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DySAS Center for CPA Review (DCCPAR)

2nd Floor Mitra Bldg. (Mercury Drug)


San Pedro St., Davao City

FINANCIAL ACCOUNTING Batch 9 – May 2005


Review Material Mr. John C. Frivaldo, MBA, CPA

FRAMEWORK OF ACCOUNTING

1. The International Accounting Standards Committee (IASC):


(a) directly influences governmental legislative regarding accounting standards.
(b) develops binding pronouncements for its members.
(c) is composed of members from national standard-setting bodies.
(d) establishes uniform accounting standards to eliminate reporting differences among
nations. D

2. In evaluating the reliability of accounting information, which of the following need not be
considered?
(a) neutrality (c) accessibility
(b) verifiability (d) representational faithfulness C

3. Generally accepted accounting principles:


(a) are fundamental truths or axioms that can be derived from laws of nature.
(b) derive their authority form legal court proceedings.
(c) derived their credibility and authority from general recognition and acceptance by the
accounting profession.
(d) have been specified in detail in the conceptual framework. C

4. Decision makers vary widely in the types of decisions they make, the methods of decision
making they employ, the information they already possess or can be obtain from other
sources, and their ability to process information. Consequently, for information to be
useful there must be a linkage between these users and the decisions they make. This
link is:
(a) relevance (c) understandability
(b) reliability (d) materiality C

5. Which of the following concepts means that there should be no attempt on the part of the
preparers of financial reports to induce a predetermined outcome or a particular mode of
behavior?
(a) conservatism (c) representational faithfulness
(b) neutrality (d) consistency B

6. Financial information exhibits the characteristics of consistency when:


(a) expenses are reported as charges against revenue in the period in which they are
paid.
(b) accounting entities give accountable events the same accounting treatment from
period to period.
(c) extraordinary gains and losses are not included on the income statement.
(d) accounting procedures are adopted which give a consistent rate of net income. B

7. Which of the following is an implication of the going concern assumption?


(a) the historical cost principle is credible
(b) depreciation and amortization policies are justifiable and appropriate
(c) the current-noncurrent classification of assets and liabilities is justifiable and
significant
(d) all of these D

8. Revenue should be recognized:


(a) at the end of production. (c) when realized.
(b) at the time of cash collection. (d) when realized or realizable and earned D

9. An operating cycle:
(a) is twelve months or less in length.
(b) is the average time required for an enterprise to collect its receivables.
(c) is used to determine current assets when the operating cycle is longer than one year.
(d) starts with inventory and end with cash. C

10. When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are:
(a) earned (c) recognized
(b) realized (d) all of these A

11. A sale should not be recognized as revenue by the seller at the time of sale if:
(a) payment was made by check
(b) the selling price is less than the normal selling price
(c) the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated
(d) none of the these C

12. Which of the following may be recognized as revenue?


(a) rental deposits
(b) cash from advance magazine subscriptions
(c) value of gold extracted from a mine but not yet sold
(d) cash received in payment of a note receivable C

13. Which is not a qualitative characteristic?


(a) understandability (c) comparability
(b) relevance (d) accrual basis D

14. Which is not a descriptive of reliability?


(a) The information must represent faithfully the transactions and other events it either
purports to represent or could reasonably be expected to represent.
(b) The transactions and other events are accounted for and presented in accordance
with their substance and economic reality and not merely their legal form.
(c) The information contained in financial statements must be free from bias.
(d) The exercise of prudence allows the creation of hidden reserves or excessive
provisions and deliberate understatement of assets and income. D

15. Comparability of financial statements of a single enterprise for one date or period of time
with those of other dates or for other periods would be more informative if the following
conditions exist, except:
(a) the presentations are in the same form
(b) the contents of the statements are identical.
(c) accounting principles are not changed at all.
(d) changes in circumstances or the nature of the underlying transactions are disclosed.
C

16. The purpose of the International Accounting Standards Committee is to:


(a) issue enforceable standards which regulate the financial accounting and reporting of
multinational corporations.
(b) develop a uniform currency in which the financial transactions of companies
throughout the world would be measured.
(c) promote uniform accounting standards among countries of the world.
(d) arbitrate accounting disputes between auditors and international companies. C

17. Accounting information is considered to be relevant when it:


(a) can be depended on to represent the economic conditions and events that is intended
to represent.
(b) is capable of making a difference in a decision.
(c) is understandable by reasonably informed users of accounting information.
(d) is verifiable and neutral. B

18. Information about different entities and about different periods of the same entity can be
prepared and presented in a similar manger. Comparability and consistency are related
to which of these objectives?
Comparability Consistency Comparability Consistency
(a) Entities Entities (c) Periods Entities
(b) Entities Periods (d) Periods Periods B

19. Valuing assets at their liquidation values rather than their cost is inconsistent with the:
(a) periodicity assumption (c) materiality constraint
(b) matching principle (d) historical cost principle D

20. Trade-offs between the characteristics that make information useful may be necessary or
beneficial. Issuance of interim financial statements is an example of a trade-off between:
(a) relevance and reliability (c) timeliness and materiality
(b) reliability and periodicity (d) understandability and timeliness A

21. The preparation of quarterly financial statements is an example of:


(a) predictive value (c) timeliness
(b) feedback value (d) understandability C

22. The rule that helps accounting information be reliable is called:


(a) objective principle (c) accounting
(b) going concern principle (d) entity A

23. Which statement is incorrect concerning the ASC framework?


(a) The framework sets out the concepts that underlie the preparation and presentation of
financial statements for external users.
(b) The framework is not a Standard of Financial Accounting Standards for any particular
measurement or disclosure issue.
(c) The framework applies to the financial statements of all commercial, industrial and
business reporting enterprises, whether in the public or private sector.
(d) Special purpose financial reports, for example, prospectuses and computations
prepared for taxation purposes, are within the scope of the framework. D

24. Financial statements (choose the incorrect one):


(a) provide information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic
decisions.
(b) also show the results of the stewardship of management or the accountability of the
management for the resources entrusted to it.
(c) are the primary responsibility of the management of an enterprise.
(d) are prepared and presented at least annually and are directed toward the specific
information needs of a wide ranges of users. D

25. Which is incorrect concerning the qualitative characteristics of financial statements?


(a) To achieve the quality of understandable financial information, 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.
(b) Information has the quality of relevance when it influences the economic decisions of
users by helping them evaluate past, present or future events or confirming or
correcting their past evaluations.
(c) To be reliable, information must represent faithfully the transactions and other events it
either purports to represent or could reasonably be expected to represent.
(d) The need for comparability dictates that it is appropriate for an enterprise to leave its
accounting policies unchanged even when more relevant and reliable alternatives
exist. D

26. Which is not a basic purpose of the ASC framework?


(a) to assist ASC in developing accounting standards
(b) to assist prepares of financial statements in applying ASC accounting standards
(c) to assist ASC in reviewing and adopting International Accounting Standards
(d) to assist the Board of Accountancy in promulgating rules and regulations affecting the
practice of accountancy in the Philippines. D

27. Which is not a characteristic of relevant information?


(a) It can help users increase the likelihood of correctly forecasting outcome of events.
(b) It enables users to confirm or correct earlier expectations.
(c) It is furnished to the decision maker early enough before a decision is made.
(d) It is neutral. D

28. When a company makes a change in accounting principle, prior year statements are not
generally restated to reflect the change. This procedure would prevent a dilution of public
confidence in financial statements but that it would conflict with the accounting concept of:
(a) materiality (c) objectivity
(b) conservatism (d) comparability D

29. This feature of financial accounting considers that determination of periodic income and
financial position depends on measurement of economic resources and obligations and
changes in them as the changes occur rather than simply on recording receipts and
payments of money.
(a) measurement of economic resources and obligations
(b) use of the accrual basis of accounting
(c) measurement in terms of money
(d) exchange price B

30. On December 31, 2005, F Corporation sued J, Inc. for breach of the contract of carriage
in the amount of P1 million. F’s financial statements should report the expected award of
P1 million as a:
(a) recoverable and revenue (c) receivable and deferred payments
(b) revenue (d) disclosures by footnotes only D

31. Liabilities + Capital = Assets explains the:


(a) proprietary theory (c) residual equity theory
(b) entity theory (d) fund theory B
32. Q, Inc. is a company whose securities are traded on over-the-counter market. It controls
R Corporation. Consolidated financial statements are prepared in recognition of the
accounting concept of:
(a) economic entity (c) legal entity
(b) materiality (d) reliability A

33. It is the body authorized by law to promulgate rules and regulations affecting the practice
of accountancy in the Philippines.
(a) PICPA (c) Board of Accountancy
(b) ASC (d) PRC C

34. The ASC will not issue any SFAS without the approval of at least:
(a) eight members (c) four members
(b) five members (d) three members B

35. The financial information is designed to serve the common needs of owners, creditors,
managers, and other users, with primary emphasis on the needs of present and potential
owners and creditors.
(a) general purpose financial information
(b) fundamentally related financial statements
(c) substance over form
(d) materiality A

36. Which statement best describes generally accepted accounting principles?


(a) they have been formulated mainly by the public sector
(b) they have been developed on the basis of such factors as experience, reason,
custom, usage and to a significant extent, practical necessity
(c) they are the same as laws within our legal system
(d) they do not apply to small enterprises B

37. Which of the following accounting pronouncements is the most authoritative?


(a) ASC Exposure Draft
(b) ASC Statement of Financial Accounting Standards
(c) ASPC Statements of Auditing Standards
(d) PICPA Statement of Position B

38. The qualitative objective in accounting that information should be made available without
delay before decisions are to be made.
(a) relevance (c) completeness
(b) timeliness (d) understandability B

39. Fundamental assumptions related to the economic environment in which accounting


operates are called:
(a) accounting principles (c) accounting concepts
(b) accounting postulates (d) accounting theories B

40. In cases of any departure from conformity with GAAP, the CPA must indicate:
A B C D
Nature of departure Yes Yes No No
Approximate effects thereof No Yes No Yes B

41. The basis for valuing or recording transactions where cash is not involved:
(a) historical cost (c) selling price
(b) fair value (d) home consumption value B
42. The following are related to objectivity except:
(a) arm’s length-transactions (c) periodicity
(b) neutrality (d) verifiability C

43. The following are related to comparability, except:


(a) representational faithfulness (c) consistency
(b) periodicity (d) uniformity A

44. Early accounting records were used primarily by:


(a) owners and managers (c) creditors and managers
(b) owners and creditors (d) creditors and suppliers B

45. Periodicity refers to:


(a) the entire life of the entity. (c) a chain of one-year segments.
(b) the natural life of the business. (d) any period covered by a report. C

46. Going concern refers to the assumption that the:


(a) firm will continue to operate.
(b) firm operations are soon to be terminated.
(c) firm cannot fulfill existing commitments.
(d) firm is suffering from huge losses. A

47. The matching principle provides guidance in accounting for:


(a) owner’s equity (c) liabilities
(b) expense (d) assets B

48. Generally accepted accounting principles are:


(a) a set of standards and rules that are recognized as a general guide for financial
reporting.
(b) usually established by the bureau of internal revenue.
(c) the guidelines used to resolve ethical dilemmas.
(d) fundamental truths that can be derived from the laws of nature. A

49. What is the primary criterion by which accounting information can be judged?
(a) consistency (c) usefulness for decision-making
(b) predictive value (d) comparability C

50. This refers to the tendency of accountants to resolve uncertainty in a way least likely to
overstate assets and revenues?
(a) comparability (c) conservatism
(b) materiality (d) consistency C