University of Pangasinan

ACC 103

OVERVIEW OF ACCOUNTING

1)The concept of recognition is applied in which of the following instances?

1. 1. An entity includes the effects of an event in the financial statements through a journal entry.
   2. An entity removes the effects of an event from the financial statements through a journal entry.
   3. An entity discloses only an event in the notes because its occurrence is not probable.
   4. An entity records an event through a memorandum entry.

2. Which of the following events is not considered an exchange or reciprocal transfer?
   1. Purchase of inventory on account
   2. Lending money to another entity
   3. Payment of a loan payable
   4. Payment of taxes

3. Which of the following events is considered a nonreciprocal transfer?
   1. Sale of an asset
   2. Donation
   3. Loss from a calamity
   4. Production of finished goods

4. To be useful, accounting information should be presented using
   1. Monetary amounts.
   2. A common denominator.
   3. Historical costs.
   4. Fair values.

5. Which of the following violates the historical cost concept?
   1. Recording purchases of merchandise inventory at the purchase price.
   2. Recording a building at the total construction costs.
   3. Measuring inventories at net realizable value.
   4. Recording an equipment acquired in an instalment purchase at the cash price equivalent.

6. Entity A values its fixed assets at their historical costs and does not restate them for changes in the purchasing power of the Philippine peso due to inflation. Entity A is applying which of the following accounting concepts?
   1. Prudence
   2. Accrual basis
   3. Stable monetary unit
   4. Time period

7. Entity A engages in importing and exporting activities. At the end of the period, Entity A has assets and liabilities denominated in foreign currencies. When preparing its financial statements, Entity A translates these assets and liabilities to pesos. Entity A is most likely to be applying which of the following accounting concepts?
   1. Double entry
   2. Accrual basis
   3. Stable monetary unit
   4. Time period

8. Preparing financial statements at least annually is an application of which of the following accounting concepts?
   1. Historical concepts
   2. Accrual basis
   3. Stable monetary unit
   4. Time period

9. Entity A acquires merchandise inventory. Entity A initially records the acquisition cost of the inventory as asset rather than an outright expense. When the inventory is subsequently sold, Entity A recognizes the cost of the inventory sold as expense, in the same period the sale revenue is recognized. This is an application of which of the following accounting concepts?
   1. Stable monetary unit
   2. Materiality
   3. Matching
   4. Proprietary

10. On Day 1, a customer buys goods from Entity A and promises to pay the sale price on Day 30. Entity A recognizes sales revenue on Day 1 rather than on Day

30. This an application of which of the following accounting concepts?
    1. Prudence
    2. Accrual basis
    3. Consistency
    4. Materiality

PROBLEM 3: MULTIPLE CHOICE

1. All of the following are events considered as internal events, except
   1. Transfer of goods from work-in-process to finished goods inventory
   2. Losses from flood, earthquake, fire and other calamities
   3. Transformation of biological assets from immature to mature
   4. Vandalism committed by the entity’s employee

2. Which of the following is considered an internal user of Entity A’s financial reports?
   1. Entity B, a bank, requires Entity A to submit audited financial statements in conjunction to a loan being applied for by Entity A.
   2. Mr. I is deciding whether to invest in Entity A. Mr. I uses Entity A’s financial statements in making its investment analysis.
   3. Ms. S, a shareholder of Entity A, is deciding whether to hold or sell her shareholdings in Entity A. Ms. S uses Entity A’s financial statements in making its “hold or sell” analysis.
   4. Mr. X, a member of Entity A’s board of directors, uses financial reports to make decisions regarding the financial and operational affairs of Entity A.

3. When resolving accounting problems not specifically addressed by current standards, an entity shall be guided by the hierarchy of financial reporting standards. The correct sequence of the hierarchy of financial reporting standards in the Philippines is

1. PASs, PFRSs and Interpretations
2. Conceptual Framework
3. Judgment
4. Pronouncement of other standard-setting bodies

1. I, III, II and IV
2. I, II, IV and III
3. I, IV, II and III
4. I, II, III and IV

4. The proper application of accounting principles is most dependent upon the
   1. Management.
   2. Accountant.
   3. Auditor.
   4. Chief executive officer.

5. Which of the following statements is correct?
   1. Accounting provides quantitative information only.
   2. Accounting is considered an art because it requires the use of creative skills and judgment.
   3. The only acceptable measurement basis in accounting is historical cost.
   4. Qualitative information can be found only in the notes in the financial statements.

6. Which of the following statements is correct?
   1. All quantitative information are also financial in nature.
   2. The accounting process of assigning peso amounts to economic transactions and events is measuring.

6. 3. The economic activity that involves using current inputs to increase the stock of resources available for output is called savings.
   4. The economic activity of using the final output of the production process is called income distribution.
7. Which of the following statements is incorrect regarding accounting concepts?
   1. Under the Accrual Basis of accounting, revenues are recognized when earned and expenses are recognized when incurred, not when cash id received and disbursed.
   2. Under the Going concern concept, the business entity is assumed to carry on its operations for an indefinite period of time.
   3. Under the Business entity/ Separate entity/ Entity/ Accounting entity concept, the business is treated separately from its owners.
   4. Under the Time period/ Periodicity/ Accounting Period concept, the life of the business is divided into series of reporting periods.
   5. Under the Cost- benefit concept, the cost of processing and communicating information should exceed the benefits derived from it.

8. Which of the following statements is incorrect?
   1. Financial reporting standards may at times be influenced by legal, political, business and social environments.
   2. General- purpose financial statements must be prepared by a certified public accountant.
   3. General purpose financial statements are prepared primarily for the use of external users.
   4. The PFRSs are issued by the Financial Reporting Standards Council.

9. Mr. John Doe, CPA, is a professor in a university where he teaches mainly home economics, music and physical education. Those subjects require that the teacher must be awesome. Mr. Doe is also frequently invited as a judge in beauty pageants and singing contests and as a referee in mixed martial arts competitions. Mr. Doe is considered to be practicing accountancy in which of the following sectors?
   1. Academe
   2. Public accounting
   3. Commerce and Industry
   4. None of these

10. Changes to reporting standards are primarily made in response to
    1. Government regulations
    2. Users’ needs
    3. Global modernization
    4. All of these

PROBLEM 4: FOR CLASSROOM DISCUSIION

Events

1. Entity A buys bananas and converts them into banana chips. The conversion of bananas into banana chips is a (an)
   1. Non- accountable event
   2. External event
   3. Non-reciprocal transfer
   4. Internal event

Valuation by fact or opinion

2. Which of the following is considered valued by fact rather than by opinion?
   1. Depreciation
   2. Cost of goods sold
   3. Discount on share capital
   4. Retained earnings

Measurement bases

3. Which of the following is not one of the several measurement bases used in accounting?
   1. Historical cost
   2. Fair value
   3. Present value
   4. All of these are used

Accounting concepts

4. Entity A is owned by Mr. X and Ms. Y. Which of the following transactions does not violate the separate entity concept and therefore is appropriately recorded in the accounting records of Entity A?
   1. Mr. X purchases groceries for his home consumption.
   2. Mr. X gives Ms. Y chocolate and flowers on Valentine’s date.
   3. Ms. Y provides capital to Entity A.
   4. Ms. Y provides capital to Entity B, another business entity.

5. Mr. A is assessing the ability of Entity A to generate future cash and cash equivalents. In making the assessment, Mr. A uses not only the statement of cash flows but also the other components of a complete set of financial statements. This is because of which of the following concepts?
   1. Going concern
   2. Time period
   3. Intercalation
   4. Articulation

6. Entity A acquires a stapler. Instead of recognizing the cost of the stapler as an asset to be subsequently depreciated, Entity A immediately charges it as expense. This is an application of which of the following concepts?
   1. Prudence
   2. Materiality
   3. Cost-benefit
   4. B and C

Common branches of accounting

7. What type of users’ needs is catered by general purpose financial statements?
   1. Common needs
   2. Specific needs
   3. A and B
   4. Neither A nor B

Four sectors in the practice of accountancy

8. Which of the following is not among the Four Sectors in the practice of accountancy as enumerated in R.A. 9298 also known as the “Philippine Accountancy Act of 2004”?
   1. Practice in Commerce and Industry
   2. Practice in the Government
   3. Practice in Education/ Academe
   4. Practice of Private Accountancy

Accounting standards

9. The Philippine Financial Reporting Standards (PFRSs) comprise:

1. Philippine Financial Reporting Standards
2. Philippine Accounting Standards
3. Interpretations
4. Accounting Practice Statements and Implementation Guidance

1. I, II and III
2. I, II,III and IV
3. I and II
4. I and III

10. Which of the following statements is incorrect regarding the PFRSs?
    1. The PFRSs are based on IFRSs.
    2. The financial reporting standards used in the Philippines are the same as those used globally.
    3. The PFRSs have higher authority than the PASs and Interpretations.
    4. The PFRSs are accompanied by guidance. The use of such guidance is sometimes mandatory and sometimes optional.

CONCEPTUAL FRAMEWORK PROBLEM 2: MULTIPLE CHOICE

1. According to the conceptual framework, these are the qualitative characteristics that that make information useful to users.
   1. Fundamental
   2. Enhancing
   3. Relevance
   4. Comparability

2. Information that is capable of making a difference in the decisions made by users has this qualitative characteristic.
   1. Relevance
   2. Faithful representation
   3. Timeliness
   4. Verifiability

3. When making materiality judgments, the overriding consideration is
   1. The ability of the item being judged to influence users’ decisions.
   2. The size of the impact of the item being judged
   3. The characteristics of the item being judged.
   4. C and D

4. This qualitative characteristic is unique in the sense that it necessarily requires at least two items.
   1. Verifiability
   2. Faithful representation
   3. Timeliness
   4. Comparability

5. Which of the following enhances the comparability of information?
   1. Making unlike things look alike.
   2. Making like things look different.
   3. Using different methods to account for similar transactions from period to period.
   4. Using the same technologies used by other entities in the same industry where the reporting entity belongs.

6. Information has this qualitative characteristics if different, knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.
   1. Relevance
   2. Faithful representation

1. 3. Verifiability
   4. Comparability

7. Entity A is assessing whether an item meets the definition of financial statement element. Entity A is considers the transaction’s substance and economic reality rather than merely its legal form. Entity A is applying which of the following accounting concepts?
   1. Substance over form
   2. Form over substance
   3. Accrual
   4. Verifiability

8. Which of the following does not provide evidence of future economic benefits from a resource?
   1. The resource can be used in combination with other resources to produce goods for sale.
   2. The resource can be used to pay liabilities.
   3. The resource can be distributed to the owners.
   4. The resource has no resale value and is very costly to use in the entity’s operations.

9. Which of the following does not meet the definition of an asset?
   1. Equipment which the entity intends, and very certain, to acquire in the future.
   2. Inventories purchased and received but not yet paid.
   3. Land received from a donation.
   4. A publishing title for a college textbook. The publishing title has no physical substance, meaning you cannot see or touch it.

10. Which of the following could result to the recognition of income?
    1. Increase in liability
    2. Decrease in asset
    3. Decrease in equity
    4. Decrease in liability

PROBLEM 3: MULTIPLE CHOICE

1. The conceptual framework is least applicable in which of the following cases?
   1. To account for a transaction that is specifically dealt with by a PFRS
   2. In resolving issues not addressed directly by a Standard
   3. In developing new financial reporting standards
   4. In reviewing and amending existing PFRSs

2. General purpose financial statements are designed to

1. 1. Meet all the information needs of the primary users.
   2. Meet all of the common needs of all primary users.
   3. Meet most of the common needs of most primary users.
   4. Meet none of the needs of users of financial information.

3. This refers to the process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an element and satisfies the recognition criteria.
   1. Recognition
   2. Incorporation
   3. Definition
   4. Celebration

4. This concept is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with an item will flow to or from the entity.
   1. Concept of Probability
   2. Concept of Possibility
   3. Risk Concept
   4. Concept of Uncertainty

5. If the chance that an item will cause an inflow or an outflow of the future economic benefits is lower than the chance that it will not, the inflow or outflow of future economic benefits is
   1. Probable
   2. Improbable
   3. Impossible
   4. Verifiable

6. According to the conceptual framework, this information provides an indication of how well management has discharged its responsibilities to make efficient and effective use of the reporting entity’s resources.
   1. The changes in the reporting entity’s economic resources and claims to those resources.
   2. The return the entity has produced from its economic resources.
   3. The level of the entity’s economic resources in relation to the claims thereof.
   4. The entity’s liquidity and solvency.

7. Which of the following is considered a qualitative factor in making materiality judments?
   1. 10% of total revenues
   2. 2.5% of total assets
   3. ? 25, 000 or more

1. 4. The context of an item in relation to a current crisis in the banking and insurance industry.

8. These are users of financial information who are not in a position to require a reporting entity to prepare reports tailored to their particular information needs.
   1. Primary users
   2. Secondary users
   3. Heavy users
   4. Slight users

9. Which of the following is not one of the primary users listed in the conceptual framework?
   1. Investors
   2. Lenders
   3. Creditors
   4. Debtors

10. Which of the following would least likely need general purpose financial statement in making economic decisions?
    1. Stockholders
    2. Potential investors
    3. Management
    4. Lenders

PROBLEM 4: FOR CLASSROOM DISCUSSION

Authoritative status

1. The conceptual framework (choose the incorrect statement)
   1. Is not a PFRS.
   2. In the absence of a standard, shall be considered by management when making its judgment in developing and applying an accounting policy that results in information that is relevant and reliable.
   3. Is concerned with general- purpose financial statements only.
   4. Prevails over the PFRs in cases of conflicts.

Primary users

2. Which of the following statements best explains why the reporting entity’s management and government regulators are not considered primary users under the Conceptual Framework?
   1. These users are considered related parties, and hence do not make relevant decisions.

1. 2. These users have the ability to curtail the operations of the reporting entity and therefore have the ability to affect the entity’s going concern.
   3. These users have the power to demand information they need directly from the reporting entity.
   4. All of these.

Information on economic resources, clams, and changes

3. Information about the reporting entity’s economic resources, claims against the reporting entity and the effects of transactions and other events and conditions that change those resources and claims is referred to in the Conceptual Framework as information about the
   1. Economic phenomena.
   2. Entity’s return.
   3. Financial performance.
   4. Prospects for future cash flows.

Materiality

4. Entity A is making a materiality judgment. Entity A considers the size of the impact of an item to be material if it exceeds 5% of the total assets. What type of materiality assessment is this?
   1. Quantitative
   2. Qualitative
   3. Requirement of a standard
   4. Relevance

Qualitative characteristics

5. Entity A deliberately overstated its liabilities from ? 1M to ?1.2M. What qualitative characteristic is violated?
   1. Relevance
   2. Faithful representation
   3. Timeliness
   4. Understandability

6. Two primary users are using the financial information of Entity A. If User #1 concludes that Entity A’s sales has increased while User #2 conludes that it has decreased, Entity A’s financial information is not
   1. Relevant.
   2. Faithfully represented.
   3. Comparable.
   4. Verifiable.

Elements of Financial Statements