence to the entity concept would not allow a parent company to take up in
its books its proportionate share in the profits and losses of its subsidiaries
(d) under the fund theory, assets represent prospective services to the fund, liabilities
represent restriction against asses of the funds, and invested capital represents either
legal or financial restrictions on the use of assets B

12. The type of money prices which uses such concepts as present value, discounted cash flow
and value in use is known as:
(a) price in a current purchase exchange (c) price based on future exchange
(b) price in a past exchange (d) price in a current sale exchange C

13. All accounts in the financial statements are affected to a certain extent by inflationary
conditions, but the effect is more explicit in some accounts than in others. Which account is
the more seriously affected by inflation?
(a) property, plant and equipment (c) receivables
(b) merchandise inventory (d) cash A

14. The recognition of the deficiencies of historical cost accounting has led to the advocacy of
the recognition of the effects of inflation in the accounts. The following statements
characterize the recognition of the effects of inflation except:
(a) all accounts in the financial statements are affected to a certain extent by inflationary
conditions, and the effect is more explicit in some accounts than in others
(b) restating the entire financial statements in terms of current prices is a very complicated
process and requires considerable additional work
(c) users of financial statements advocate the recognition of the effects of inflation in the
accounts because historical cost creates the impression that the business entity is more
profitable than what it really is
(d) inflation affects more drastically those items in the accounts where the rate of turnover
is quite high D
 C. SCOPE – QUALITATIVE CHARACTERISTICS

1. It is the capacity of information to make a difference in a decision by helping users from

predictions about the outcome of past, present and future events, or confirm and correct
prior expectations.
(a) relevance (c) comparability
(b) reliability (d) understandability A

2. The attributes of relevance include ( choose the incorrect one):

(a) predictive value (c) timeliness
(b) feedback value (d) neutrality D

3. It is the quality of information that assures readers that the information is free from bias or
error and faithfully represents what it purports to show.
(a) understandability (c) reliability
(b) relevance (d) comparability C

4. Which of the following has the primary responsibility for the preparation, presentation and
reliability of information in the financial statements?
(a) management (c) external auditor
(b) internal audit staff (d) internal management accountant A

5. Verifiability of financial accounting information is synonymous with:

(a) faithful representation (c) prudence
(b) substance over form (d) completeness A

6. In the event of conflict between the economic substance of a transaction and its legal form,
the economic substance shall prevail. This concept is known as:
(a) form over substance (c) faithful representation
(b) substance over form (d) completeness B

7. The financial accounting information is directed toward the common needs of users and is
independent of presumptions about particular needs and desires of specific users.
(a) relevance (c) neutrality
(b) verifiability (d) completeness C

8. John Company does not know exactly how long its equipment will last. It decides to use
shorter rather than longer useful life for depreciating the equipment. What accounting
concept is being applied in this decision?
(a) reliability (c) materiality
(b) relevance (d) conservatism D

9. It is the exercise of care and caution in dealing with uncertainties in measurement so s not
to overstate assets and income and not understated liabilities and expenses.
(a) completeness (c) faithful representation
(b) prudence (d) neutrality B
10. It is the result of the standard of adequate disclosure.
(a) faithful representation (c) neutrality
(b) substance over form (d) completeness D

11. Which of the following improves the reliability of accounting information?

(a) accounting entity (c) verifiability
(b) going concern (d) time period C

12. The conceptual framework of accounting sets out certain essential characteristics of
accounting information. Which of the following is not as essential characteristic?
(a) understandability (c) reliability
(b) profit-oriented (d) comparability B

13. The financial information must be comprehensible or intelligible if it to be useful.

(a) relevance (c) understandability
(b) reliability (d) comparability C

14. Which qualitative characteristics relate to the content of the financial statements?
(a) relevance and reliability (c) relevance and understandability
(b) understandability (d) reliability and comparability A

15. Which qualitative characteristics relate to the presentation of financial statements?

(a) relevance and reliability (c) relevance and understandability
(b) understandability and comparability (d) reliability and comparability B

16. It is the ability to bring together for the purpose of noting similarities and dissimilarities.
(a) relevance (c) understandability
(b) reliability (d) comparability D

17. Which is incorrect concerning the conditions for comparability within a single enterprise?
(a) The presentations are in the same form.
(b) The contents of the statements are identical.
(c) Accounting principles are not changed or if they are changed, the financial effects of
the changes are not disclosed.
(d) Changes in circumstances or in the nature of underlying transactions are disclosed.

C
18. The ASC conceptual framework of accounting sets out two constraints when implementing
accounting procedures. What are they?
(a) cost-benefit and cost principle (c) cost principle and revenue principle
(b) timeliness and revenue principle (d) cost-benefit and timeliness D

19. According to the ASC conceptual framework, the usefulness of providing information in
financial statements is subject to the constraints of:
(a) consistency (c) reliability
(b) cost-benefit (d) representational faithfulness B
20. The ability through consensus among measures to ensure that information represents what
it purports to represents is an example of the concept of:
(a) relevance (c) comparability
(b) verifiability (d) feedback value B

21. 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 conclusions?
(a) conservatism (c) periodicity
(b) objectivity (d) stable monetary unit B

22. Objectivity is assumed to be achieved when an accounting transaction:

(a) is recorded in a fixed amount of peso.
(b) involves the payment or receipt of cash.
(c) involves an arm’s length transaction between two independent parties.
(d) Allocates revenue or expenses in a rational and systematic manner. C

23. The principle of objectivity includes the concept of:

(a) summarization (c) conservatism
(b) classification (d) verifiability D

24. The consistency standard of reporting requires that:

(a) expenses be reported as charges against the period in which they are incurred.
(b) the effect of changes in accounting upon income be properly disclosed.
(c) extraordinary gains and losses should not appear on the income statement.
(d) accounting procedures be adopted which give a consistent rate of return. B

25. Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of:
(a) materiality (c) conservatism
(b) consistency (d) objectivity B

26. Timeliness is an ingredient of:

(a) reliability (c) verifiability
(b) relevance (d) adequate financial statements B

27. Which of the following situations violates the concept of reliability?

(a) Financial statements were issued nine months late.
(b) Report data on segments having the same expected risks and growth rates to
analysts estimating future profits.
(c) Financial statements included property with a carrying amount increases to
management’s estimate of market value.
(d) Management reports to stockholders regularly refer to new projects undertaken, but
the financial statements never report project results. C
28. What is the underlying concept that supports the immediate recognition of a contingent
loss?
(a) substance over form (c) matching
(b) consistency (d) conservatism D

29. What is the underlying concept governing the GAAP pertaining to recording gain
contingencies?
(a) conservatism (c) consistency
(b) relevance (d) reliability A

30. Uncertainty and risks inherent in business situations should be adequately considered in
financial reporting. This statement is an example of the concept of:
(a) conservatism (c) neutrality
(b) completeness (d) representation faithfulness A

31. An estimated loss from a loss contingency should be accrued when:

(a) It is probable at the date of the financial statements that an asset has been impaired
or a liability has been incurred and the amount of the loss can be reasonably
estimated.
(b) The loss has been incurred on the date of the financial statements and the amount
of the loss may be material.
(c) It is probable that a loss will be incurred in a future period and the amount of the
loss can be reasonably estimated.
(d) It is probable at the date of the financial statements that a loss has been incurred
and the amount of the loss may be material. A

32. How should a loss contingency that is reasonably possible and for which the amount can be
reasonably estimated be reported?
(a) accrues and disclosed (c) disclosed only
(b) accrued only (d) neither accrued nor disclosed C

33. Reserves for general contingencies should:

(a) be accrued in the financial statements and disclosed in the notes thereto.
(b) not be accrued in the financial statements but should be disclosed in the notes
thereto.
(c) not be accrued in the financial statements and need no be disclosed in the notes
thereto.
(d) be accrued in the financial statements but need not be disclosed in the notes
thereto. C

34. An estimated loss from a loss contingency that is probable and for which the amount of the
loss can be reasonably estimated should:
(a) not be accrued but should be disclosed in the notes to the financial statements.
(b) be accrued by debiting an appropriated retained earnings account and crediting a
liability account or an asset account.
(c) be accrued by debiting an expense account and crediting an appropriated retained
earnings account.
 (d) be accrued by debiting an expense account and crediting a liability account or an
asset account. D

35. On December 20,2001, an uninsured property damage loss was caused by a company car
being driven on company business by a company salesman. The company did not become
aware of the loss until January 25, 2002. The amount of the loss was reasonably estimable
before the company’s 2001 financial statements were issued. The company’s December 31,
2001 financial statements should report an estimated loss as:
(a) a disclosure, but not an accrual. (c) neither an accrual nor a disclosure.
(b) an accrual. (d) an appropriation of retained earnings. B

36. A company did not record an accrual for a contingent loss but disclose the nature of the
contingency and the range of the loss. How likely is the loss?
(a) remote (c) probable
(b) reasonably possible (d) certain B

37. A lawsuit in connection with a safety hazard exists for a manufactured product. Occurrence
of a loss is probable and reasonably estimable. The loss contingency should:
(a) be accrued and disclosed. (c) be disclosed.
(b) be accrued only. (d) neither be accrued nor disclosed. A

38. An expropriation of assets which is imminent and for which the amount of loss can be
reasonably estimated should be:
(a) accrued only. (c) accrued and disclosed.
(b) disclosed only. (d) neither accrued and disclosed. C

39. Management can estimate the amount of loss that will occur if a foreign government
expropriates some company assets. If the appropriation is reasonably possible, what is the
treatment of the loss contingency?
(a) disclosed but not accrued as a liability (c) accrued as a liability but not disclosed
(b) disclosed and accrued as a liability (d) neither accrued as a liability not
disclosed A

40. A company has a probable loss that can only be reasonably estimated within a range of
outcomes. However, no single amount within the range is a better estimate than any other
amount. The amount of the loss accrual should be:
(a) zero. (c) minimum of the range.
(b) maximum of the range (d) mean of the range. C

41. Ax Company is being used for illness caused to local residents as a result of negligence on
the company’s part in permitting local residents to be exposed to highly toxic chemicals
from its plant. Ax’s lawyer states that it is probable that Ax will loss the suit and be found
liable for a judgment costing anywhere from P500,000 to P2,500,000. However, the lawyer
states that the most probable costs is P1,000,000. As a result of the above facts, Ax should
accrue:
(a) a loss contingency of P500,000 and disclose a additional contingency of up to
P2,000,000.
 (b) a loss contingency of P1,000,000 and disclose as additional contingency of up to
P1,500,000
(c) a loss contingency of P1,000,000 but not disclose any additional contingency.
(d) no loss contingency but disclose a contingency of P500,000 to P2,000,000. B

42. Ever Company has consigned that mortgage note on the home of its president,
guaranteeing the indebtedness in the event that the president should default. Ever
considers the likelihood of default to be remote. How should the guarantee be treated in
Ever’s financial statements?
(a) disclosed only (c) accrued and disclosed
(b) accrued only (d) neither accrued and disclosed A

43. The likelihood that the future event will or will nor occur can be expressed by a range of
outcome. Which range means that the future event occurring is very slight?
(a) probable (c) certain
(b) reasonably possible (d) remote D

44. Gain contingency is usually recognized when:

(a) realized.
(b) occurrence is reasonably possible and the amount is reasonably estimable.
(c) occurrence is probable and the amount is reasonably estimable.
(d) the amount is reasonably estimable. A

45. Which of the following is the proper accounting treatment of a gain contingency?
(a) an accrued account.
(b) deferred earnings.
(c) an account receivable with an additional disclosure explaining the nature of the
transaction.
(d) a disclosure only. D

46. When the occurrence of a gain contingency is probable and its amount can be reasonably
estimated, the gain contingency should be:
(a) recognized in the income statement and disclosed.
(b) classified as an appropriation of retained earnings.
(c) disclosed, but not recognized in the income statement.
(d) neither recognized in the income statement not disclosed. C

47. Great Company operated a plant in a foreign country. It is probable that the plant will be
expropriated. However, the foreign government has indicated that Great will receive a
definite amount of compensation for the plant. The amount of compensation is less than the
fair market value but exceeds the carrying amount of the plant. The contingency should be
reported:
(a) as a valuation allowance as a part of stockholders' equity.
(b) as a fixed asset valuation allowance account.
(c) in the notes to the financial statements.
(d) in the income statement. C
48. At December 31, 2002, Cream Company was suing a competitor for patent infringement.
The award from the probable favorable outcome could be reasonably estimated. Cream’s
2002 financial statements should report the expected award as a :
(a) receivable and revenue. (c) receivable and deferred revenue.
(b) receivable and reduction of patent. (d) disclosure only D

49. Neutrality is an ingredient of:

(a) relevance (c) understandability
(b) reliability (d) comparability B

50. Which of the following relates to both relevance and reliability?

(a) comparability (c) verifiability
(b) feedback value (d) timeliness A

51. Under the ASC framework, the qualitative characteristics are:

(a) understandability, relevance, reliability and comparability
(b) accrual and going concern
(c) timelines, cost and benefit and materiality
(d) entity, proprietary, residual equity and fund theory A

52. The characteristic that is demonstrated when a high degree of consensus can be secured
among independent measurers the same measurement methods is:
(a) relevance (c) verifiability
(b) reliability (d) neutrality C

53. Which of the following are considered pervasive constraints?

(a) materiality and conservatism (c) conservatism and timeliness
(b) timeliness and predictive value (d) cost-benefit and materiality D
D – DEFINITION, RECOGNITION AND MEASUREMENT OF ELEMENTS FROM WHICH
FINANCIAL STATEMENTS ARE CONSTRUCTED

1. These are related to the economic resources (assets), economic obligations (liabilities),
residual interest (equity) and changes in them (revenue and expense).
(a) basic elements (c) basic objectives
(b) basic principles (d) basic concepts A

2. The basic elements directly related to the measurement of financial position are:
(a) assets, liabilities, equity, revenue and expenses
(b) assets, liabilities, and equity
(c) revenue and expense
(d) assets and liabilities B

3. The basic elements directly related to the measurement performance or results of

operations are:
(a) assets, liabilities, equity, revenue and expenses
(b) assets, liabilities and equity
(c) revenue and expense
(d) sales and cost of sales C

4. These are resources controlled by the enterprise as a result of past transactions or events
and from which future economic benefits are expected to flow to the enterprise.
(a) assets (c) equity
(b) liabilities (d) revenue A

5. These are present obligations of an enterprise arising from past transactions or events the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
(a) assets (c) equity
(b) liabilities (d) revenue B

6. It is the residual interest in the assets of the enterprise after deducting all its liabilities.
(a) revenue (c) net income
(b) expenses (d) equity D

7. It represents the gross inflows of economic benefits during the period arising in the course
of ordinary activities of an enterprise when these inflows result in increases in equity, other
than those relating to contributions from owners.
(a) assets (c) expense
(b) liabilities (d) revenue D
8. It represents the gross outflows of economic benefits during the period arising in the course
of ordinary activities of an enterprise when these outflows result in decreases in equity,
other than those relating to distributions to owners.
(a) assets (c) expense
(b) liabilities (d) revenue C

9. According to ASC conceptual framework, the process of reporting an item in the financial
statements of an enterprise is:
(a) allocation (c) realization
(b) matching (d) recognition D

10. The term “recognized” is synonymous with the term:

(a) recorded (c) matched
(b) realized (d) allocated A

11. Which condition is necessary for the recognition of an asset?

(a) It is probable that future economic benefits will flow to the enterprise.
(b) The cost of the asset can be measured reliably.
(c) The asset is paid for.
(d) It is probable that future economic benefits will flow to the enterprise and the cost of
the asset can be measured reliably. D

12. Internally generated goodwill is:

(a) recognized as an asset because the inflow of future economic benefits is highly probable
and the cost of the goodwill can be measured reliably.
(b) not recognized as an asset because the cost cannot be measured reliably although the
inflow of future economic benefits is highly probable.
(c) recognized as expense.
(d) recognized as revenue. B

13. A company needed a new warehouse and a contractor quoted a P5,000,000 price to
construct it. A believed that is could build the warehouse for P4,300,000 and decided to use
company employees to build it. The final construction cost incurred by A company was
P4,800,000 but the asset was recorded at P5,000,000. What principle is this violation of?
(a) cost principle (c) matching principle
(b) separate entity (d) conservatism A

14. According to GAAP, at what value should a company show its assets on the balance sheet?
(a) market value at all times
(b) cash equivalent of asset given up or the asset received, whichever is more clearly
evident
(c) best estimate of an internal auditor
(d) cash outlay only, even if part of the consideration given was something other than
cash. B

15. Which of the following statements is not consistent with generally accepted accounting
principles as they relate to asset valuation?
(a) assets are generally recorded in the accounting records at cost to the enterprise.
 (b) accountants assume that assets such as supplies, buildings and equipment will be used
in the business operations rather sold.
(c) subtracting total liabilities from total assets results in the current market value or
equity.
(d) accountants base asset valuation upon objective, verifiable evidence rather than on
personal opinion. C

16. The valuation basis used in conventional financial statement is:

(a) replacement cost (c) original cost
(b) market value (d) a mixture of cost and value D

17. Imputing interest for certain assets and liabilities is primarily based on the concept of:
(a) valuation (c) consistency
(b) conservatism (d) stable monetary unit A

18. In an arm’s-length transaction, Company A and Company B exchanged nonmonetary

assets with no monetary consideration involved. The exchange did not culminate an
earning process for both Company A and Company B, and the fair values of the
nonmonetary assets were both clearly evident. The accounting for the exchange should be
based on the:
(a) fair value of the asset surrendered (c) recorded amount of the asset surrendered
(b) fair value of the asset received (d) recorded amount of the asset received A

19. Company A and Company B exchanged nonmonetary assets with no monetary

consideration involved and no impairment of value. The exchange did not culminate an
earning process for either Company A or Company B. The accounting for the exchange
should be based on the:
(a) recorded amount of the asset received (c) fair value of the asset received
(b) recorded amount of the asset relinquished (d) fair value of the asset relinquished
B
20. Revenue is recognized when:
(a) it is probable that future economic benefits will flow to the enterprise.
(b) the future economic benefits can be measured reliably.
(c) it is possible that reliably measurable future economic benefits will flow to the
enterprise.
(d) It its probable that reliably measurable future economic benefits will flow to the
enterprise. D
21. Normally, revenue is recognized:
(a) when the customer’s order is received.
(b) when the customer’s order is accompanied by a check.
(c) only if the transaction will create an account receivable.
(d) when the title to the goods changes. D

22. In accordance with the revenue principle, when should revenue be recognized?
(a) when the goods are shipped (c) when title to the goods passes
(b) when cash is collected (d) when goods are set aside C
23. Depending on the nature of the enterprise, revenue may be recognized based on different
acceptable criteria. Which of the following is not an accepted basis for recognition of
revenue?
(a) passage of time (c) completion of percentage of a project
(b) performance of service (d) upon signing of contract D

24. Which of the following bases of revenue recognition reflects the greatest degree of
uncertainty about future events?
(a) sales method applied to sales of a department store
(b) cost recovery method applied to an installment sales contract
(c) production method for a gold mining operation
(d) percentage of completion on a construction contract B

25. Under what methods is revenue recognized prior to delivery?

(a) percentage of completion method (c) installment sales
(b) cost recovery method (d) accrual method A

26. This revenue recognition method is allowed when a sale is insured under a forward contract
or government guarantee or when a homogenous market exists and there is a negligible
risk of failure to sell.
(a) percentage of completion method (c) cash method
(b) production method (d) accrual method B

27. What is an example of an accounting principle?

(a) The fact that one type of accounting is designed to help managers identity, measure
and control operating costs
(b) The definition of when revenue is to be recognized
(c) The fact that business transactions involve a completed exchange of economic
transactions.
(d) The definition of assets minus liabilities equals shareholders’ equity. B

28. Which of the following is true?

(a) Net assets always increase when revenue is recorded.
(b) Generally accepted accounting principles are men-made rules that never change.
(c) The assumption that a business will continue to operate until it can sell its assets to pay
its creditors underlies the going concern concept.
(d) The Board of Accountancy is the body that currently has the authority to issue
pronouncement of GAAP. A

29. Which of the following statements about executory contracts is correct?

(a) They need not be disclosed.
(b) They occur when two parties agree to transfer resources or services but only one party
has performed.
(c) They must be recorded if material n amount.
(d) They must be disclosed if material n amount. D

30. The term “revenue recognition” conventionally refers to:

 (a) the process of identifying transactions to be recorded as revenue in an accounting
period.
(b) the process of measuring and relating revenue and expenses during the period.
(c) the earning process which gives rise to revenue realization.
(d) the process of identifying those transactions that result in an inflow of assets to the
enterprise. A

31. Under what condition in it proper to recognize revenue prior to the sale of the
merchandise?
(a) when the concept of internal consistency is complied with.
(b) when the revenue is to be reported as an installment sale.
(c) when the ultimate sale of the goods is at an assured sales price.
(d) when management has a long-established policy to do so. C

32. Which of the following is the most precise sense means the process of converting noncash
resources and rights into cash or claims of cash?
(a) allocation (c) recognition
(b) collection (d) realization D

33. Gains on assets unsold are identified, in a precise sense, by the term:
(a) unrecorded (c) unrecognized
(b) unrealized (d) unallocated B

34. Which of the following statements conforms to the realization concept?

(a) Equipment depreciation was assigned to a production department and then to product
unit cost.
(b) Depreciated equipment was sold in exchange for a note receivable.
(c) Cash was collected on accounts receivable.
(d) Product unit costs were assigned to cost of goods sold when the units were sold. B

35. According to the FASB conceptual framework, an entity’s revenue may result from:
(a) a decrease in an asset from primary operations.
(b) an increase in an asset from incidental transactions.
(c) an increase in a liability from incidental transactions.
(d) a decrease in a liability from primary operations. D

36. It is proper to recognize revenue prior to the sale of merchandise when:

I. The revenue will be reported as an installment sale.
II. The revenue will be reported under the cost recovery method.
(a) I only (c) both I and II
(b) II only (d) neither I nor II D

37. Cash collection is a critical event for income recognition in the:

Cost recovery method Installment method
(a) No No
(b) Yes Yes
(c) No Yes
(d) Yes No B
38. For financial statements purposes, the installment method of accounting may be used if
the:
(a) collection period extends over more than 12 months.
(b) installment are due n different years.
(c) ultimate amount collectible is indeterminate.
(d) percentage of completion method is inappropriate. C

39. Income recognized using the installment method of accounting generally equals cash
collected multiplied by the:
(a) net operating profit percentage.
(b) net operating profit percentage adjusted for expected uncollectible accounts.
(c) gross profit percentage.
(d) gross profit percentage adjusted for expected uncollectible accounts. C

40. According to the installment method of accounting, gross profit on an installment sale is
recognized in income:
(a) on the date of sale.
(b) on the date the final cash collection is received.
(c) in proportion to the cash collection.
(d) after cash collections equal to the cost of sales have been received. C

41. According to the cost recovery method of accounting, gross profit on an installment sale is
recognized in income:
(a) after cash collections equal to the cost of sales have been received.
(b) in proportion to the cash collections.
(c) on the date the final cash collection is received.
(d) on the date of sale. A

42. Art Company is engaged in extensive exploration for water. If upon discovery of water, the
company need not recognize any revenue from water sales exceed the costs of exploration,
the basis of revenue recognition being employed is the:
(a) production method (c) sales or accrual basis
(b) cash or collection basis (d) sunk cost or cost recovery method D

43. Art Company sells equipment on installment contracts. Which of the statements best
justifies the use of the cost recovery method of revenue recognition to account for these
installment sales?
(a) The sales contract provides that title to the equipment only passes to the purchase
when all payments have been made.
(b) No cash payments are due until one year from the date of sales.
(c) Sales are subject to a high rate of return.
(d) There is no reasonable basis for estimating collectibility. D

44. X Company produces expensive equipment for sale on installment contracts. Where there is
doubt about eventual collectibility, the income recognition method least likely to overstate
income is:
(a) at the time the equipment is completed. (c) the cost recovery method.
 (b) the installment method. (d) at the time of delivery. C

45. When costs can be reasonably associated with specific revenue but not with specific
product, the cost should be:
(a) expensed in the period incurred.
(b) allocated to the specific produced based on the best estimate of the product processing
time.
(c) expensed in the period in which the related revenue is recognized.
(d) capitalized and then amortized over a reasonable period. C

46. Why are certain costs of doing business capitalized when incurred and then depreciated or
amortized over the periods benefited?
(a) to adhere to the concept of conservatism
(b) to reduce income tax liability
(c) to aid management in decision –making process
(d) to properly match costs of production with revenue earned D

47. Which of the following is an example of the expense recognition principle of associating
cause and effect?
(a) allocation of insurance cost (c) depreciation of property, plant and equipment
(b) sales commissions (d) officers’ salaries B

48. Which of the following principles best describes the conceptual rational for the method of
matching depreciation with revenue?
(a) associating cause and effect (c) immediate recognition
(b) systematic and rational allocation (d) partial recognition B

49. Which of the following is expensed under the principle of systematic and rational
allocation?
(a) salesmens’ monthly salaries (c) transportation to customers
(b) insurance premiums (d) electricity to light office building B

50. Which of the following would be matched with current revenue on a basis other than
association of cause and effect?
(a) goodwill (c) sales commission
(b) cost of goods sold (d) warranty cost A

51. A patent with a ten-year life was determined to be worthless. The write off of the asset is
an example of which of the following principles?
(a) associating cause and effect (c) profit maximization
(b) immediate recognition (d) classification B

52. Which of the following is not a theoretical basis for the allocation of expense?
(a) immediate recognition (c) cause and effects association
(b) systematic and rational allocation (d) profit maximization D
53. Some costs cannot be directly related to particular revenues but are incurred to obtain
benefits that are exhausted in the period in which costs are incurred. An example of such
costs is:
(a) sales commissions (c) freight in
(b) sales salaries (d) prepaid insurance B

54. This measurement basis is the discounted value of future net cash inflows that an asset is
expected to generate in the normal course of business.
(a) historical cost (c) realizable value
(b) current cost (d) present value D

55. Historical cost is a measurement base currently used in financial accounting. Which of the
following measurement bases is also currently used in financial accounting?
Current selling price Discounted cash flow Replacement cost
(a) Yes No Yes
(b) Yes Yes Yes
(c) Yes No No
(d) No Yes Yes B

56. When discussing asset valuation, the following valuation bases are sometimes mentioned:
replacement cost, exit value, and discounted cash flow. Which of these bases should be
considered a current value measure?
(a) replacement cost and exit value
(b) replacement cost and discounted cash flow only
(c) exit value and discounted cash flow only
(d) replacement cost, exit value, and discounted cash flow D

57. According to the FASB conceptual framework, which of the following attributes would not
be used to measure inventory?
(a) historical cost (c) net realizable value
(b) replacement cost (d) present value of future cash flows D

58. Which of the most common measurements basis in accounting?

(a) historical cost (c) realizable value
(b) current cost (d) present value A

59. A present obligation should be accrued when:

(a) it is probable at the date of the financial statements that a liability has been incurred
and the amount can be reasonably estimated
(b) the obligation has been incurred on the date of the financial statements and the amount
may be material
(c) it is probable that the obligation will be incurred in a future period and the amount can
be reasonably estimated
(d) it is probable at the date of the financial statements that an obligation has been incurred
and the amount may be material A
60. How should a present obligation that is not probable and for which the amount can be
reasonably estimated be reported?
(a) accrued and disclosed (c) disclosed only
(b) accrued only (d) neither accrued nor disclosed C

61. A present obligation that is probable and for which the amount can be reasonably
estimated should:
(a) not be accrued but should be disclosed in the notes to the financial statements
(b) be accrued by debiting an appropriated retained earnings account and crediting a
liability account
(c) be accrued by debiting an expense account and crediting an appropriated retained
earnings account
(d) be accrued by debiting an expense account and crediting a liability account D

62. Abe Company is being sued for illness caused to local residents as a result of negligence on
the company’s part in permitting the local residents to be exposed to highly toxic chemicals
from its plant. Abe’s lawyer states that it is probable that Abe will lose the suit and be
found liable for a judgment costing anywhere from P500,000 to P2,500,000. However, the
lawyer states that the most probable cost is P1,000,000. As a result of the above facts,
Abe should accrue:
(a) a loss of P500,000 and disclose an additional contingency of up to P2,000,000
(b) a loss of P1,000,000 and disclose an additional contingency of up to P1,500,000
(c) a loss of P1,000 but not disclose any additional contingency
(d) no loss but disclose a contingency of P500,000 to P2,500,000 B

63. Contingent assets are usually recognized when:

(a) realized
(b) occurrence is reasonably possible and the amount can be reasonably estimated
(c) occurrence is probable and the amount can be reasonably estimated
(d) the amount can be reasonably estimated A

64. Which of the following is the proper accounting treatment of a contingent asset?
(a) an accrued amount
(b) deferred earnings
(c) an account receivable with an additional disclosure explaining the nature of the
transaction
(d) a disclosure only D

65. When the occurrence of a contingent asset is probable and its amount can be reasonably
estimated, the gain contingency should be:
(a) recognized in the income statement and disclosed.
(b) classified as an appropriation of retained earnings.
(c) disclosed, but not recognized in the income statement.
(d) neither recognized in the income statement not disclosed. C
 V. FINANCIAL REPORTING

1. What is the objective of financial reporting?

(a) to provide the necessary information for the management of an enterprise to
managers of that enterprise.
(b) to provide information that the creditors of an enterprise can use in deciding whether
to make additional loans to the enterprise.
(c) to measure the periodic net income of an enterprise.
(d) to provide external users with financial information that is useful in making rational
investment, credit and similar decisions. D

2. These include not only financial statements but also other information such as financial
highlights, analysis of financial statements, description of major products and list of
directors and officers.
(a) audit reports (c) note to financial statements
(b) financial reports (d) financial statements B

3. Which uses need financial information to enable them to asses the ability of the enterprise
to provide renumeration, retirement benefits and employment opportunities?
(a) customers (c) public, in general
(b) government and its agencies (d) employees D

4. The objectives of financial reporting for business enterprise are based on:
(a) the need for conservatism.
(b) reporting on management’s stewardship.
(c) generally accepted accounting principles.
(d) the needs of the users of the information. D

5. 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) individual business enterprises and an economy as a whole or to members of society
as consumers.
(c) individual business enterprises and n economy as a whole, rather than to industries or
to members of society as consumers.
 (d) individual business enterprises, industries and an economy as a whole, rather than to
members of society as consumers. A

6. During a period when an enterprise is under the direction of a particular management,

financial reporting will directly provide information about:
(a) both enterprise performance and management performance.
(b) management performance but not enterprise performance.
(c) enterprise performance but not management performance.
(d) neither enterprise performance nor management performance. C

7. What is the objective of financial reporting?

(a) assist investor in analyzing the economy.
(b) assist inventor in predicting future cash flows.
(c) assist supplier in determining an appropriate discount to offer a particular company.
(d) enable banks to determine an appropriate interest rate on their guaranteed
investment certificates.
B

8. The overall objective of financial reporting is to:

(a) provide information that is useful for decision making by external users
(b) provide information for income tax preparation and payment
(c) provide information only for stockholders
(d) provide information for management to make decisions for controlling the operations
A

9. Which one of the following items is not listed as a major objective of financial reporting?
(a) financial reporting should provide information about enterprise resources, claims to
those resources, and changes in them
(b) financial reporting should provide information useful in evaluating management’s
stewardship
(c) financial reporting should provide information useful in investment, credit, and similar
decisions
(d) financial reporting should provide information useful in assessing cash flow projects
B

10. Financial reporting is concerned only with information that is significant enough to affect
evaluation or decision.
(a) timeliness (c) materiality
(b) cost and benefit (d) comparability C

54. Proponents of historical costs maintain that in comparison with all other valuation
alternatives for general-purpose financial reporting, statements prepared using historical
costs are more:
(a) objective (c) indicative of the entity’s purchasing power
(b) relevant (d) conservative A

55. It is the quality of information that allows comparisons within a single enterprise through
time or from one accounting period to the next.
 (a) horizontal comparability (c) reliability
(b) dimensional comparability (d) uniformity A

56. When information about two different enterprises engaged in the same industry has been
prepared and presented in similar manner, the information exhibits the qualitative
characteristic of:
(a) relevance (c) consistency
(b) reliability (d) comparability D

SOURCES & REFERENCES:

 Valix, Conrado T., THEORY OF ACCOUNTS – 2001 Edition, GIC Enterprises & Co., Inc., 2001

1. Accounting is:
I. A service activity and its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making
economic decision.
II. The art of recording, classifying, and summarizing in a significant manner and in terms
of money, transactions, and events which are in part at least of a financial character and
interpreting the results thereof.
III. The process of identifying, measuring, and communicating economic information to
permit informed judgment and decision by users of the information.
(a) I only (c) I and III
(b) I and II (d) I, II, and III D

2. Which is true concerning the ASC framework?

I. The framework sets out the concepts that underlie the preparation and presentation of
financial statements for external users.
II. The framework is not a Statement of Financial Accounting Standards and hence does
not define standard for any particular measurement or disclosure issue.
III. The framework is concerned with general-purpose financial statements including
consolidated financial statements.
(a) I only (c) I and III
(b) I and II (d) I, II, and III D

3. Suppliers and other trade creditors are interested in information:

(a) that enables them to determine whether amounts owing to them will be paid when due.
(b) about the continuance of an enterprise, especially when they have a long-term
involvement with or are dependent on the enterprise.
 (c) in order to regulate the activities of the enterprise, determine taxation policies and as
the basis for national income and similar statistics.
(d) about the stability and profitability of the enterprise. A

4. Information about financial structure is useful in:

I. Predicting future borrowing needs and how future profits and cash flows will be
distributed among those with an interest in the enterprise.
II. Predicting the ability of the enterprise to meet its financial commitments as they fall
due.
(a) both I and II (c) II only
(b) I only (d) neither I nor II B

5. Under this assumption, the effects of transactions and other events are recognized when
they occur and not as cash or its equivalent is received or paid, and they are recorded in the
accounting records and reported in the financial statements of the period to which they
relate.
(a) accrual basis (c) monetary unit
(b) going concern (d) time period A

6. These are the attributes that make the information provide in financial statements useful to
users.
(a) qualitative characteristics (c) underlying assumptions
(b) quantitative characteristics (d) GAAP A

7. An essential quality of the information provided in financial statements is that it is readily

understandable by users. For this purpose, users are:
I. Assumed to have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information with reasonable diligence.
II. Informed of the accounting policies employed, any changes in those policies and the
effects of such changes.
(a) I only (c) both I and II
(b) II only (d) neither I nor II A

8. Information has the quality of relevance:

I. When it influences the economic decision of users by helping them evaluate 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 (c) both I and II
(b) II only (d) neither I nor II A

9. The information contained in the financial statements is neutral when the information:
(a) is free from bias and error.
(b) is complete within the bounds of materiality and cost.
(c) reflects the economic substance of the transactions rather than their mere legal form.
(d) represents faithfully the transactions and other events that it purports to represent. A
10. Which is incorrect concerning comparability of financial information?
(a) Users must be able to compare the financial statements of an enterprise through time in
order to identify trends in its financial position and performance.
(b) Users must be able to compare the financial statements of different enterprises in order
to evaluate their relative financial position, performance and cash flows.
(c) It is appropriate for an enterprise to leave its accounting policies unchanged when more
relevant and reliable alternatives exist.
(d) It is important that financial statements show financial information for the preceding
period because users wish to compare the financial position, performance and cash
flows of an enterprise over time. C

11. The elements that directly related to the measurement of financial position are:
(a) assets, liabilities and equity. (c) income and expenses.
(b) assets and liabilities. (d) assets, liabilities, equity, income and expenses.
A
12. The elements directly related to the measurement of performance are:
(a) income and expenses. (c) assets and liabilities.
(b) assets, liabilities and equity. (d) income, expenses and equity. A

13. An asset is:

(a) a resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow the enterprise.
(b) a present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow from the enterprise of resources embodying economic
benefits.
(c) the residual interest in the assets of the enterprise after deducting all its liabilities.
(d) the excess of revenues over expenses. A

14. Revenue is:

I. Gross inflow of economic benefits during the period arising in the ordinary course of
ordinary activities of an enterprise when such inflow results in an increase in equity,
other than contributions from owners.
II. Gross outflow of economic benefits during the period arising in the ordinary course of
ordinary activities of an enterprise when such outflow results in a decrease in equity,
other than distribution to owners.
(a) I only (c) both I and II
(b) II only (d) neither I nor II A

15. Conceptually and technically, this arises in the ordinary course of ordinary activities of an
enterprise and is referred to by a variety of different names including sales, fees, interest,
dividend, royalty, and rent.
(a) revenue (c) profit
(b) income (d) gain A
16. Expenses are recognized in the income statement on the basis of a direct association
between the cost incurred and the earning of specific items of income. This process is
commonly referred to as:
(a) matching of costs with revenues (c) revenue recognition
(b) matching of revenues with costs (d) cost allocation A

17. When economic benefits are expected to arise over several accounting periods and the
association with income can only be broadly or indirectly determined, expenses are
recognized in the income statement on the basis of:
(a) cause and effect association (c) immediate recognition
(b) systematic and rational allocation (d) profit maximization B

18. An expense is recognized immediately in the income statement:

I. When an expenditure produces no future economic benefits.
II. When cost incurred ceases to qualify for recognition as an asset in the balance sheet.
(a) I only (c) both I and II
(b) II only (d) neither I nor II C

19. Which statement is incorrect concerning the ASC framework?

I. The framework applies to the financial statements of all commercial, industrial, and
business reporting enterprises, whether in public and private sector.
II. Special purpose financial reports, for example, prospectuses and computations prepared
for taxation purposes, are within the scope of the framework.
(a) both I and II (c) I only
(b) neither I nor II (d) II only D

20. Current cost is the:

(a) amount of cash paid or fair value of the consideration given at the time of acquisition.
(b) amount of cash that would have to be paid if the same or an equivalent asset is
acquired currently.
(c) amount of cash that could currently be obtained by selling the asset in an orderly
disposal.
(d) present discounted value of the future net cash inflows that the item is expected to
generate in the normal course of business. B

21. Historical cost is the:

(e) amount of cash paid or fair value of the consideration given at the time of acquisition.
(f) amount of cash that would have to be paid if the same or an equivalent asset is
acquired currently.
(g) amount of cash that could currently be obtained by selling the asset in an orderly
disposal.
(h) present discounted value of the future net cash inflows that the item is expected to
generate in the normal course of business. A

22. These are also known as postulates.

(a) accounting concepts (c) accounting principles
(b) accounting standards (d) accounting assumptions D
23. Which subsequent event requires adjustment?
(a) loss on trade receivable which is confirmed by the bankruptcy of a customer
(b) sale of common stock
(c) settlement of litigation
(d) loss of plant as a result of fire A

24. Important subsequent events should be disclosed because they:

(a) may affect the interpretation of the current period financial statements.
(b) describe change in accounting period.
(c) occur immediately after the current period.
(d) reveal losses that have a high probability of occurring in the future. A

25. These users require financial information in order to regulate the activities of an enterprise,
determine taxation policies and as basis for nation income and similar statistics.
(a) lenders (c) investors
(b) public (d) governments and their agencies D

26. The providers of risk capital and their advisers:

(a) have an interest in information about the continuance of an enterprise especially when
they have a long-term involvement with or are dependent on the enterprise.
(b) are interested in information that enables them to determine whether their loans and
the interest attaching to them will be paid when due.
(c) are interested in information about the stability and profitability of the enterprise.
(d) are concerned with the risk inherent in and return provided by their investments and
need information to help them determine whether they should buy or sell. D

27. Which statement is incorrect concerning financial statements?

(a) Financial statements are prepared and presented at least annually and are directed
toward the specific information needs of a wide range of users.
(b) The objective of financial statements is to provide information about financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in
making economic decisions.
(c) Financial statements also show the results of the stewardship of management of the
accountability of management for the resources entrusted to it.
(d) The management of an enterprise has the primary responsibility for the preparation and
presentation of the financial statements of the enterprise.

28. Information about economic resources controlled by the enterprise and its capacity to
modify these resources is useful in predicting:
(a) the ability of the enterprise to meet its financial commitments as they fall due over a
longer term.
(b) the ability of the enterprise to meet currently maturing financial commitments.
(c) the future borrowing needs and how future profits and cash flows will be distributed
among those with an interest in the enterprise.
(d) the ability of the enterprise to generate cash and cash equivalents in the future.
29. Information about the performance of an enterprise is required in order to assess potential
changes in the economic resources that is likely to control in the future. This information is
primarily provided in the:
(a) cash flow statement (c) balance sheet
(b) statement of retained earnings (d) income statement

30. Which statement is incorrect concerning the qualitative characteristic of relevance?

(a) The relevance of information is affected by its nature and materiality.
(b) To be useful, information must be relevant to the decision making needs of users.
(c) Information about financial position and past performance is frequently used as basis for
predicting future financial position and performance and other matters such as dividend
and wage payments and ability of the enterprises to meet its financial commitments as
they fall due.
(d) The predictive and confirmatory roles of information are not interrelated. D

31. Which statement is incorrect concerning the qualitative characteristic of reliability?

(a) The information in financial statements must be within the bounds of materiality and
cost.
(b) To be reliable, information must represent faithfully the transactions and other events it
either purports to represent or could reasonably be expected to represent.
(c) The information should be accounted for in accordance with their substance and
economic reality and not merely their legal form.
(d) Prudence is the inclusion of a degree of caution in the exercise of judgment needed in
making an estimate required under conditions of uncertainty, such that assets or income
are overstated and liabilities or expenses are understated. D

32. The following statements relate to the constraints on relevant and reliable information.
Which statement is incorrect?
(a) The benefits derived from the information should exceed the cost of providing it.
(b) In achieving a balance between relevance and reliability, the overriding consideration is
how best to satisfy the economic decision-making needs of users.
(c) If there is undue delay in the reporting of information, it may lose its relevance and
reliability.
(d) To provide information on a timely basis, it may often be necessary to report before all
aspects of a transaction or other event are known, thus impairing reliability. C

33. Casualty loss from an earthquake is:

(a) not recognized (c) deferred loss
(b) external transaction (d) internal transaction

34. The future economic benefit embodied in an asset is the potential to contribute directly or
indirectly to the flow of cash and cash equivalent to the enterprise. Such potential may:
I. be a productive one that is part of the operating activities of the enterprise.
II. take the form of convertibility into cash or cash equivalents.
III. take the form of a capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.
(a) I only (c) III only
(b) I and II only (d) I, II and III D
35. Which statement is incorrect concerning liabilities?
(a) A decision by the management of an enterprise to acquire assets in the future in itself
does not give rise to a present obligation.
(b) Obligation may be legally enforceable as a consequence of a binding contract or
statutory requirement.
(c) An essential characteristic of a liability is that the enterprise has a present obligation.
(d) If an enterprise decides as a matter of policy to rectify faults in its products even when
these become apparent after the warranty period has expired, the amounts that are
expected to be expended in respect of goods already sold are liabilities. A

36. Which statement is incorrect concerning the elements directly related to the measurement
of performance?
(a) Gains represent other items that meet the definition of income and may or may not
arise in the course of ordinary activities.
(b) Losses represent other items that meet the definition of expenses and may or may not
arise in the course of ordinary activities.
(c) The definition and expenses encompasses losses as well as those expenses that arise in
the course of ordinary activities.
(d) The definition of revenue encompasses both income and gains. D

37. Which statement is correct concerning the recognition of the elements of financial
statements?
(a) An asset is recognized when it is possible that future economic benefits will flow to the
enterprise and the cost of the asset 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 an obligation that can be measured
reliably.
(c) Income is recognized when an increase in future economic benefits related to a
decrease in asset or an increase in liability has arisen and the increase in economic
benefits can be measured reliably.
(d) Expenses are recognized when a decrease in future economic benefits related to a
decrease in asset or increase in liability has occurred and the decrease in economic
benefits can be measured reliably. D

38. Which statement is correct concerning materiality?

I. Information is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
II. Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement.
III. Materiality is a primary qualitative characteristic rather than a threshold or cut off
point for useful information.
(a) I, II and III (c) I and III only
(b) I only (d) I and II only D

39. A contingent liability is a:

 I. possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence and nonoccurrence of one or more uncertain
future events not wholly within the control of the enterprise.
II. present obligation that arises from past and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and
the amount of the obligation can be measured reliably.
(a) I only (c) both I and II
(b) II only (d) neither I nor II A

40. The present obligation is not a contingent liability but should be recognized as a provision
when:
(a) amount is reasonably estimable and event occurs infrequently.
(b) amount is reasonably estimable and occurrence of event is probable.
(c) event is unusual in nature and occurrence of event is probable.
(d) event is unusual in nature and event occurs infrequently. B

41. Which statement is incorrect concerning contingent liability?

(a) A contingent liability is not recognized in the financial statements.
(b) A contingent liability is disclosed only.
(c) If the contingent liability is remote, no disclosure is required.
(d) A contingent liability is both probable and measurable. D

42. It is a possible asset that arises from past event and whose existence will be confirmed only
by occurrence or nonoccurrence of one or more uncertain future events not wholly within
the control of the enterprise.
(a) contingent asset (c) suspense account
(b) other asset (d) current asset A

43. Which statement is incorrect concerning a contingent asset?

(a) A contingent asset is not recognized in the financial statements because this may result
to recognition of income that may never be realized.
(b) When the realization of income is virtually certain, the related asset is no longer
contingent asset and its recognition is appropriate.
(c) A contingent asset is only disclosed when the occurrence of the future event is possible
or remote.
(d) The related gain arising from the contingent asset is recognized usually when it is
realized. C

44. These are events, whether favorable or unfavorable, that occur between the balance sheet
date and the date on which the financial statements are authorized for issue.
(a) events after balance sheet date (c) past events
(b) current assets (d) future uncertain events A

45. Adjusting entries after balance sheet date include all of the following, except:
(a) resolution after balance sheet date of a court case because it confirms that the
enterprise had already a present obligation
(b) bankruptcy of customer which occurs after the balance sheet date
(c) discovery of fraud or errors that show that the financial statements were incorrect
 (d) business combination after the balance sheet date D

46. Non-adjusting events after balance sheet date which require disclosure include all of the
following, except:
(a) plan to discontinue an operation
(b) major purchase and disposal of asset or expropriation of major asset by government
(c) destruction of a major production plant by a fire after the balance sheet date
(d) determination after balance sheet date of the cost of assets purchased or proceeds sold
before the balance sheet date D

47. Which of the following is most likely to prepare the most accurate financial forecast for a
corporate enterprise based on empirical evidence?
(a) investors using statistical models to generate forecasts
(b) corporate management
(c) financial analysts
(d) independent CPAs B

48. The overriding criterion by which accounting information can be judged is that of:
(a) usefulness for decision making (c) timeliness
(b) freedom from bias (d) comparability A

49. Which concept of accounting holds that, to a maximum extent possible, financial statements
should be based on arm’s length transactions?
(a) revenue realization (c) monetary unit
(b) verifiability (d) matching B

50. Allowing firms to estimate rather than physically count inventory at interim periods is an
example of a tradeoff between:
(a) verifiability and reliability (c) timeliness and verifiability
(b) reliability and comparability (d) neutrality and consistency C

57. Which of the following relates to both relevance and reliability?

(a) faithful representation (c) substance over form
(b) feedback value (d) cost-benefit constraint D

58. Which of the following financial attributes of assets is generally considered to be the most
relevant?
(a) present value (c) current cost
(b) current exit value (d) historical cost A

59. The conservative approach in the measurement of financial position is best illustrated in
which of the following?
(a) arbitrary reduction of property items to report a conservative asset position
(b) recognition of fictitious liabilities
(c) inventories valued at cost or market, whichever is lower
(d) intangible asses are valued at nominal amounts C
60. An example of subsequent event which requires adjustment of financial statements is:
(a) settlement of litigation when the event giving rise to the claim took place subsequent to
the balance sheet date
(b) decline in market value of investment between the balance sheet date and date on
which financial statements are issued
(c) loss on trade receivable which is confirmed by the bankruptcy of a customer occurring
after the balance sheet date
(d) loss of inventories as a result of flood C

61. Events after balance sheet date are those which occur between the balance sheet date and
the date on which the financial statements are issued. Which subsequent event requires
adjustment as opposed to mere disclosure in the financial statements?
(a) material decline in market value of inventory
(b) loss of plant as a result of fire
(c) material writeoff of receivables resulting from customer’s major casualty after the
balance sheet date
(d) payment to BIR of disputed income tax assessment D

62. Under the accrual basis of accounting, cash receipts and disbursements may:
(a) precede, coincide with, or follow the period in which revenue and expenses are
recognized
(b) precede or coincide with, but never follow the period in which revenue and expenses are
recognized
(c) coincide with or follow, but never precede the period in which revenue and expenses are
recognized
(d) only coincide with the period in which revenue and expenses are recognized A

63. Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristic. These broad
classes are termed as:
(a) audit reports (c) notes to financial statements
(b) financial reports (d) elements of financial statements D

64. It is the process of incorporating in the balance sheet or income statement an item that
meets the definition of an element of financial statement.
(a) measurement (c) allocation
(b) realization (d) recognition D

65. What is another term for equity?

(a) net assets (c) revenue
(b) net loss (d) liability A

66. The elements of financial statements should be measured in:

(a) constant pesos (c) fixed pesos
(b) nominal pesos (d) flexible pesos B

67. Generally, revenue from sales should be recognized at a point when:

(a) management decides it is appropriate to do so
 (b) the product is available for sale to the ultimate consumer
(c) the entire amount receivable has been collected from the customer and there remains
no further warranty liability
(d) the enterprise has transferred to the buyer the significant risks and rewards of
ownership of the goods D

68. Which of the following represents the least desirable choice in terms of realization and
recognition of revenue?
(a) recognition of revenue during production
(b) recognition of revenue when a sale occurs
(c) recognition of revenue when a cash is collected
(d) recognition of revenue when production is completed C

69. Which accounting principle is being observed when an accountant charges to expense a
cost that contributed to revenue during a period?
(a) revenue realization (c) monetary unit
(b) matching (d) conservatism B

70. The costs of selling and administration in a manufacturing firm are an example of:
(a) direct matching (c) asset valuation
(b) systematic and rational allocation (d) immediate recognition D

71. A decrease in net assets arising from peripheral or incidental transactions is called:
(a) capital expenditure (c) loss
(b) cost (d) expense C

72. An outflow of assets from an entity based on an activity that represents the entity’s major
operations is called:
(a) loss (c) expense
(b) liability (d) equity C

73. Which of the following is not among the economic resources of a business enterprise?
(a) money (c) obligations to pay money
(b) products or output of the enterprise (d) ownership interest in other enterprises C

74. The following statements relate to the concept of asset. Which is false?
(a) the primary characteristic of an asset is its capacity to provide the enterprise with
probable economic benefits
(b) there is an expiration of economic benefits when an asset is used up in the production
of another asset
(c) a business entity may recognize an asset even if it does not possess legal title
(d) the assets of an enterprise result from past transactions or other past events B

75. The following statements relate to the concept of revenue. Which statement is not true?
(a) income determination is technical term that refers to the process of identifying,
measuring and relating revenue and expenses during an accounting period
(b) transactions like issuance of capital stock and payment of dividends between the
business entity and its owners cannot give rise to revenue
 (c) deferred revenue is synonymous with unrealized revenue
(d) the definition of income encompasses both revenue and gains C

76. Gross decreases in assets or gross increases in liabilities recognized and measured in
conformity with GAAP that result from those types of profit-directed activities of an
enterprise that can change owners’ equity refer to:
(a) expenses (c) revenue
(b) results of operations (d) net income A

77. The following statements relate to the concept of expense. Which of the following is false?
(a) all expenses and loss are expired costs, but not all expired cots are expenses or losses
(b) all expenses decrease owners’ equity, but not all decreases in owners’ equity are
expenses
(c) expense is synonymous with expenditure
(d) business enterprise do not incur expenses per se but they initially acquire assets C

78. An expiration of cost which is incurred without compensation or return and not absorbed as
cost of revenue is called:
(a) deferred credit (c) loss
(b) deferred charge (d) indirect cost C

79. The allowance for cash discounts which would appear as a deduction from accounts
receivable on a balance sheet and would be based on an estimate of cash discounts to be
taken on accounts receivable is an effect of the application of:
(a) matching (c) materiality
(b) consistency (d) objectivity A

80. Some costs cannot be directly related to particular revenue but are incurred to obtain
benefits in the period in which the costs are incurred. An example of such cost is:
(a) telephone expenses (c) cost of merchandise sold
(b) sales commissions (d) transportation in A

81. This represents the approximation of the exchange price in transfers in which money or
promises to pay money are not involved.
(a) fair value (c) selling price
(b) estimated value (d) transfer price A

82. Which transaction indicates compliance with the concept of objectivity?

(a) the accounting transaction that furthers the objectives of the enterprise
(b) the accounting transaction which involves the allocation of revenue or expense items in
a rational and systematic manner
(c) an arm’s length transaction between two independent parties
(d) the accounting transaction which is promptly recorded in a fixed amount C

83. Which of the following accounting theory justifies the use of historical cost in the
preparation of the financial statements?
(a) conservatism (c) relevance
(b) objectivity (d) comparability B
84. Robbers stole from a company 30 computers worth P300,000. The value of the loss should
be classified as:
(a) an exchange (c) a cost
(b) a casualty (d) a nonreciprocal transfer D

85. An example of revenue derived from a nonreciprocal transfer is:

(a) compensation received as damages in a successful lawsuit
(b) appreciation of property
(c) land acquired as donation
(d) settlement of a liability at less than its book value A

86. The restatement of historical peso financial statements in terms of current prices results in
presenting assets at:
(a) lower of cost or market value
(b) current appraisal value
(c) current replacement cost
(d) costs adjusted for purchasing power changes C

87. The following statements relate to current value accounting. Which statement is correct?
(a) the objective of current value accounting is to report the effects of general price
changes rather than specific price changes
(b) the term current value may mean current replacement cost, net realizable value or net
present value of expected future cash flows
(c) all items in a current value balance sheet are difference in amount from what they
would be in a historical cost balance sheet
(d) both purchasing power and holding gains and losses are recognized in current value
accounting B

88. The main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.
(a) PICPA (c) PRC
(b) Board of Accountancy (d) ASC D

89. Expenses are recognized when:

(a) It is probable that an outflow of future economic benefits has occurred.
(b) The outflow of future economic benefits can be measured reliably.
(c) It is probable that a reliably measurable outflow of future economic benefits has
occurred.
(d) It is possible that a reliably measurable outflow of future economic benefits has
occurred. C

90. The requirement that expenses be reported in the same accounting period as the revenues
earned as a result of those expenses is:
(a) revenue principle (c) cash basis of accounting
(b) cost principle (d) matching principle D
91. Some costs are recognized as expenses on the basis of a presumed direct association with
specific revenue.
(a) associating cause and effect (c) immediate recognition
(b) systematic and rational allocation (d) income tax method A

92. If an asset provides benefits for several periods, its cost is allocated on the periods
benefited in the absence of a more direct basis for relating the cost to revenue.
(a) associating cause and effect (c) immediate recognition
(b) systematic and rational allocation (d) installment method B

93. Which of the following is not a basis for the immediate recognition of a cost during a
period?
(a) The cost provides no discernible future benefit.
(b) The cost recorded in a prior period no longer provides discernible benefit.
(c) The income tax savings using the immediate write-off method exceed the savings
obtained by allocating the cost to several periods.
(d) Allocation of the cost on the basis of association with revenue among several accounting
periods is considered to serve no useful purpose. C

94. When costs can be reasonably associated with specific revenues but not with specific
products, the costs should be:
(a) charged to expense in the period incurred
(b) allocated to specific products based on the best estimate of the product processing time
(c) expensed in the period in which the related revenue is recognized
(d) capitalized and then amortized over a reasonable period C

95. Why are certain costs of doing business capitalized when incurred and then depreciated or
amortized over subsequent accounting cycles?
(a) to reduce the income tax liability
(b) to aid management in the decision making process
(c) to mach the costs of production with revenue as earned
(d) to adhere to the accounting concept of conservatism C

66. Which of the following is expensed under the principle of systematic and rational allocation?
(a) amortization of intangible assets (c) research and development costs
(b) sales commissions (d) officers’ salaries A

96.

SOURCES & REFERENCES:

 Valix, Conrado T., THEORY OF ACCOUNTS – 2002 & 2004 Edition, GIC Enterprises & Co.,
Inc., 2002 & 2004