TRUE OR FALSE. The underlined word or phrase is the one that makes the sentence false. If there is no underlined word, the statement is true.

1. Financial accounting focuses on general-purpose reports that are intended for internal and external users.

2. An accountant who prepares a balance sheet that does not balance had made a mistake somewhere because the balance sheet must balance.

3. The fact that the equity represents an ownership interest and a residual claim against the net assets of an enterprise means in the event of liquidation, creditors have priority over owners in the distribution of assets.

4. The economic entity assumption is useful only when the entity referred to is a profit-seeking business enterprise.

5. To be reliable, accounting information must be capable of making a difference in a decision.6. A conceptual framework underlying financial accounting is necessary because future accounting

problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.

7. The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent.

8. As commonly used, the term “net assets” represents current assets minus current liabilities.9. Generally accepted accounting principles become “generally accepted” by agreement, often tacit

agreement, rather than by formal derivation from a set of postulates and basic concepts.10. Accounting theory is developed without consideration of the environment within which it exists.11. Accrual accounting means that income is recognized when received regardless of when earned and

expense is recognized when paid regardless of when incurred.12. If there is evidence that the entity would experience large and persistent losses or that the entity’s

operations are to be terminated, the going concern assumption is abandoned.13. Adherence to the concept of consistency requires that the same accounting principles be applied to

similar transactions for a minimum of five years before any change in principle is adopted.14. When an amount is determined by the accountant to be immaterial in relation to other amounts

reported in the financial statements, that amount may be deleted from the financial statements.15. Information that has been measured and reported in a similar manner for different enterprises is

considered comparable.16. A natural business year is a twelve-month period that ends on any month when the business is at the

lowest or experiencing slack season.17. The three elements ~ assets, liabilities, and equity ~ describe transactions, events, and circumstances

that affect an enterprise during a period of time.18. The conservatism convention allows for the reporting of financial information in any manner the

accountant desires when there is doubt surrounding a particular issue.19. The periodicity assumption is a result of the demands of various financial statement user groups for

timely reporting of financial information.20. The monetary unit assumption means that the money (peso) is the common denominator of

economic activity and provides an appropriate basis for accounting measurement and analysis.21. In case where there is a conflict, the requirements of the conceptual framework shall prevail over the

Philippine Financial Reporting Standards.

22. The full disclosure principle states that the information should be provided when it is of sufficient importance to influence the judgment and decisions of an informed user.

23. Liquidity is the availability of cash over a long term to meet financial commitments when they fall due.

24. Under entity theory, the accounting objective is geared toward proper income determination.25. The notes to financial statements generally summarize the items presented in the main body of the

statements.

IDENTIFICATION. Try to answer these!

_______________ 1. A list of names of all account titles_______________ 2. Balance sheet accounts_______________ 3. The function that general ledgers serve in the accounting process_______________ 4. The responsibility for the proper preparation of a company’s financial statements

rests with it._______________ 5. The recognition or nonrecognition of business activities as accountable events _______________ 6. It refers to the financial flexibility of the enterprise._______________ 7. It refers to the ability of the enterprise to pay currently maturing obligations._______________ 8. The assumption on which the best indication of an enterprise’s present and

continuing ability to generate favorable cash flows is information about enterprise earnings is based

_______________ 9. The assigning of peso amounts to accountable economic transactions and events_______________ 10. In recognition of this, consolidated financial statements are prepared._______________ 11. The number of members of FRSC_______________ 12. The level of income earned by an enterprise through efficient and effective

utilization of its resources_______________ 13. Its main function is to establish and improve accounting standards that will be

generally accepted in the Philippines._______________ 14. It involves the examination of financial statements by an independent CPA for

the purpose of expressing an opinion as to fairness_______________ 15. Continuation of an accounting entity in the absence of evidence to the contrary_______________ 16. A theoretical foundation which guides the ASC, preparers, and users of financial

accounting information in preparation and presentation of financial statements_______________ 17. A listing of the components of account balances_______________ 18. Entries that transfer the balances in all of the nominal accounts to equity_______________ 19. The first step in the accounting cycle_______________ 20. The manner in which the accounting records are organized and employed within

a business_______________ 21. An amount not paid and currently matched with earnings_______________ 22. An amount paid and not currently matched with earnings_______________ 23. An amount not received and currently matched with earnings_______________ 24. An amount received and not currently matched with earnings_______________ 25. When special journals are used, adjusting and closing entries are generally

recorded in it.

MULTIPLE CHOICES.

1. They encompass the conventions, rules, and procedures necessary to define what is accepted accounting practice.a. Generally accepted accounting principlesb. Accounting constraintsc. Conceptual frameworkd. Accounting assumptions

2. Financial statement users with a direct economic interest in a specific business includea. Financial advisersb. Regulatory bodiesc. Stock marketsd. Suppliers

3. The following procedures are involved in the FRSC standard-setting process, excepta. Preparation and approval by a task force established by the FRSC chairman of a draft of a

proposed SFASb. Distribution of the exposure draft for comment to PICPA members, FINEX members, and other

interested partiesc. Publication in the official gazette or in a newspaper of general circulationd. Approval by the Professional Regulation Commission

4. The business reason usually given for a business to select a fiscal year different from the calendar year isa. The firm’s owners may have a personal preference.b. Tax laws favor firms which employ a fiscal year other than the calendar year.c. The fiscal year-end is selected to coincide with the low points in sales, production, and

inventories, which may occur at some period other than the calendar year-end.d. Public accounting firms might not be able to handle the workload if all their clients were to

report on a calendar-year basis.

5. The essential characteristic/s of accounting is/area. Communication of financial information to interested personsb. Communication of financial information about economic entitiesc. Identification, measurement, and communication of financial informationd. All of the above

6. Which of the following financial statements users need financial information to enable them to assess the ability of the enterprise to pay dividends?a. Investorsb. Employeesc. Creditorsd. Suppliers

7. This requires reporting of information that has a value significant enough to affect decisions of those using the financial statements.a. Accounting entityb. Materialityc. Verifiabilityd. Going concern

8. The correct order of the following steps of the accounting cycle isa. Posting, closing, adjusting, reversingb. Posting, adjusting, closing, reversingc. Posting, reversing, adjusting, closingd. Adjusting, posting, closing, reversing

9. What is the purpose of nominal accounts?a. To provide temporary accumulations of certain account balances for a meaningful period of

timeb. To facilitate accounting for small amountsc. To correct errors as they are detectedd. To record all transactions initially

10. The primary purpose of the Statement of Financial Position of a business enterprise is to reflecta. The fair value of the firm’s assets at some moment in timeb. The status of a firm’s assets in case of forced liquidation of the firmc. The firm’s potential for growth in stock values in the stock marketd. Items of value, debts, and net worth

11. What is the purpose of information presented in notes to financial statements?a. To provide disclosures required by generally accepted accounting principlesb. To correct improper presentation in the financial statementsc. To provide recognition of amounts not included in the totals of the financial statementsd. To present management’s responses to auditor comments

12. Financial accounting is concerned witha. General-purpose reports on financial position and results of operationsb. Specialized reports for inventory management and controlc. Specialized reports for income tax computation and recognitiond. General-purpose reports on changes in stock prices and future estimates of market position

13. Many CPAs join the in-house accounting staff of a business. They are said to be engaged ina. Public accountingb. Private accountingc. Government accountingd. Financial accounting

14. The information provided by financial reporting pertains toa. Individual business enterprises, rather than to industries or an economy as a whole or to

members of society as consumersb. Business industries, rather than to individual enterprises or an economy as a whole or to

members of society as consumersc. Individual business enterprises, industries, and an economy as a whole, rather than to members

of society as consumersd. An economy as a whole and to members of society as consumers, rather than to individual

enterprises or industries

15. A primary objective of external financial reporting isa. Direct measurement of the value of a business enterpriseb. Provision of information that is useful to present and potential investors, creditors, and others in

making rational financial decisions regarding the enterprisec. Establishment of rules for accruing liabilitiesd. Direct measurement of the enterprise’s stock price

16. Financial accounting can be broadly defined as the area of accounting that preparesa. General-purpose financial statements to be used by parties internal to the business enterprise

onlyb. Financial statements to be used by investors onlyc. General-purpose financial statements to be used by parties both internal and external to the

business enterprised. Financial statements to be used primarily by management

17. Its objective is to achieve uniformity in the accounting principles which are used by business enterprises around the world.a. International Accounting Standards Committeeb. Financial Accounting Standards Boardc. Securities and Exchange Commissiond. World Bank

18. Accountants prepare financial statements at arbitrary points in time during the lifetime of an entity. This is in accordance with which basic accounting concept?a. Going concernb. Periodicityc. Unit of measured. Accrual

19. Which of the following is an accounting constraint?a. Cost-benefitb. Conservatismc. Relevanced. Reliability

20. Which of the following is not a purpose of a conceptual framework?a. To assist FRSC in reviewing and adopting IASb. To assist FRSC in developing accounting standardsc. To assist preparers of financial statements in applying PFRSd. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice

of accountancy in the Philippines

21. The following are included in the scope of the ASC conceptual framework, excepta. Objective of financial statementsb. Qualitative characteristics that determine usefulness of financial accounting informationc. Definition, recognition, and measurement of the elements of financial statementsd. Generally accepted accounting principles

22. These include not only financial statements but also other information such as supplementary schedules in a corporate annual report, prospectuses, and description of major products.a. Financial statementsb. Financial reportsc. Notes to financial statementsd. Audit reports

23. An example of a nominal accounta. Customer depositsb. Capital stockc. Petty cashd. Sales returns

24. The term “double-entry system” refers toa. The use of real and nominal accountsb. The recording of each transaction in two partsc. The use of two journalsd. The use of a journal and a ledger

25. Why are adjusting entries necessary?a. To record revenues and expensesb. To make debits equal creditsc. To close nominal accounts at year-endd. To correct erroneous balances in accounts

26. Which of the following statements is a correct description of reversing entries?a. The recording of reversing entries is a mandatory step in the accounting cycle.b. Reversing entries are made at the end of the next accounting period, after recording regular

transactions of the period.c. Reversing entries are identical to the adjusting entries made in the previous period.d. Reversing entries are the exact opposite of the adjustments made in the previous period.

27. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance?a. Revenue for the entire proceedsb. Revenue to the extent of related costs expendedc. Unearned revenue to the extent of related costs expendedd. Unearned revenue for the entire proceeds

28. Asset valuation accounts area. Assetsb. Neither assets nor liabilitiesc. Part of stockholders’ equityd. Liabilities

29. Which of the following statements conforms to the realization concept?a. Equipment depreciation was assigned to a production department and then to product unit costs.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 good sold when the units were sold.

30. Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such cost isa. Salespersons’ monthly salariesb. Salespersons’ commissionsc. Transportation to customersd. Prepaid insurance

31. Reporting inventory at the lower of cost or market is a departure from the accounting principles ofa. Historical costb. Conservatismc. Consistencyd. Full disclosure

32. A voucher system is used in connection with transaction that involve onlya. The receipt of cashb. The payment of cashc. Revenue and expensed. The purchase and sale of merchandise

33. Which of the following is an adjunct account?a. Cashb. Accounts receivablec. Premium on bonds payabled. Allowance for bad debts

34. An adjusting entry that records the earned portion of unearned revenue previously recorded always includes aa. Debit to an account in the asset categoryb. Credit to an account in the asset categoryc. Credit to an account in the owners’ equity categoryd. Credit to an account in the liability category

35. A company that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months’ service at the beginning of each new quarter. Which term appropriately describes the prepayment from the perspective of the service providers?a. Unearned revenueb. Earned revenuec. Accrued revenued. Prepaid expense

36. Which of the following documents does not initiate an entry to be made in the accounts?a. Sales invoiceb. Credit memorandumc. Purchase orderd. Purchase invoice

37. If an enterprise uses special journals, in which journal would the sale of merchandise for cash be recorded?a. Sales journalb. Cash receipts journalc. General journald. Cash disbursements journal

38. Which of the following statements regarding a trial balance is false?a. A trial balance helps to localize errors within an identifiable time period.b. A trial balance is a test of equality of the debit and credit balances in the ledger.c. A trial balance proves that no errors of any kind have been made in the accounts during the

accounting period.d. A trial balance is a list of all of the open accounts in the ledger with their balances as of a given

date.

39. Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are thea. Basic elementsb. Basic principlesc. Basic objectivesd. Basic assumption

40. According to the ASC conceptual framework, which of the following is an essential characteristic of an asset?a. The claims to an asset’s benefits are legally enforceable.b. An asset is tangible.c. An asset is obtained at a cost.d. An asset provides future benefits.

41. An essential characteristic of a liability is thata. The obligated enterprise must pay cash to a recipient entity.b. It must be legally enforceable.c. The identity of the recipient entity must be known to the obligated entity before the time of

settlement.d. The obligation must have arisen as the result of a previous transaction.

42. Which of the following best describes the distinction between expenses and losses?a. Losses are reported net of related tax effect, whereas expenses are not reported net of tax.b. Losses are extraordinary charges, whereas expenses are ordinary charges.c. Losses are material items, whereas expenses are immaterial items.d. Losses result from peripheral or incidental transactions, whereas expenses result from ongoing

major or central operations of the entity.

43. An entity’s revenue may result froma. A decrease in an asset from primary operationsb. An increase in an asset from incidental transactionsc. An increase in a liability from incidental transactionsd. A decrease in a liability from primary operations

44. When is revenue recognized?a. It is probable that future economic benefits will flow to the enterprise.b. It is possible that reliably measurably future economic benefits will flow to the enterprise.c. The future economic benefits can be measured reliably.d. It is probable that reliably measurable future economic benefits will flow to the enterprise.

45. Under a loyalty agreement with another enterprise, a company will receive royalties from the assignment of a patent for 2 years. The royalties received should be reported as revenuea. At the date of the royalty agreementb. In the period earnedc. In the period receivedd. Evenly over the life of the royalty agreement

46. Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains toa. Disclosureb. Accrual accountingc. Materialityd. Matching concept

47. When bad debt expense is estimated on the basis of the percentage of past actual losses from bad debts to past net credit sales and this percentage is adjusted for anticipated conditions, the accounting concept ofa. Matching is being followed.b. Matching is not being followed.c. Substance over form is being followed.d. Going concern is not being followed.

48. Costs that can be reasonably associated with specific revenues but not with specific products should bea. Charged to expense in the period incurred.b. Allocated to specific products based on the best estimate of the production processing time.c. Expensed in the period in which the related revenue is recognized.d. Capitalized and then amortized over a period not exceeding 60 months.

49. Which of the following is an application of the principle of systematic and rational allocation?a. Amortization of intangible assetsb. Sales commissionsc. Research and development costsd. Officers’ salaries

50. A patent, purchased in 2003 and amortized over a 15-year life, was determined to be worthless in 2008. The write-off of the asset in 2008 is an application of which of the following principles?a. Associating cause and effectb. Immediate recognitionc. Systematic and rational allocationd. Objectivity