FINANCIAL ACCOUNTING REVIEW

1. The principles, which constitute the ground rules for financial reporting, are termed as generally
accepted accounting principles. To qualify as generally accepted, an accounting principle:
(a) must guide corporate managers in the preparation of financial statements which should be
understood by widely scattered stockholders.
(b) must guide corporate managers in the preparation of financial statements which will be used
in making collective bargaining agreements with trade unions.
(c) must guide entrepreneurs in the choice of investments.
(d) must receive substantial authoritative support from the public and the members of the
profession. D

2. In accounting, those standards and practices that have won acceptance because of their logic
and proven usefulness are referred to as:
(a) accounting dogmas (c) accounting procedures
(b) accounting principles (d) accounting theories B

3. Financial statements that are expressed assuming a stable monetary unit are:
(a) general price-level financial statements. (c) current value financial statements.
(b) historical peso financial statements. (d) fair-value financial statements. B

4. As compared with other valuation alternatives that are used in the preparation of general-purpose
financial statements, historical cost is more:
(a) objective. (c) indicative of the entity’s purchasing power.
(b) relevant. (d) conservative. A

5. The following information is shown in the accounting records of Manolito Company for the year
2008:
Balances as of January 1:
Cash P620,000
Accounts receivable 670,000
Merchandise inventory 860,000
Accounts payable 530,000
Balances as of December 31:
Accounts receivable 910,000
Merchandise inventory 780,000
Accounts payable 480,000
Total sales and cost of goods sold for 2008 were P7,980,000 and P5,830,000, respectively. All
sales and all merchandise purchases were made on credit. Various operating expenses of
P1,070,000 were paid in cash. Assume that there were no other pertinent transactions. The
cash balances on December 31, 2008 would be:
(a) P1,080,000 (b) P1,490,000 (c) P2,560,000(d) P3,050,000 B

Cash balance, January 1 P620,000

Collections of accounts (670,000 + 7,980,000
- 910,000) 7,740,000
Payments of accounts (530,000 + 5,750,000 *
- 480,000) (5,800,000)
Payment of various operating expenses (1,070,000)
Cash balance, December 31 P1,490,000
* 7,980,000 + 780,000 – 860,000

6. The cash or operating cycle refers to:

(a) the length of time that elapses between an outlay of cash for resources and the receipt of
cash from the sale of goods or services
(b) the length of time that elapses between the time an item is purchased and payment is made
(c) the length of time it takes to collect receivables from customers who have been extended
special credit terms
(d) none A

7. The cash balance your company reports should be increased if in doing the bank reconciliation
discover:
(a) a note receivable has been collected for you by the bank
(b) not all of the checks written this period have yet cleared the bank
(c) a check from one of your customers has been returned for insufficiency of funds
 (d) a deposit in transit included in your bank reconciliation last period is shown by the bank as
received at the beginning of this period A

For items 8 and 9:

Patsy Corp. has estimated its activity for December 2008. Selected data from these estimated
amounts are as follows:
Sales P350,000
Gross profit (based on sales) 30%
Increase in trade accounts receivable P 10,500
Change in accounts payable P 0
Increase in inventory P 5,000
Variable selling, general and administrative expenses includes a charge for uncollectible accounts
of 1% of sales. Accounts written off were P3,000.

8. On the basis of the above data, what is the cash inflow from operating activities for December?
(a) P336,500 (b) P339,500 (c) P346,500 (d) P350,000 A

9. On the bases of the above data, what is the cash outflow from operating activities for December?
(a) P309,500 (b) P313,000 (c) P314,500 (d) P318,000 C

10. The Reynolds Company is preparing its cash budget for the month of June. The following
information is available concerning its accounts receivable:
Estimated credit sales for June P200,000
Actual credit sales for May 150,000
Estimated collections in June for credit sales in June 20%
Estimated collections in June for credit sales in May 70%
Estimated collections in June for credit sales prior to May P12,000
Estimated writeoffs in June for uncollectible credit sales P8,000
Estimated provision for bad debts in June for credit sales
in June P7,000
What are the estimated cash receipts from accounts receivable collections in June?
(a) P142,000 (b) P149,000 (c) P150,000 (d) P157,000 D

June (200,000 x 20%) P 40,000

May (150,000 x 70%) 105,000
Prior to May 12,000
Estimated cash receipts in June P157,000

11. Royal Corporation’s books disclosed the following information as of and for the year ended
December 31, 2004:
Net credit sales P2,000,000
Net cash sales 500,000
Merchandise purchases 1,000,000
Inventory at beginning 600,000
Inventory at end 200,000
Accounts receivable at beginning 300,000
Accounts receivable at end 700,000
Net income 100,000
Royal’s accounts receivable turnover is:
(a) 2.9 times (b) 3.6 times (c) 4.0 times (d) 5.0 times C

[2,000,000 / (300,000 + 700,000/ 2) ] 4 times

12. For the month of December 2008, the records of Magi Corporation show the following
information:
Cash received on accounts receivable P35,000
Cash sales 30,000
Accounts receivable, December 31, 2007 80,000
Accounts receivable, December 31, 2008 74,000
Accounts receivable written off 1,000
The corporation uses the direct write off method in accounting for uncollectible accounts
receivable. What are the gross sales for the month of December 2008?
(a) P59,000 (b) P60,000 (c) P65,000 (d) P72,000 B
 Cash sales P30,000
Credit sales during 2004:
Accounts receivable, December 31, 2004 P74,000
Cash received on accounts 35,000
Accounts receivable written off 1,000
Accounts receivable, December 31, 2003 (80,000) 30,000
Gross sales P60,000

13. On January 1, Uni Company assigned P500,000 of accounts receivable to Mix Finance Company.
Uni gave a 14% note for P450,000 representing 90% of the assigned accounts and received
proceeds of P432,000 after deduction of a 4% fee. On February 1, Uni remitted P80,000 to Mix,
including interest for 1 month on the unpaid balance. As a result of this P80,000 remittance,
accounts receivable assigned and notes payable will be decreased by what amount?
Accounts receivable Notes payable Accounts receivable Notes payable
(a) P80,000 P74,750 (c) P72,000 P74,750
(b) P80,000 P80,000 (d) P74,750 P80,000 A

Accounts receivable assigned is reduced by the amount of P80,00 collected.

Notes payable is reduced by P74,750.
[80,000 – (450,000 x 14% x 1/12)]

14. When a note is discounted, the party receiving the proceeds is referred to as:
(a) the maker (c) the payor
(b) the payee (d) the endorser D

15. Which method of recording bad debts is consistent with accrual accounting?
(a) the entire receivables are shown as current without disclosure of the amount not currently
due
(b) the entire receivables are shown as noncurrent
(c) only the portion currently due is shown as current the balance as noncurrent
(d) the entire receivables are shown as current with disclosure of the amount not currently due
C
16. When an account receivable aging schedule is prepared, a series of computations is made to
determine the estimated uncollectible accounts. The resulting amount from this aging schedule:
(a) when added to the total accounts written off during the year is the desired credit balance of
the allowance for doubtful accounts at year-end
(b) is the amount of doubtful accounts expense for the year
(c) is the amount that should be added to the beginning allowance for doubtful accounts to get
the doubtful accounts expense for the year
(d) is the amount of desired credit balance of the allowance for doubtful accounts to be reported
at year-end D

17. If a note receivable is discounted with recourse:

(a) a contingent liability does not exist
(b) note receivable discounted should be credited
(c) liability for note receivable discounted should be credited
(d) note receivable must be credited B

18. A decrease in net accounts receivable should be presented in a statement of cash flows (indirect
approach) as a (an):
(a) inflow and outflow of cash
(b) outflow of cash
(c) deduction from net income
(d) addition to income from continuing operations D

19. In a statement of cash flows in which the operating activities section is prepared under the
indirect method, a gain on the sale of long-term investment should be presented as a (an):
(a) deduction from net income
(b) addition to net income
(c) inflow and outflow of cash
(d) outflow of cash A

20. A division experienced a 2008 fire, which destroyed all of inventory except for P48,000 of
inventory (at cost). Data available are below:
 2007 2008 (to date of fire)
Sales P800,000 P320,000
Purchases 560,000 280,000
Cost of goods sold 480,000
Ending inventory 80,000
What is the approximate inventory lost to the fire?
(a) P80,000 (b) P120,000 (c) P128,000 (d) P168,000 B

Beginning inventory, 1/1/2004 P 80,000

Purchases for 2004 280,000
Cost of goods available for sale P360,000
Cost of goods sold (sales, 320,000 x 60%) (192,000)
Estimated inventory before the fire P168,000
Inventory not destroyed ( 48,000)
Inventory lost to the fire P120,000