WAVE 1: Theory of Accounts

1. The ASC framework (Choose the incorrect one)

a. Sets out the concepts that underlie the preparation and presentation of financial statements
for external users.
b. Is not a Statement of Financial Accounting Standards and hence does not define standards for
any particular measurement or disclosure issue.
c. Is concerned with special purpose reports, for example, prospectuses and computations
prepared for taxation purposes.
d. Applies to the financial statements of all commercial, industrial and business reporting
enterprises, whether in the public or private sector.

2. Accounting is
I. A service activity and its function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decision.
II. The art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.
III. The process of identifying, measuring and communicating economic information to permit
informed judgment and decision by users of the information.
a. I, II and III b. I only c. II only d. III only

3. Financial accounting
a. Is the examination of financial statements by an independent CPA for the purpose of
expressing an opinion as to the fairness of the financial statements.
b. Focuses on the preparation and presentation of general purpose reports known as financial
statements.
c. Has no precise coverage but is used generally to refer to services to clients on matters of
accounting, finance, business policies, organization procedures, product costs, distribution and
many other phases of business conduct and operations.
d. Is the preparation of annual income tax returns and determination of tax consequences of
certain proposed business venture.

4. Which is not a purpose of the ASC framework?

a. To assist the ASC in developing accounting standards that represent generally accepted
accounting principles in the Philippines.
b. To assist the ASC in its review and adoption of existing International Accounting Standards.
c. To assist auditors in forming an opinion as to whether financial statements conform with
Philippine GAAP.
d. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice
of accountancy in the Philippines.

5. The ASC framework deals with (choose the incorrect one)

a. Objective of financial statements
b. Qualitative characteristics
c. Definition, recognition and measurement of the basic elements of financial statements
d. Generally accepted accounting principles

6. Which is incorrect concerning financial statements?

a. The objective of general purpose financial statements is to provide information about the
financial position, performance and cash flows of an enterprise that is useful to a wide range of
users in making economic decisions.
b. Financial statements also show the results of managements stewardship of the resources
entrusted to it.
c. The management of an enterprise has the primary responsibility for the preparation and
presentation of financial statements.
 d. Financial statements are prepared and presented at least annually and are directed toward the
specific needs of a wide range of users.

7. The providers of risk capital (investors)

a. Are interested in information which enables them to assess the ability of the enterprise to
provide renumeration, retirement benefits and employment opportunities.
b. Are interested in information that enables them to determine whether their loans and the
interest attaching to them will be paid when due.
c. Have an interest in information about the continuance of an enterprise especially when they
have a long-term involvement with or are dependent on the enterprise.
d. Are concerned with the risk inherent in and return provided by their investments and need
information to help them determine whether they should buy or sell the investments.

8. These users are interested in the allocation of resources and activities of enterprises, and
therefore require information to regulate the activities of enterprises, determine taxation policies
and as a basis for national income and similar statistics.
a. Suppliers and trade creditors c. Public
b. Customers d. Governments and their agencies

9. Information about economic resources controlled by the enterprise and its capacity to modify
these resources is useful in predicting the
a. Ability of the enterprise to meet its financial commitments in the near term.
b. Ability of the enterprise to meet its financial commitments over a longer term.
c. Future borrowing needs and how future profits and cash flows will be distributed among
interested users.
d. Ability of the enterprise to generate cash and cash equivalents in the future.

10. Information about the performance of an enterprise is required in order to assess potential
changes in the economic resources that it is likely to control in the future. This information is
primarily pictured in the
a. Cash flow statement c. Balance sheet
b. Statement of retained earnings d. Income statement

11. The accrual basis means that

a. The effects of transactions and other events are recognized when they occur and not as cash
or its equivalent is received or paid and they are recorded in the accounting records and
reported in the financial statements of the periods to which they relate.
b. The financial statements are normally prepared on the assumption that an enterprise will
continue in operation for the foreseeable future.
c. Where parent and subsidiary relationship exists, consolidated statements for the affiliates are
prepared because the parent and the subsidiary are a single economic entity.
d. The financial statements should be stated in terms of a common financial denominator.

12. Qualitative characteristics

a. Are the attributes that make the information provided in financial statements useful to users.
b. Are the generally accepted accounting principles.
c. Are the basic notions and fundamental premises on which the accounting process is based.
d. Refer to the definition, recognition and measurement of the elements from which financial
statements are constructed.

13. What are the primary qualities of financial accounting information that pertain to the content
rather than to the presentation of financial information?
a. Relevance and reliability c. Relevance and comparability
b. Understandability and comparability d. Reliability and understandability

14. Information has the quality of relevance when

 a. It influences the economic decisions of users by helping them evaluate past, present or future
events or confirming or correcting their past evaluations.
b. It is free from bias and error and can be depended upon by users to represent faithfully that
which it either purports to represent or could reasonably be expected to represent.
c. Users are assumed to have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information with reasonable diligence.
d. Users are informed of the accounting policies employed, any changes in those policies and the
effects of such changes.

15. Which statement is incorrect concerning reliability of information?

a. The information must be neutral, meaning free from bias.
b. The information should reflect the economic substance of the transactions rather than their
mere legal form.
c. The information must be complete within the bounds of materiality and cost.
d. Prudence is the inclusion of a degree of caution in the exercise of judgment needed in making
an estimate required under conditions of uncertainty, such that assets or income are
overstated and liabilities or expenses are understated.

16. Which is incorrect concerning the quality of relevance?

a. The relevance of information is affected by its nature and materiality.
b. The information must be relevant to the decision-making needs of the users in order to be
useful.
c. Information about financial position and past performance is frequently used as a basis for
predicting future financial position and performance and other matters such as dividend and
wage payments, security price movements and the ability of the enterprise to meet its
commitments when they fall due.
d. The predictive and confirmatory roles of information are not interrelated.
17. Which is incorrect concerning the qualitative characteristic of comparability?
a. Horizontal comparability is the quality of information that allows comparisons within a single
enterprise through time or from one accounting period to the next.
b. Dimensional comparability is the quality of information that allows comparisons between two
or more enterprises engaged in the same industry.
c. The need for comparability should not be confused with mere uniformity and should not be
allowed to become an impediment to the introduction of improved accounting standards.
d. It is appropriate for an enterprise to leave its accounting policies unchanged when more
relevant and reliable alternatives exist.

18. Which is incorrect concerning the accounting constraints on relevant and reliable information?
a. It may often be necessary to report before all aspects of a transaction or other event are
known, thus impairing reliability.
b. The benefits derived from the information should exceed the cost of providing it.
c. In achieving a balance between relevance and reliability, the overriding consideration is how
best to satisfy the economic decision-making needs of users.
d. If there is undue delay in the reporting of information it may lose its relevance and reliability.

19. A contingent liability is a

I. Possible obligation arising from past events that will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not wholly within the control of the
enterprise.
II. Present obligation that arises from past events and it is not probable that an outflow of
resources will be required to settle the obligation and the obligation can be measured reliably.
I only b. II only c. Both I and II d. Neither I nor II

20. A contingent liability is (choose the incorrect one)

Disclosed only c. Disclosed even if remote
Either probable or measurable but not both d. Not recognized in the financial statements
21. It is a possible asset that arises from past event and whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain future events not wholly within the control
of the enterprise.
a. Contingent asset c.
Goodwill
b. Intangible asset d.
Other asset

22. A contingent asset (choose the incorrect one)

a. Disclosed where an inflow of economic benefits if probable.
b. Disclosed where an inflow of economic benefits is remote.
c. Not recognized in the financial statement.
d. No longer contingent if the realization of income is virtually certain.

23. These are the events, both favorable and unfavorable, that occur between the balance sheet date
and the date when financial statements are authorized for issue.
a. Events after the balance sheet date c. Fundamental errors
b. Contingencies d. Current events

24. Events after the balance sheet date are

a. Adjusting events only c. Both adjusting and nonadjusting events
b. Nonadjusting events only d. Neither adjusting nor nonadjusting events

25. Adjusting events after balance sheet date include all of the following, except
a. The resolution after the balance sheet date of a court case.
b. The bankruptcy of a customer which occurs after the balance sheet date resulting to a loss on
a trade receivable account.
c. The discovery of fraud or errors that show that the financial statements were incorrect.
d. Dividends to holders of equity instruments proposed or declared after balance sheet date

26. Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed as the
a. Elements of financial statements c. Accounting constraints
b. Features of accounting d. Concepts of capital and capital maintenance

27. The elements directly related to the measurement of financial position are
a. Assets, liabilities, equity, revenue and expenses
b. Assets, liabilities, equity and revenue
c. Assets, liabilities and equity
d. Revenue and expenses

28. Asset is
a. A resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise.
b. A present obligation of the enterprise arising from past events the settlement of which is
expected to result in an outflow from the enterprise of resources embodying economic
benefits.
c. The residual interest in the assets of the enterprise after deducting all its liabilities.
d. Equivalent to all financial resources of the enterprise.

29. It is the process of incorporating in the balance sheet or income statement an item that meets
the definition of an element of financial statements.
a. Recognition b. Allocation c. Realization d. Summarization

30. It is the process of determining the monetary amounts at which the elements are to be
recognized and carried in the balance sheet and income statement.
a. Measurement b. Recognition c. Reporting d. Interpreting
31. Historical cost is the measurement basis most commonly adopted by enterprises in preparing the
financial statements. This means the
a. Amount of cash or cash equivalent paid or the fair value of the consideration given.
b. Amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquired currently.
c. Amount of cash or cash equivalent that could currently be obtained by selling the asset in an
orderly disposal.
d. Discounted value of the future net cash inflows that an item is expected to generate in the
normal course of business.
32. Which statement is incorrect concerning the recognition principles?
a. An asset is recognized when it is probable that future economic benefits will flow to the
enterprise and the asset has a cost or value that can be measured reliably.
b. A liability is recognized when it is probable that an outflow of resources embodying economic
benefits will result from the settlement of a present obligation that can measured reliably.
c. Income is recognized when an increase in future economic benefits related to an increase in
asset or a decrease in liability has arisen that can be measured reliably.
d. Expenses are recognized when a decrease in future economic benefits related to an increase in
asset or a decrease in liability has arisen that can be measured reliably.

33. Which is incorrect concerning the recognition of a liability?

a. Obligations may be legally enforceable as a consequence of a binding contract or statutory
requirement.
b. If an enterprise decides as a matter of policy to rectify faults in its products even when these
become apparent after the warranty period has expired, the amounts that are expected to be
expended in respect of goods sold are liabilities.
c. An obligation normally arises only when the asset is delivered or the enterprise enters into an
irrevocable agreement to acquire the asset.
d. A decision by the management of an enterprise to acquire assets in the future, in itself, gives
rise to a present obligation.

34. Technically, this arises in the course of the ordinary activities of an enterprise and is referred to by
a variety of different names including sales, interest, dividends, royalties and rent.
a. Income b. Gain c. Profit d. Revenue

35. This process involves the simultaneous or
result directly and jointly from the same
association between the costs incurred and
a. Matching of revenues with costs
b. Matching of costs with revenues
combined recognition of revenues and expenses that
transactions or other events on the basis of direct
the earning of specific items of income.
c. Systematic and rational allocation
d. Immediate recognition

36. The following statements pertain to the concept of income and expenses. Which statement is
incorrect?
a. The definition of expenses encompasses losses as well as those expenses that arise in the
course of the ordinary activities of the enterprise.
b. Losses represent other items that meet the definition of expenses and may or may not arise in
the course of the ordinary activities of the enterprise.
c. The definition of revenue encompasses both income and gains.
d. Gains represent other items that meet the definition of income and may or may not arise in the
course of the ordinary activities of an enterprise.

37. Which of the following is not regarded as constituting a separate element in the ASC Framework?
a. Income b. Expense c. Gain d. Equity

38. Which capital maintenance concept is applied to currently reported net income and
comprehensive income?
Currently reported net income Comprehensive income
a. Financial capital Physical capital
 b. Physical capital Physical capital
c. Financial capital Financial capital
d. Physical capital Financial capital

39. Which statement is correct concerning the two concepts of capital?

I. Under a financial capital concept, such as invested money or invested purchasing power,
capital is synonymous with the net assets or equity of the enterprise.
II. Under a physical capital concept, such as operating capability, capital is regarded as the
productive capacity of the enterprise.
a. Both I and II b. Neither I nor II c. I only d. II only

40. Which statement is correct concerning the concepts of capital?

I. Under a financial capital concept, a profit is earned only if the financial amount of the net
assets at the end of the period exceeds the financial amount of the net assets at the beginning
of the period, after excluding any distributions to and contributions from owners during the
period.
II. Under a physical capital concept, a profit is earned only if the physical productive capacity at
the end of the period exceeds the physical productive capacity at the beginning of the period,
after excluding distributions to and contributions from owners during the period.
a. Both I and II b. Neither I nor II c. I only d. II only