Theory of Accounts Reviewers / Test banks

1. Which of the following statements is false?

(a)Financial reporting should provide information which is relevant
to investment, credit and public policy decisions.
(b)Generally speaking, GAAP are those accounting principles with
substantial authoritative support.
(c) GAAP are established to ensure the relevancy of the general-
purpose financial statements to the widespread uses of the
information by external decision makers.
(d)Once established, GAAP should never be changed.

2. A firm signs a major contract in December to construct custom

machinery for a client. No work is begun the current year yet the
footnotes to the firm’s financial statements discuss the nature and
peso amount of the contract. This is an example of
(a)reliability (c) historical cost
(b)full disclosure (d) conservatism

3. A corporation needed a new warehouse; a contractor quoted a

P250,000 prices to construct it. The corporation believed that it
could build the warehouse for P215,000 and decided to use
company employees to construct the warehouse. The final
construction cost incurred by the corporation was P240,000 but
the asset was recorded at P250,000. This is in violation of the:
(a)time period assumption (c) cost principle
(b)matching principle (d) revenue principle

4. Which of the following accounting concepts best justifies the

use of accruals and deferrals?
(a)Cost/benefit constraint (c) Continuity assumption
(b)Unit-measure assumption (d) Materiality
constraint

5. Which of the following most clearly states the most important

quality which an expenditure must have to be recognized as an
asset on the balance sheet?
 (a)It must be both material and relevant
(b)It must have reasonably certain future benefit to the business.
(c) It must be a physical object
(d)It must be used in operation of the business.

6. Which of the following is a current asset?

(a) cash surrender value of a life insurance policy, where the
company is the beneficiary
(b) investment in marketable securities for the purpose of
controlling the issuing company
(c) cash designated for the purchase of tangible fixed assets
(d) trade installments receivable normally collectible in 24 months

7. The basic components of financial statements include (choose

the incorrect one):
(a) statement of changes in equity (c) statement of
retained earnings
(b) profit (loss) statement (d) statement of cash flow

8. Which of the following reconciling items would require an adjusting

journal entry on the company’s books?
(a)outstanding checks (c) deposits in transit
(b)non-sufficient funds checks (d) cash on hand

9. In recording the bank balance with the book cash balance, which
of the following would not cause the bank balance shown on the
bank statement to be lower than the unadjusted book balance?
(a)cash on hand at the company
(b)NSF checks from a customer, as reported on the bank
statement
(c) interest credited to the account by the bank
(d)deposits in transit

10. In determining the cost of goods sold:

(a)purchase discounts are deducted net purchases
 (b)freight out is added to net purchases
(c) purchase returns and allowances are deducted from net
purchases
(d)freight in is added to net purchases

11. Which of these would cause the inventory turnover ratio to

increase the most?
(a)increasing the amount of inventory on hand
(b)keeping the amount of inventory on hand constant but
increasing sales
(c) keeping the amount of inventory on hand constant but
decreasing sales
(d)decreasing the amount of inventory on hand and increasing
sales

12. An entity is a large manufacturer of machines. A major

customer has placed an order for a special machine for which it
has given a deposit to the entity. The parties have agreed on a
price for the machine. As per the terms of the sale agreement, it is
FOB (free on board) contract and the title passes to the buyer
when goods are loaded into the ship at the port. When should the
revenue be recognized by the entity?
(a)When the customer orders the machine
(b)When the deposit is received
(c) When the machine is loaded at the port
(d)When the machine has been received by the customer

13. A large manufacturer of cosmetics sells merchandise to a

retailer, which in turn sells the goods to the public at large through
its chain of retail outlets. The retailer purchases merchandise from
the manufacturer under a consignment contract. When should
revenue from the sale of merchandise to the retailer be recognized
by the manufacturer?
(a)When goods are delivered to the retailer
(b)When goods are sold by the retailer
(c) It will depend on the terms of delivery of the merchandise (i.e.,
CIF cost, insurance, and freight or FOB)
(d)It will depend on the terms of payment (i.e., cash or credit)
14. When the allowance method of recognizing bad debt expense
is used, the typical write off of a specific customer’s account:
(a)has no effect on net income (c) decreases current
asset
(b)decrease net income (d) decreases working
capital

15. Which of the following is the incorrect statement?

(a)The fair value method of accounting is the most appropriate
method of accounting for short-term investments in marketable
debt securities.
(b)Unrealized holding gains and losses on investments in trading
securities are recognized in income.
(c) All investments in available for sale securities are reported at
fair value.
(d)Only investments in bonds are accounted for by the fair value
method.

16. Which of the following is false?

(a)A debit valuation allowance balance for an investment in
available for sale securities implies a corresponding owners’
equity account with a credit balance of the same amount.
(b)Unrealized holding gains on investments in available for sale
securities may be recognized as a direct increase to owners’
equity.
(c) Investments in trading securities may be classified as current or
long-term.
(d)Investments in available for sale securities may be classified as
current or long-term.

17. Which of the following is incorrect?

(a)Investments classified as long-term are reclassified as short-
term investments only if it is the intention of the management to
dispose of them in the short term.
(b)If an investor company does not have significant influence in
another company, it must use either the fair value method or the
cost method to account for that investment in equity securities.
 (c) If an investor company has a controlling interest in another
company, it must use either the cost method or the equity
method to account for that investment in equity securities.
(d)The cost method is sometimes applied to investments in equity
securities.

18. Select the incorrect statement.

(a)The cost method of accounting for an investment in a
subsidiary recognizes the legal fact that the parent and
subsidiary are one economic unit.
(b)Realized gains and losses on investments in equity securities
accounted for under the cost method are usually measured by
the difference between the cost and current selling price.
(c) Under the equity method of accounting for long-term
investments in equity securities, the investor’ investment
account is decreased by all dividends received from the
investee.
(d)The equity method of accounting for long-term investments in
equity securities is based on the presumption that the investor
owns a sufficient number of the outstanding voting shares of
another company to exercise significant influence over the
operating and financing policies of the other company.

19. Which of the following is the incorrect statement?

(a)For a long-term equity investment, the investor accounts for a
stock split in the same manner as for a stock dividend.
(b)The relative sales value method is usually used to apportion the
book or carrying value of a long-term equity investment
between the old shares still owned and newly received stock
rights related to those shares.
(c) A stock dividend received on an investment reduces the per
share cost to the investor.
(d)For the equity method to be applicable to equity investments, it
is presumed that the investor owns enough voting shares of the
investee to exercise managing control.

20. An entity shall classify a noncurrent asset or disposal group as

“held for sale” when:
 (a)The carrying amount of the asset or disposal group will be
recovered through continuing use.
(b)The carrying amount of the asset or disposal group will be
recovered through a sale transaction.
(c) The noncurrent asset or disposal group is to be abandoned.
(d)The noncurrent asset or disposal group is idle or retired from
active use.

21. Noncurrent asset or disposal group is classified as “held for

sale” when the asset is available for immediate sale and the sale is
highly probable. For the sale to be highly probable, (choose the
incorrect one)
(a)Management must be committed to a plan to sell the asset.
(b)An active program to locate a buyer and complete the plan
must have been initiated.
(c) The asset must be actively marketed for sale at a reasonable
price in relation to its carrying value.
(d)The sale is expected to qualify for recognition as a completed
sale within one year from the date of classification of the asset
as “held for sale”.

22. Which statement is incorrect concerning presentation of

noncurrent asset or disposal group classified as held for sale?
(a)An entity shall present a noncurrent asset held for sale and the
assets of a disposal group classified as held for sale separately
from other assets.
(b)The liabilities of a disposal group classified as held for sale
shall be presented separately from other liabilities.
(c) The assets and liabilities a disposal group classified as held for
sale shall be offset as a single amount.
(d)An entity shall not depreciate a noncurrent asset classified as
held for sale or while it is part of a disposal group classified as
held for sale.
23. What is the treatment of gain on an initial increase in the fair
value less cost to sell of a noncurrent asset classified as held for
sale?
(a)The gain shall be recognized in full.
(b)The gain shall not be recognized.
(c) The gain shall be recognized but not in excess of the
cumulative impairment loss previously recognized.
(d)The gain shall be recognized but only in retained earnings.

24. Noncurrent asset classified as for rental to others shall be

presented in the statement of financial position as:
(a)Current asset
(b)Other noncurrent asset
(c) Noncurrent investment
(d)Property, plant and equipment

25. How should the assets and liabilities of a disposal group

classified as held for sale be shown in the statement of financial
position?
(a)The assets and liabilities shall be offset and presented as a
single amount.
(b)The assets of the disposal group shall be shown separately
from other assets in the statement of financial position, and the
liabilities of the disposal group shall be shown separately from
other liabilities in the statement of financial position.
(c) The assets and liabilities shall be presented as a single amount
and as a deduction from equity.
(d)There should be no separate disclosure of assets and liabilities
that form part of a disposal group.

26. An entity acquires a subsidiary exclusively with a view to selling

it. The subsidiary meets the criteria to be classified as held for
sale. At the end of the reporting period, the subsidiary has not yet
 been sold, and six months have passed since its acquisition. How
will the subsidiary be valued in the statement of financial position
at the date of the first financial statements after acquisition?
(a)At fair value
(b)At the lower of its cost and fair value less cost to sell
(c) At carrying amount
(d)In accordance with applicable PFRS

27. An entity classified a noncurrent asset accounted for under the

cost model as held for sale on December 31, 2009. Because no
offers were received at an acceptable price, the entity decided on
July 1, 2010 not to sell the asset but to continue to use it. In
accordance with PFRS 5, the asset shall be measured on July 1,
2010 at:
(a)The lower of its carrying amount and its recoverable amount
(b)The higher of its carrying amount and its recoverable amount
(c) The higher of its carrying amount on the basis that is had never
been classified as held for sale and its recoverable amount

(d)The lower of its carrying amount on the basis that it had never
been classified as held for sale and its recoverable amount

28. The following statements relate to the term “profit”.

Statement 1: Profit is any amount over and above that required to
maintain the capital at the
beginning of the period.
Statement 2: Profit is the residual amount that remains after
expenses have been deducted
from income.
(a)Both statements are false.
(b)Statement 1 is false.
(c) Statement 2 is false.
(d)Both statements are true.

29. Which of the following is not true of a subsidiary ledger?

(a) The purpose of a subsidiary ledger is to store details of certain
general ledger accounts.
 (b) The sum of the individual balances in a subsidiary ledger
should equal the balance in the general ledger control
accounts.
(c) Journal entries posted to a subsidiary ledger need not be
posted to the general ledger.
(d) One benefit of a subsidiary ledger is that the number of general
ledger accounts necessary is reduced.

30. The purpose of trial balance is to:

(a) indicate whether total debits equal total credits.
(b) ensure that all transactions have been recorded.
(c) speed the collection of cash receipts from customers.
(d) increase assets and owner’s equity.

31. The closing entry for sales discounts is:

(a) debit sales discounts and credit income summary.
(b) debit sales discounts and credit sales revenue.
(c) debit income summary and credit sales discounts.
(d) not used because sales discount is a real account which is not
closed.

32. Which of the following is not reversed at the start of the new
accounting period?
(a) expense paid in advance that is debited to the expense
account at the time of payment
(b) doubtful accounts computed using the aging schedule
(c) income earned but not yet recorded because was not yet
received
(d) rent collected in advance and credited to a nominal account

33. In the equation, “Assets + Expenses = Liabilities + Revenue +

Capital”, the expenses and revenues are:
(a)contra asset and contra liability accounts, respectively, that
assist analysis of the financial progress of the firm
(b)incorrectly stated because their signs are reversed, i.e., both
are contra items that should have negative signs in the formula
 (c) adjustments to capital that are postponed until the end of a
specific accounting period to determine their net effect on
capital for that period
(d)incorrectly included in the formula because “Assets = Liabilities
+ Capital”

34. Which of the following statements is true?

(a)Service companies do not need to prepare financial statements.
(b)Manufacturing companies maintain the simplest accounting
records.
(c) Merchandising companies purchase goods that are ready for
sale and then sell them to customers.
(d)A drugstore is an example of a service company.

35. Which of the following is not an accurate statement regarding the

rules of debit and credit in recording revenue and expense
transactions?
(a) revenue increases owner’s equity; since increases in owner’s
equity are recorded by credits, revenue is recorded by a credit
(b) expenses decreases owner’s equity; since decreases in
owner’s equity are recorded by debits, expenses are recorded
by debits
(c) in recording revenue transactions, we debit the assets received
and credit the revenue account
(d) expenses used up assets; since decreases in assets are
recorded by credits, expenses are recorded by credits to the
expense account

36. Consider the following:

I. increase an asset VI. decrease owner’s
equity
II. decrease an asset VII. increase a
revenue
III. increase a liability VIII. decrease a
revenue
IV. decrease a liability IX. increase an expense
V. increase owner’s equity X. decrease an
expense
 Using the above, if an asset account is debited, what are the five
possible corresponding credits?
(a) I, IV, VI, VIII, IX (c) I, III, V, VII, IX
(b) II, IV, VI, VIII, X (d) II, III, V, VII, X

37. The historical cost concept measures assets on the basis of:
(a)the replacement cost of assets on the balance sheet
(b)the amount of cash for which the assets could be sold
(c) an appraisal by the auditors
(d)the fair market value of assets on the day they were acquired

38. In financial accounting, gains may be defined as:

(a)total receipts of cash
(b)total receipts of cash in excess of the historical costs of the
assets being sold
(c) total revenues
(d)total increases in net assets other than revenues

39. Under the accrual basis of accounting, if cash is received prior to

the sale, then:
(a)revenue is recognized when the cash is received
(b)a liability is recognized when cash is received
(c) a liability is removed from the system when the cash is received
(d)revenue is removed from the system when the services have
been performed or the goods have been delivered

40. If there is an objective evidence that AFS is impaired, the

cumulative loss that had been recognized in other comprehensive
income:
(a)Shall be amortized over a reasonable period
(b)Shall remain unpaid until the financial asset is disposed of
(c) Shall be recognized in profit or loss
(d)Shall be recognized as an adjustment of the beginning balance
of retained earnings

41. A net unrealized loss on an entity’s portfolio of AFS equity

securities shall be reflected in the current financial statements as:
 (a)Direct reduction of retained earnings
(b)Current loss resulting from holding equity securities
(c) Footnote or parenthetical disclosure only
(d)Component of other comprehensive income

42. What should happen when the financial statements of an

associate are not prepared as of the same date as of the financial
statements of the investor?
(a)The associate shall prepare financial statements for the use of
the investor at the same date as that of the investor.
(b)The financial statements of the associate prepared up to a
different date shall be used as normal.
(c) Any major transactions between the date of the financial
statements of the investor and that of the associate shall be
accounted for.
(d)As long as the gap is not greater than 3 months, there is no
problem.

43. When an investor purchases sufficient ordinary shares to gain

significant influence over the investee, what is the proper
accounting treatment of any excess of cost over book value
acquired?
(a)The excess remains in the investment account until it is sold.
(b)The excess is immediately expensed in the period in which the
investment is made.
(c) The excess is amortized over the time period that is reasonable
in the light of the underlying cause of the excess.
(d)The excess is charged to retained earnings at the time the
investor resells the investment.

44. Land, building and equipment should be reported on the

balance sheet at their cost, less accumulated depreciation, unless:
(a)some obsolescence is known to have occurred
(b)some of the property still on hand were written down pursuant
to a quasi-organization
(c) the amount of insurance carried on the property is well in
excess of its book value
(d)not given
45. Dave started his own cheese factory on March 16, 2003.
Which of the following transactions would not be admissible in
Dave’s accounting system for the month of March?
(a)On March 18, Dave purchased a cow on account for P3,000.
(b)On March 20, Dave sold his cow to a fast food restaurant for
P5,000.
(c) On March 21, Dave contracted with a local radio station to run
several one-minute advertising spots during the month of April.
(d)All of the above transactions would be admissible for Dave’s
accounting system in the month of March.

46. Jeff purchased a new register system for his grocery store,
paying P1,000 in cash and issuing a P6,000 note payable for the
balance owed. As a result of this transaction, Jeff’s balance sheet
would reflect:
(a)an increase in assets and an increase in liabilities
(b)a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d)an increase in assets and an increase in owner’s equity

47. The double-entry system of accounting means that every

transaction:
(a)is recorded initially on both the journal and the general ledger
(b)increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by
an equal amount of debits and credits
(d)results in changes in accounts on both sides of the balance
sheet

48. Which of the following statements is not correct?

(a)debits may increase assets
(b)credits may increase liabilities
(c) debits may increase liabilities
(d)credits may increase owner’s equity
49. Tony owns a store specializing in bags. Tony has just
completed a transaction that caused a P12,000 increase in total
assets and a P12,000 increase in liabilities. This transaction could
have been:
(a)the investment in his business of P12,000 in cash
(b)the purchase of store equipment, paying P9,000 in cash and
issuing a P12,000 note payable for the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash
and issuing an P8,000 note payable for the balance owed
(d)none of the above transactions would cause total assets and
total liabilities to increase by P12,000

50. Dean has completed the posting process for the month of June
and has prepared a trial balance in which the debits total P11,000
and the credits total P11,100. Which of the following errors would
be the most likely candidate in causing the trial balance not to
balance by P100?
(a)a P100 debit was posted as a P100 credit
(b)a P100 debit was posted as a P100 credit and a P100 credit
was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d)the purchase of supplies on account was never posted to the
general ledger

51. Which of the following is the correct statement?

(a)The best way to ascertain whether a marketable security is
short-term or a long-term investment is to check with a
securities dealer.
(b)For balance sheet classification, a security is classified as a
short-term investment if it is readily marketable.
(c) For balance sheet classification, a security is classified as a
short-term investment based on the intended holding period.
(d)All investments in trading securities are reported at book
values. C

53. Which of the following is the incorrect statement?

(a)The fair value method of accounting is the most appropriate
method of accounting for short-term investments in marketable
debt securities.
 (b)Unrealized holding gains and losses on investments in trading
securities are recognized in income.
(c) All investments in available for sale securities are reported at
fair value.
(d)Only investments in bonds are accounted for by the fair value
method. D

54. Which of the following is true?

(a)The fair value method of accounting is the most appropriate
method of accounting for short-term investments in marketable
equity securities.
(b)All bond investments are accounted for by the amortized cost
method.
(c) The carrying value of an investment in trading securities or
available for sale securities is limited to market value at the
date of acquisition.
(d)The realized gain or loss on a short-term investment in an
equity security is usually equal to the difference between its
cost and its sale price. A

55. Which of the following is false?

(a)A debit valuation allowance balance for an investment in
available for sale securities implies a corresponding owners’
equity account with a credit balance of the same amount.
(b)Unrealized holding gains on investments in available for sale
securities may be recognized as a direct increase to owners’
equity.
(c) Investments in trading securities may be classified as current or
long-term.
(d)Investments in available for sale securities may be classified as
current or long-term. C

56. Which of the following is the correct statement?

(a)Investments in available for sale securities and trading
securities are classified separately in a balance sheet.
(b)Investments in available for sale securities include only equity
securities.
(c) Investments in trading securities include only debt securities.
 (d)Increases in the market value of trading securities and available
for sale securities investments always cause the valuation
account to decrease. A

57. Tangible goods used in the productive process and directly

related to the products being manufactured are called:
(a) factory supplies. (c) raw materials.
(b) finished goods. (d) goods in process.
C

58. When a portion of inventories has been pledged as security on

a loan:
(a) the value of the portion pledged should be subtracted form the
debt.
(b) an equal amount of retained earnings should be appropriated.
(c) the fact should be disclosed but the amount of current assets
should not be affected.
(d) the cost of the pledged inventories should be transferred from
current assets to noncurrent assets.
C

59. Slow-moving and obsolete inventory items should be priced for

balance sheet purposes at:
(a)retail inventory price.
(b)cost or market, whichever is lower.
(c) moving average.
(d) at an amount not in excess of possible realizable value.
D

60. Subnormal or obsolete goods, either under the cost or the lower
of cost or market basis:
(a)should be taken up an unrealized inventory loss.
(b)should be valued at bona-fide selling price less direct cost of
disposition.
(c) should be valued by applying an inventory method that uses a
constant or nominal value for the normal inventory level.
(d)should be adjusted in the cost of goods sold.
B
61. Merchandise which a trader contracted to purchase but which
was not delivered or identified in the year should:
(a)not be included in the inventory.
(b)be included in the inventory at cost.
(c) be included in the inventory at its probable retail value.
(d)be included in the inventory at a normal price.
A

62. The appropriate valuation of an operating lease on the

statement of financial position of a lessee is:
(a)zero
(b)the absolute sum of the lease payments
(c) the present value of the sum of the lease payments discounted
at an appropriate rate
(d)the market value of the asset at the date of the inception of the
lease A

63. When equipment held under an operating lease is subleased by

the original lessee, the original lessee would account for the
sublease as:
(a)operating lease (c) direct financing lease
(b)sales-type lease (d) capital lease
A

64. Equal monthly rental payments for a particular lease should be

charged to rental expense by the lessee for which of the following?
Capital Operating Capital
Operating
lease lease lease lease
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes D

65. In a lease that is recorded as an operating lease by the lessee,

the equal monthly rental payments should be:
(a)allocated between a reduction in the liability for leased asset and
depreciation expense
(b)allocated between a reduction in the liability for leased asset and
interest expense
(c) recorded as a reduction in the liability for leased asset
 (d)recorded as rental expense
D

66. Where the balance sheet indicates that a portion of property,

plant and equipment the related accumulated depreciation pertains
to equipment leased to customers, it is evident that the:
(a)operating method of accounting is used for the lease
(b)financing method of accounting is used for the lease
(c) lessor has violated GAAP
(d)lessor is using the income tax method of accounting for the
lease A

67. A 20-year property lease, classified as an operating lease,

provides for a 10% increase in annual payments every five years.
In the 6th year compared to the 5 th year, the lease will cause the
following expenses to increase:
Rent Interest Rent Interest
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes C

68. Which is not an essential characteristic of an accounting

liability?
(a) The liability is the present obligation of a particular enterprise.
(b) The liability arises from past transaction or event.
(c) The settlement of the liability requires an outflow of resources
embodying economic benefits.
(d) The liability is payable to a specifically identified payee.
D

69. Current liabilities include:

(a)only obligations which are expected to be settled within the
normal operating cycle.
(b)only obligations which are due to be settled within one year
from balance sheet date.
(c) obligations which are expected to be settled within the normal
operating cycle and obligations which are due to be settled
within one year from balance sheet date.
(d)refinanced long-term debt falling due within one year from
balance sheet. C
70. A long-term debt falling due within one year should be reported
as noncurrent liability should be reported as noncurrent liability if
the following conditions are met (choose the incorrect one):
(a)The original term is for a period of more than one year.
(b)The enterprise intends to refinance the obligation on a long-
term basis.
(c) The intent to refinance is supported by an agreement to
refinance which is completed before the issuance of the
financial statements.
(d)The intent to refinance is supported by an agreement to
refinance which is completed after the issuance of the financial
statements. D

71. Which will demonstrate an agreement to refinance (choose the

incorrect one)?
(a)Long-term obligation has in fact been issued before the
issuance of the financial statements for the purpose of
refinancing.
(b)Equity security has in fact been issued before the issuance of
the financial statements for the purpose of refinancing.
(c) Before the issuance of the financial statements, the enterprise
has in fact entered into a financing agreement that clearly
permits the enterprise to refinance the currently maturing long-
term debt on a long-term basis.
(d)Preferred stock has in fact been issued before the issuance of
financial statements for the purpose of obtaining working
capital. D

72. Some obligations that are due to be repaid within the next
operating cycle and expected to be refinanced or “rolled over”
should be classified as noncurrent:
(a)If the refinancing or “rolling over” is at the discretion of the
enterprise and the refinancing agreement has been reached
before the issuance of the statements.
(b)If the refinancing or “rolling over” is at the discretion of the
enterprise regardless of whether a refinancing agreement has
been reached or not before the issuance of the statements.
 (c) If the refinancing or “rolling over” is not at the discretion of the
enterprise.
(d)Subject to no conditions.
A

73. Which is not a characteristic of an intangible asset?

(e)the asset lacks physical substance
(f) the asset is used in production or supply of goods and services,
for rental to others or for administrative purposes
(g)the asset provides future economic benefits
(h)the asset has indeterminate useful life
D

74. Which is not unidentifiable intangible asset?

(a)patent (c) copyright
(b)franchise (d) goodwill D

75. If the pattern in which the economic benefits from the asset are
consumed cannot be predicted reliably, the method of amortization
for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years’ digits
A

76. Intangible assets should be carried (benchmark treatment):

(a)gross cost
(b)fair value on balance sheet date
(c) revalued amount minus accumulated amortization and
accumulated impairment losses
(d)cost minus accumulated impairment losses and accumulated
amortization D

77. Which of the following is not considered in estimating the useful

life of intangible assets?
(a)expected usage of the asset by the enterprise
(b)stability of the industry in which the intangible asset operates
(c) salvage value of the asset
(d)level of maintenance expenditure required to obtain the future
economic benefit from the asset
C
78. Choose the correct statement.
(a)Financial accounting is a social science and cannot be
influenced by changes in legal, political, business and social
environments.
(b)Financial accounting is an information system designed to
provide information primarily to the internal users.
(c) General-purpose financial statements must be prepared by a
certified public accountant.
(d)The preparation of general-purpose financial statements is
usually based on the assumption that the primary users of the
information are external decision makers. D

79. Which of the following statements is false?

(e)Financial reporting should provide information which is relevant
to investment, credit and public policy decisions.
(f) Generally speaking, GAAP are those accounting principles with
substantial authoritative support.
(g)GAAP are established to ensure the relevancy of the general-
purpose financial statements to the widespread uses of the
information by external decision makers.
(h)Once established, GAAP should never be changed.
D

80. Which of the following statement is true?

(a)Managers of an entity are considered to be internal decision
makers.
(b)External decision makers can be obtained whatever financial
data they need whenever they need it.
(c) Accounting information is prepared for and useful to only
outside decision makers.
(d)The members of the Board of Directors are not “internal users”
only. D

81. Choose the incorrect statement.

(a)The objective of the external financial statements is to
communicate the economic effects of completed transactions
and other events on the entity.
(b)The practice of accounting requires considerable professional
judgment.
 (c) Security analysis use information from financial statements and
other sources to project future earnings.
(d)The assessment of earnings quality has become an exact
science. D

82. Which of the following statement is correct?

(a)Certified Public Accountants are not independent for the benefit
of the users of the financial statements, because they are paid
by the client.
(b)Accounting concepts, principles and standards are just as
broad and general today as they were sixty years old.
(c) Due the excellent work of the ASC, there are very few choices
among alternative accounting policies today.
(d)Disclosure notes are an integral part of the financial statements.
D

83. Which of the following equations is not true?

(a)Assets + Liabilities = Owner’s Equity

(b)Assets = Liabilities + Owner’s Equity

(c) Assets – Owner’s Equity = Liabilities

(d)Assets – Liabilities = Owner’s Equity

A

84. Dave started his own cheese factory on March 16, 2003.
Which of the following transactions would not be admissible in
Dave’s accounting system for the month of March?
(e)On March 18, Dave purchased a cow on account for P3,000.
(f) On March 20, Dave sold his cow to a fast food restaurant for
P5,000.
(g)On March 21, Dave contracted with a local radio station to run
several one-minute advertising spots during the month of April.
(h)All of the above transactions would be admissible for Dave’s
accounting system in the month of March.
C

85. Jeff purchased a new register system for his grocery store,
paying P1,000 in cash and issuing a P6,000 note payable for the
 balance owed. As a result of this transaction, Jeff’s balance sheet
would reflect:
(a)an increase in assets and an increase in liabilities
(b)a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d)an increase in assets and an increase in owner’s equity
A

86. The double-entry system of accounting means that every

transaction:
(a)is recorded initially on both the journal and the general ledger
(b)increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by
an equal amount of debits and credits
(d)results in changes in accounts on both sides of the balance
sheet C

87. Which of the following statements is not correct?

(a)debits may increase assets
(b)credits may increase liabilities
(c) debits may increase liabilities
(d)credits may increase owner’s equity
C

88. Tony owns a store specializing in bags. Tony has just

completed a transaction that caused a P12,000 increase in total
assets and a P12,000 increase in liabilities. This transaction could
have been:
(a)the investment in his business of P12,000 in cash
(b)the purchase of store equipment, paying P9,000 in cash and
issuing a P12,000 note payable for the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash
and issuing an P8,000 note payable for the balance owed
(d)none of the above transactions would cause total assets and
total liabilities to increase by P12,000
B
89. Dean has completed the posting process for the month of June
and has prepared a trial balance in which the debits total P11,000
and the credits total P11,100. Which of the following errors would
be the most likely candidate in causing the trial balance not to
balance by P100?
(a)a P100 debit was posted as a P100 credit
(b)a P100 debit was posted as a P100 credit and a P100 credit
was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d)the purchase of supplies on account was never posted to the
general ledger C

90. Increase in net assets may result from:

(a)revenues
(b)expenses
(c) withdrawals
(d)all of the above are correct
A

91. Which of the following statements is false?

(a)Increases to owner’s capital are recorded with credits.
(b)Sales are recorded as debits.
(c) Expenses reduce owner’s capital.
(d)Expenses and dividends are both recorded as debits.
B

92. Zinc Company recorded office supplies as an asset account

when the supplies were purchased. Failure to make an adjusting
entry reflecting the use of these supplies will result in:
(a)an understatement of assets
(b)an overstatement of owner’s equity
(c) an understatement of liabilities
(d)an understatement of owner’s equity
B

BPS/EPS
93) Under PAS 33, EPS disclosures are required for
I. Entities whose ordinary shares or potential ordinary shares are
publicly traded.
 II. Entities that are in the process of issuing ordinary shares in the
public market.
a. I only b. II only c. Both I and II
d. Neither I nor II

94) Under PAS 33, which of the following statements about an

ordinary share is true?
I. An ordinary share is an equity instrument that is superior to all
other classes of equity instrument.
II. A potential ordinary share is a financial instrument or other
contract that may entitle its holder to ordinary shares.
a. I only b. II only c. Both I and II
d. Neither I nor II
subordinate
95) Which of the following statements is true?
I. Earnings per share amounts should not be presented if they are
negative, i.e. loss per share.
II. Earnings per share amounts calculated for discontinued
operations should be presented.
a. I only b. II only c. Both I and II
d. Neither I nor II

96) When computing diluted EPS for an entity with a complex

capital structure, what is the denominator in the computation?
a. Number of ordinary shares outstanding at year-end
b. Weighted average number of ordinary shares outstanding
c. Weighted number of ordinary shares outstanding plus all other
potentially antidilutive securities.
d. Weighted average number of ordinary shares outstanding plus
all other potentially dilutive securities

97) For purpose of computing the weighted average number of

shares outstanding in EPS calculation, a mid-year that must be
treated as occurring at the beginning oif the year is the
a. Issuance of the share warrants
b. Purchase of treasury shares
c. Issuance of share certificates
d. Issuance of new shares from share split

98) When EPS is computed, dividends on preferred stock are

 a. Added because they represent earnings to preferred share
holders
b. Reported separately on the income statement
c. Subtracted they represent earnings to preferred shareholders
d. Ignored because so they do not pertain to the common stock

99) It is reduction in earnings per share or an increase in loss per

share resulting from the assumption that convertible instruments
are converted, that options or warrants are exercised, or that
ordinary shares are issued upon the satisfaction of specified
conditions.
a. Dilution

c. Either dilution or antidilution

b. Antidilution

d. Neither dilution nor antidilution

100) What is the inherent justification underlying the concept of

potential diluters in an earnings per share computation?
a. form over substance
b. substance over form
c. form and substance considered equally
d. substance over form or form over substance depending on the
circumstances

101) In determining earnings per share, interest expense, net of

applicable income taxes, on convertible debt which is dilutive should
be
a. Added back to net income for diluted earnings per share.
b. Deducted from net income for basic earnings per share and
ignored for diluted earnings per share.
c. Deducted from net income for both basic earnings per share
and diluted earnings per share.
d. Added back to net income for basic earnings per share, and
ignored for diluted earnings per share.

102) Potential ordinary shares do not include

 a. Share warrants
b. Employee share options
c. Financial liabilities or equity instruments, including preference
shares, that are not convertible into ordinary
shares.
d. Shares which would be issued upon the satsfaction of certain
conditions resulting from contractual arrangements, such as the
purchase of a business or other assets.

103) For a company that has only ordinary share outstanding , total
shareholder’s equity divided by the number of shares outstanding
represents the:
a. return on equity
c. stated value per
share
b. book value per share
d. price-earnings ratio

104) A company with a simple capital structure for purposes of

computing earnings per share would include which of the following
in the computation of earnings per share?
a. potentially dilutive securities
b. dividends on ordinary share
c. dividends on nonconvertible cumulative preferred stock
d. number of shares of nonconvertible cumulative preferred stock

Sharebased
105) The entity has issued a range of share options to employees. In
accordance with PFRS 2, what type of share-based payment
transaction does this represent?
a. Equity-settled share-based payment transaction
b. Asset-settled share-based payment transaction
c. Cash-settled share-based payment transaction
d. Liability-settled share-based payment transaction

106) In accordance with PFRS2, how should an entity recognize the

change in the fair value of the liability in respect of a cash-settled
share-based payment transaction?
a. Should not recognize in the financial statements but disclose in
the notes thereto
 b. Should recognize in the statement of changes in equity
c. Should recognize in profit or loss
d. Should recognize in other comprehensive income

107) A cash-settled share-based payment shall give rise to an

increase in which of the following?
a. A current asset

c. Equity
b. A noncurrent asset
d. A
liability

108) An entity has entered into a contract with another entity. The
latter will supply the former with a range of services. The payment
for those services will be in cash and based upon the price of
former’s ordinary shares on completion of the contract. In
accordance with PFRS 2, what type of share-based payment
transaction does this represent?
a. Asset-settled share-based payment transaction
b. Cash-settles share-based payment transaction
c. Liability-settled share-based payment transaction
d. Equity-settled share-based payment transaction

109) If share-based payment transaction provides that employees

have the right to choose the settlement whether in cash or shares,
the entity is deemed to have issued
a. An equity instrument
b. A liability instrument
c. A compound financial instrument
d. Either an equity instrument or liability instrument but not both

110) Under PFRS 2 share – based Payment, the method that must
be used to measure employee stock options and other payments
given to employees in the form of equity securities, is:
a. Initial cost
c.
Fair value
b. Discounted cash flows
d. Selling price
111) Many shares and most share options are not traded in an active
market. Therefore, it is often difficult to arrive at a fair value of the
equity instruments being issued. Which of the following option
valuation techniques should not be used as a measure of fair value
in the first instance?
a. Black – Scholes model
c. Monte – Carlo model
b. Binomial model
d. Intrinsic
value

112) It is the difference between the fair value of the shares to which
the counterparty has the right to subscribe and the price the
counterparty is required to pay for those shares.
a. fair value

c. Market value
b. Intrinsic value
d.
Book value

113) These are transactions in which the entity receives goods or

services as consideration for equity instruments of the entity
including shares and share options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions

114) Compensatory stock options were granted to executives on

January 1, 2008, for services to be rendered during 2008, 2009, and
2010. The fair value of the option was measured at the grant-date
fair value using the observable market price of an option with similar
terms. The fair value of the options was in excess of the amount the
executives must pay for the stock. The stock options were exercised
on December 30, 2010 Compensation expense should be
recognized in the income statement in which of the following years?
2008 2009 2010 2008 2009
2010
a. No No Yes c. Yes
Yes Yes
b. No Yes Yes d. Yes
No No

115) For cash settled share-based payment transactions, an entity

shall measure the goods or services received and the liability
incurred at the
a. Fair value of the liability
b. Fair value of the goods and services received
c. Either the fair value of the goods or services received or the fair
value of the liability
d. Neither the fair value of the goods or services received nor the
fair value of the liability

116) Sydney Corporation granted 1,000 stock options to its

employees on January 1, 2006, for services performed during 2006
and 2007. At the date of the grant, the fair value of the stock options
is P6,000. The options are exercisable on January 1, 2008, and
expire on June 30, 2008. On July 1, 2008, it was determined that
none of the options were exercised. On December 31, 2008,
Sydney Corporation should
a. Restate its financial statements for 2006 and 2007 and reduce
compensation expense for each year.
b. Make a prior period adjustment to retained earnings for
compensation expense recognized in 2006 and 2007.
c. Not adjust or reverse compensation expense.
d. Record P6,000 of compensation expense in 2008.

SHE
117) Under IFRIC 17, a property dividend declared before the end of
the reporting period should be recognized as liability at the end of
the reporting period at
a. Carrying amount of the asset to be distributed
b. Fair value of the asset on the date of declaration
c. Fair value of the asset at the end of reporting period
d. Fair value of the asset at the date of distribution

118) Which of the following should be reported as a stockholder

equity account?
 a. Discount on convertible bonds
b. Premium on convertible bonds
c. Cumulative foreign exchange translation loss
d. Organization costs

119) Gains and losses on the purchase and resale of treasury stock
may be only be reflected in
a. Paid-in capital accounts
b. Paid-in capital and retained earnings accounts
c. Income, paid-in capital and retained earnings
d. Income and paid-in capital accounts

120) Deposits on subscriptions to a proposed increase in capital

stock are reported on the balance sheet as
a. Unearned revenue
b. Advances from subscribers
c. A separate item in the capital stock section
d. An addition to retained earnings

121) Which of the following statements best describes the net effect
on retained earnings of the purchase and subsequent sale of
treasury stock?
a. retained earnings may never be increased , but sometimes
decreased.
b. Retained earnings may never be increased or decreased
c. Retained earnings may be increased but never be
decreased.
d. Retained earnings account is always affected unless the selling
price is exactly equal to cost

122) When stock rights are exercised, how much should be treated
as total proceeds from the issuance of shares?
a. only the consideration received
b. The total of the consideration received and the amount previously
recorded for the stock rights
c. the amount previously recorded for the stock rights
d. The total par value of the shares

123) Liabilities and stockholders’ equity are similar in that

 a. Both provide certain amount of payments in the form of interest
and dividends
respectively based upon written agreements.
b. Both provide specific timing of payments as a result of specific
maturity dates.
c. Both creditors and stockholders are equity holders although they
have different rights with respect to income, risk, control and
liquidation.
d. Both liabilities and owners equity are ranked equally when the
enterprise’s assets are distributed.

124) The declaration of a 10% stock dividend

a. Would decrease both accumulated profits and total
shareholders’ equity
b. Would decrease accumulated profits but would have no
effect on total shareholders’ total
c. Would have no effect on accumulated profits but would
decrease total shareholders’ equity
d. Would have no effect both on accumulated profits and total
shareholders’ equity

125) What is the most likely effect of a share split down?

Par value PER SHARE Numbers of shares
a. Decrease No effect
b. Decrease Increase
c. Increase Decrease
d. No effect No effect

126) How would the declaration of a liquidating dividend by a

corporation affect each of the following?
Contributed capital Total shareholders’ equity
a. Decrease No effect
b. No effect Decrease
c. No effect No effect
d. Decrease Decrease

127) An entity issued what is called a “12% stock dividend” on its

share capital. At what amount per share, if any, should retained
earnings be reduced for this transaction?
a. Zero because no entry is made
 b. Par value
c. Market value at the declaration
d. Market value at the date of issuance

128) The peso amount of total shareholders’ equity remains the

same when there is
a. Issuance of preference share in exchange for convertible
debentures
b. Issuance of nonconvertible bonds with share warrants
c. Declaration of a stock dividend
d. Declaration of a cash dividend

Income taxes

129) Justification for the method of determining periodic deferred tax

expense is based on the concept of
a. Matching of periodic expense to periodic revenue
b. Objectivity in the calculation of periodic expense
c. Recognition of asset and liability
d. Consistency of tax expense measurement with the actual tax
planning strategies.

130) The deferred tax expense is the

a. Increase in balance of deferred tax asset minus the increase in
balance of deferred tax liability
b. Increase in balance of deferred tax liability minus the increase
in balance of deferred tax asset
c. Increase in balance of deferred tax asset plus the increase in
balance of deferred tax liability
d. Decrease in balance of deferred tax asset minus the increase in
balance of deferred tax liability

131) Where a business transaction requires a direct adjustment to

an equity account, the tax effect is adjusted against
a. Income
 c. Equity
b. Tax expense

d. Cash

132) Under PAS 12 Income Taxes, deferred tax assets and liabilities
are measured at the tax rates that:
a. Applied at the beginning of the reporting period
b. At the end of the reporting period
c. At the rates that prevail at the reporting date
d. Are expected to apply when the asset or liability is settled

133) Which of the following could never be subject to interperiod tax

allocation?
a. Interest revenue on government bonds.
a. Depreciation expense on operational assets.
b. Estimated warranty expense.
c. Rent revenue

134) A temporary difference which would result in deferred tax asset

is
a. Tax, penalty or surcharge
b. Dividend received on stock investment
c. Excess tax depreciation over accounting depreciation
d. Rent received in advance included in taxable income at the time
of receipt but deferred for accounting purposes

135) Differences between taxable income and pretax accounting

income arising from transactions that, under applicable tax laws
and regulations, will not be offset by corresponding differences or
turn around in future periods is a definition of
a. Temporary differences
c. Deductible differences
b. Permanent differences
d. Taxable differences

136) When a temporary difference will result in taxable amounts in 5

years
a. A deferred tax liability is recognized in the current year.
 b. A deferred tax asset is recognized in the current year.
c. A deferred tax liability may be recognized in the current year if
certain conditions are met.
d. A deferred tax asset may be recognized in the current year if
certain conditions are met.

137) As a result of differences between depreciation for financial

reporting purposes and tax purposes, the financial reporting basis
of a company's plant assets falls below the tax basis. Assuming
the company had no other temporary differences, the company
should report a
a. Current tax receivable.
c. Deferred tax asset.
b. Current tax payable.
d. Deferred tax
liability.

138) Income tax expense is computed based on

a. Taxable income
b. Total-pretax financial income
c. Accounting income subject to income tax
d. The temporary difference

139) These are differences between carrying amount of an asset or

liability in the statement of financial position and its tax base.
a. Temporary differences
c. Permanent differences
b. Timing differences
d. Accounting
differences

140) Which of the following differences would result in future taxable

amounts?
a. Expenses or losses that are deductible after they are
recognized in financial income.
b. Revenue or gains that are taxable before they are recognized in
financial income.
c. Revenues or gains that are recognized in financial income but
are never included in taxable income.
 d. Expenses and losses that are deductible before they are
recognized in financial income.

Benefits
141) Which of the following is not one of the six components of
pension expense (or part of a component)?
a. Initial transition asset
b. Amortization of unrecognized gain or loss
c. Expected return on plan assets
d. Growth (interest cost) in PBO/ABO since the beginning of the
period

142) What is measured by the accumulated benefit obligation?

a. The pension expense, computed by the plan formula applied
to years of service to date, assuming future salary levels
b. The pension expense, computed by the plan formula applied
to years of service to date, using existing salary levels
c. The pension obligation, computed by the plan formula
applied to years of service to date, using existing salary levels.
d. The pension obligation, computed by the plan formula
applied to year of service to date, assuming future salary levels.

143) Under which category should lump sum benefit of 1% of the

final salary for each year of service and actuarial gains be
accounted for?
a. Lump sum benefits should be accounted for under defined
benefit plans.
Actuarial gains should be accounted for under defined benefit
plans.
b. Lump sum benefit should be accounted for under short term
employee benefits
Actuarial gains should be accounted for under defined benefit
plans.
c. Lump sum benefit should be accounted for under defined
benefit plans
 Actuarial gains should be accounted for under defined contribution
plans
d. Lump sum benefit should be accounted for under short term
employee benefits
Actuarial gains should be accounted for under defined contribution
plans

144) Investments held by retirement benefit plans should be stated

in the statement of net assets at
a. Net realizable value
c. Original cost
less impairment
b. Fair value

d. Value in use

145) In a rare circumstance, when a retirement benefit plan has

attributes of both defined contribution and defined benefit plan, it is
deemed
a. Defined contribution plan
b. Define benefit plan
c. Neither a defined contribution nor a defined benefit plan
d. Both defined contribution and defined benefit plan

146) Which is incorrect concerning the recognition and measurement

of a defined benefit plan?
a. actuarial assumptions are required to measure the obligation and
expense and there is a possibility of actuarial gains and losses.
b. the obligation is measured at a discounted basis.
c. the defined benefit plan must be fully funded
d. the expense recognized for a defined benefit plan is not
necessarily the amount of contribution due for the period

147) The vested benefits:

a. are employee benefits that are not conditional of future
employment
b. are benefits to be paid to the retired employees in the current
period.
c. are benefits to be paid to the retired employees in the
subsequent period.
 d. are benefits accumulated in the hands of a trustee.

148) Any transition loss on first adopting PAS 19 shall be recognized:

I. as expense immediately
II. as expense over a maximum of 5 years
a. I only

c. Either I or II irrevocably
b. II only

d. Either I or II revocably

149) An employer’s obligation for postretirement health benefits that

are expected to be provided to an employee must be fully accrued
by the date the
a. Employee is fully eligible for benefits
b. Employee retires
c. Benefits are utilized
d. Benefits are paid

150) For a defined benefit pension plan, the discount rate used to
calculate the projected benefit obligation is determined by the
Expected return on plan asset Actual return on plan
asset
a. yes yes
b. no no
c. yes no
d. no yes

151) The present value of pension benefits accrued to date using

assumptions as to future compensation levels is the
a. Prior service cost.
c.
Projected benefit obligation.
b. Accumulated benefit obligation.
d. Accrued pension cost.

152) Interest cost included in the net pension cost recognized by an

employer sponsoring a defined benefit plan represents the:
a. amortization of the discount on unrecognized past service cost

b. increase in the fair value of plan assets due to passage of time

c. increase in the projected benefit obligation due to passage of

time
d. shortage between the expected and actual return on plan
assets