DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
Theory of Accounts – Reviewer
____________________________________________________________________________________________________________

COVERAGE:
PAS 7: Statement of Cash Flows
PAS 32: Financial Instruments: Disclosures and Presentation
PAS 39: Financial Instruments: Recognition and Measurement
Other Topics: Cash and cash equivalents
Bank Reconciliation
Trade and other receivables
Bad debts
Receivable factoring
Loans Receivable

Direction: Read and select the best answer for the following questions.

1. There is no specific standard dealing with cash. The only guidance is found in PAS 1 which provides that in order for a cash or cash
equivalent to be current, it must be
a. Unrestricted from being exchanged or used to settle a liability for at least 3 months after the end of reporting period.
b. Unrestricted from being exchanged or used to settle a liability for at least 12 months after the end of reporting period.
c. Restricted from being exchanged or used to settle a liability for at least 3 months after the end of reporting period.
d. Restricted from being exchanged or used to settle a liability for at least 3 months after the end of reporting period.
2. The following items may qualify as cash equivalents, except
a. Redeemable preference shares
b. Ordinary shares
c. Held to maturity bonds receivable
d. Money market placement
3. The following fund may form part of cash and cash equivalents, except
a. Interest fund
b. Cash surrender value
c. Sinking fund for bonds payable due within 12 months
d. Payroll fund
4. Which of the following statements concerning compensating balance is incorrect?
a. If the compensating balance is not legally restricted as to withdrawal, it is part of cash.
b. If the compensating balance is legally restricted as to withdrawal for a short-term loan, it is not part of cash but presented as
short-tem investment.
c. If the compensating balance is legally restricted as to withdrawal for a long-term loan, it is not part of cash but presented as long-
term investment.
d. The agreements regarding compensating balance shall not be disclosed in the notes to financial statements.
5. Under the imprest fund system, the petty cash fund account shall be debited or credited under the following transactions, except
a. When the petty cash fund is replenished.
b. When the petty cash fund is created.
c. When the petty cash fund is increased.
d. When the petty cash fund is adjusted at the end of the period.
6. The following are bank reconciling items, except
a. Deposit in Transit
b. Bank Error
c. Notes Receivable Collected
d. Outstanding checks
7. The following are book reconciling items that require adjusting entries in the book of depositor, except
a. Erroneous bank credit
b. Bank service charge
c. Interest earned
d. NSF Check

8. The adjusted bank balance is higher than the unadjusted book balance. Which of the following items is not yet reconciled?
a. Bank service charge
DLSL CPA Board Operation – Theory of Accounts Page 1 of 5
 b. Deposit in transit
c. Outstanding check
d. Interest earned
9. The adjusted book balance is lower than the unadjusted bank balance. Which of the following items is not yet reconciled?
a. Bank service charge
b. Deposit in transit
c. Outstanding check
d. Interest earned
10. Which of the following statements concerning the presentation of receivables are incorrect?
a. Trade receivables which are expected to be realized in cash within the normal operating cycle or one year, whichever is longer,
are classified as current assets.
b. Nontrade receivables which are expected to be realized in cash within one year, the length of the operating cycle
notwithstanding, are classified as current assets.
c. Trade receivables and nontrade receivable which are currently collectible shall be presented on the face of the statement of
financial position as one line item called trade and other receivables.
d. Trade and nontrade receivables which are currently collectible shall be separately presented on the face of the statement of
financial position.
11. The following non-trade receivables are generally classified as current, except
a. Advances to shareholders, employees or officers.
b. Advances to supplier for acquisition of merchandise.
c. Accrued income receivables such as dividends receivable, rent receivables and royalty receivables.
d. Advances to affiliates and associates.
12. The following non-trade receivable may form part of the asset section, except
a. Claims receivable
b. Subscription receivable collectible beyond one year
c. Advances to subsidiary collectible beyond one year
d. Special deposits on contracts
13. Customer credit balances shall be presented as
a. Current asset as part of trade and other receivables by offsetting it customer accounts with debit balances.
b. Current asset as part of short-term investment.
c. Current liability by removing it from the trade and other receivables
d. Both part of current asset and current liability
14. What is the proper treatment of bank overdraft?
a. As a general rule, it shall form part of cash and cash equivalents.
b. It shall form part of trade and other receivables.
c. As a general rule, it shall form part of current liabilities unless it can be offsetted to another bank account.
d. It shall be disclosed in the notes to financial statements.
15. PAS 39, par. 43, provides that a financial asset shall be recognized initially at fair value plus transaction costs that are directly attributable
to the acquisition. Receivable is an example of financial asset. Which of the following statements is incorrect regarding the initial
measurement of different receivables?
a. Accounts receivable shall be measured initially at fair value plus transaction cost.
b. Short-term receivables shall be measured initially at face value.
c. Long-term receivables that are interest-bearing shall be measured initially at face value.
d. Long-term receivable that are non-interest bearing shall be measured initially at present value of all future cash flows discounted
using the prevailing market rate of interest for similar receivables.
16. Accounts receivable shall be subsequently measured at
a. Face value
b. Present value
c. Amortized cost
d. Net realizable value
17. If the shipping term is FOB Shipping Point – Freight Collect, who shall pay and who actually paid the freight, respectively?
a. Seller – Buyer
b. Seller – Seller
c. Buyer – Buyer
d. Buyer – Seller

18. If the company uses the gross method of recording credit sales, which of the following accounts shall not appear?
a. Accounts receivable

DLSL CPA Board Operation – Theory of Accounts Page 2 of 5

 b. Sales discount
c. Sales discount forfeited
d. Sales
19. If the company uses the net method of recording credit sales, which of the following is true?
a. The total sales may be recorded at gross amount.
b. The sales discount account may be presented in the Income Statements.
c. Sales discount forfeited is presented as a contra-sales account.
d. The total credit sales is always recorded at net amount.
20. Which of the following methods of recording bad debts does not conform to the matching principle mandated by GAAP?
a. Direct write off method
b. Percent of sales method
c. Percent of accounts receivable method
d. Aging method
21. Which of the following methods of recording bad debts favors the income statement and result to proper matching of expenses to
revenue?
a. Direct write off method
b. Percent of sales method
c. Percent of accounts receivable method
d. Aging method
22. The amount initially computed under aging method of estimating bad debts is the amount
a. Bad debt expense
b. Ending balance of allowance for bad debts
c. Written off accounts receivable
d. Beginning balance of accounts receivable
23. The following transactions will result to credit to allowance for bad debts account, except
a. Bad debts expense
b. Recovery of accounts previously written off
c. Adjustment to increase the bad debts expense
d. Write off of accounts receivable
24. The following transactions decrease the accounts receivable account, except
a. Credit memo issued to customer
b. Credit sales
c. Sales discount
d. Factoring of accounts receivable
25. As a general rule, bad debts expense shall be classified in the Income Statement as
a. Selling Expense or Distribution Cost
b. Administrative expense
c. Finance cost
d. Other expense
26. The allowance for bad debts account has debit balance, what does it indicate?
a. It is possible because it may be the policy of the entity to adjust the allowance for bad debts at the end of the period and record
accounts written off during the year.
b. It is not possible.
c. It is not allowed because allowance for bad debts is a contra-asset account and must have a credit balance.
d. The debit balance indicates that the allowance is inadequate.
27. Loan receivable shall be measured initially at fair value plus transaction costs. Which of the following is the proper initial measurement?
a. Principal amount of loan plus direct origination costs plus origination fees.
b. Principal amount of loan less direct origination costs less origination fees.
c. Principal amount of loan plus direct origination costs less origination fees.
d. Principal amount of loan less direct origination costs plus origination fees.
28. Loan receivable shall be measured subsequently at
a. Fair value plus transaction cost
b. Amortized cost
c. Face value
d. Net realizable value

29. PAS 39, par. 58, provides that an entity shall assess at every end of reporting period whether there is objective evidence that a financial
asset or group of financial assets is impaired. The following are objective evidences of impairment, except
a. Increase in the estimated future cash flows from a group of financial assets.
b. Disappearance of an active market for the financial asset.

DLSL CPA Board Operation – Theory of Accounts Page 3 of 5

 c. Breach of contract such as default or delinquency in interest or principal payment.
d. Significant financial difficulty of the issuer or obligor.
30. The following are examples of receivable financing, except
a. Assignment of Accounts Receivable
b. Defalcation of Accounts Receivable
c. Factoring of Accounts Receivable
d. Discounting of Accounts Receivable
31. PAS 39, par. 63, provides that if there is evidence that an impairment loss on loan receivable carried at amortized cost has been incurred,
the amount of loss is measured as the difference between the carrying amount of the loan and the present value of estimated future cash
flows discounted at the
a. Original effective rate of the loan
b. Original nominal rate of the loan
c. Current effective rate of the loan
d. Current nominal rate of the loan
32. Impairment loss on loan receivable shall be presented
a. Before tax in the income from discontinued operation of the Other comprehensive income
b. After tax in the income from continued operation of the Profit or Loss
c. Before tax in the income from continued operation of the Profit or Loss
d. After tax in the income from discontinued operation of the Profit or Loss
33. What is assignment of accounts receivable?
a. It is a type of receivable financing wherein no entry is made as to the pledged accounts receivable.
b. It means that a borrower transfers its rights in some of its accounts receivable to a lender.
c. It is a sale of accounts receivable on a without recourse, notification basis.
d. It refers to the endorsement of note receivable to a bank or other financing company.
34. What is factoring of accounts receivable?
a. It is the sale of accounts receivable on a without recourse, non-notification basis.
b. It is the sale of accounts receivable on a with recourse, notification basis
c. It is the sale of accounts receivable on a without recourse, notification basis.
d. It is the sale of accounts receivable on a with recourse, non-notification basis.
35. In a casual factoring of accounts receivable, how is the gain or loss on factoring computed?
a. Sales price minus the gross amount of accounts receivable
b. Sales price minus the fair value of accounts receivable
c. Sales price minus the present value of accounts receivable
d. Sales price minus the net realizable value of accounts receivable
36. When a promissory note matures and is not paid, it is said to be dishonored. What is the proper treatment for dishonored note?
a. It shall be derecognized by debiting loss on derecognition.
b. The note receivable together with the interest shall be transferred to accounts receivable.
c. The note receivable shall be transferred to investment in trading securities.
d. The note receivable shall be retained in the note receivable account.
37. If a note receivable is discounted, how is the gain or loss on discounting computed?
a. Net proceeds from discounting less face value of note receivable.
b. Net proceeds from discounting less present value of note receivable.
c. Net proceeds from discounting less carrying amount of the note receivable.
d. Net proceeds from discounting less fair value of the note receivable.
38. PAS 39, par. 17, provides that an entity shall derecognize a financial asset when
I. The contractual rights to the cash flows of the financial asset have expired.
II. The financial asset has been transferred and the transfer qualifies for derecognition based on the extent of
transfer of risks and rewards of ownership.
a. I only
b. II only
c. Either I or II
d. Neither I nor II

39. PAS 39, par. 20, further provides the following guidelines for derecognition based on transfer of risks and rewards of ownership, except
a. If the entity has transferred substantially all risks and rewards, the financial asset shall be derecognized.
b. If the entity has retained substantially all risks and rewards, the financial asset shall not be derecognized.
c. If the entity has neither transferred nor retained substantially all risks and rewards, the financial asset is not derecognized if the
entity has lost control of the asset.

DLSL CPA Board Operation – Theory of Accounts Page 4 of 5

 d.If the entity has neither transferred nor retained substantially all risks and rewards, the financial asset is derecognized if the entity
has not retained control over the asset.
40. Long-term notes receivable shall be subsequently measured at
a. Net realizable value
b. Amortized cost
c. Face value
d. Maturity value

DLSL CPA Board Operation – Theory of Accounts Page 5 of 5