Dynamic Society of Accounting Students

Monthly Examinations
Theory of Accounts

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