DySAS Center for CPA Review (DCCPAR)

2nd Floor Mitra Bldg. (Mercury Drug)

San Pedro St., Davao City

FINANCIAL ACCOUNTING Batch 8 – October 2004

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

FRAMEWORK OF ACCOUNTING

1. 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

2. Which of the following statement is true?

(a) Managers of an entity are considered to be internal decision makers.
(b) External decision makers can obtain whatever financial data they need whenever they need
it.
(c) Accounting information is prepared for and useful to only outside decision makers.
(d) The members of the Board of Directors are not “external users” only. A

3. Choose the incorrect statement.

(a) Benefits provided by accounting procedures should exceed their cost.
(b) The Securities and Exchange Commission (SEC) exerts influence on the development of the
accounting standards.
(c) The primary function of the Accounting Standards Council is to develop and enforce auditing
standards.
(d) The double-entry system of accounting has been used for centuries. C

4. The accounting period convention regards the life of the entity as consisting of:
(a) a chain of one-year segments (c) the remaining corporate life of the business
(b) the entire life of the venture (d) the nature life of the owner(s) A

5. 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

6. For general-purpose financial accounting, the advocates of the historical cost approach say that
this valuation method is:
(a) relevant. (c) conservative.
(b) objective. (d) subjective. B

7. Choose the correct statement about generally accepted accounting principles (GAAP):
(a) They are laws.
(b) The Bureau of Internal Revenue enforces GAAP.
(c) Firms that do not comply with GAAP may suffer negative economic consequences.
(d) GAAP and tax principles are the same. C

8. Which of the following statements about international accounting standards is true?

(a) International standards are enforceable world-wide in order to allow for judgments
regarding international investments.
(b) Legal and psychological hurdles to achieving common reporting standards have already
been overcome.
(c) The international Accounting Standards Committee (IASC) was established with the purpose
of narrowing the range of divergence in accounting standards used throughout the world.
(d) The IASC is able to enforce its standards by prohibiting the listing of companies which do
not comply on stock exchanges which sell internationally. C

9. Strict adherence to the entity concept would not allow:

(a) the use of the account form of the balance sheet.
(b) the use of replacement cost as a basis of valuation on the financial statements of branches.
(c) the capitalization of certain construction costs subsidiary companies.
 (d) a parent company to take up in its books its proportionate share in its subsidiary’s profits
and losses. D

10. The conservative approach in the measurement of financial position is best illustrated in the
following practice?
(a) Arbitrary reduction of property items to report a conservative asset position.
(b) recognition of fictitious liabilities.
(c) inventories valued at cost or market, whichever is lower.
(d) intangibles assets are reported at nominal amounts. C

11. The cost of an inexpensive fountain pen which has an estimated life of five years was treated as
an expense of the period when purchased. It is an example of the application of the:
(a) consistency principle. (c) materiality principle.
(b) matching principle. (d) cost principle. C

12. Which of the following is not a decision that external users of a company’s financial information
would make?
(a) Whether or not to extend credit to the company.
(b) Whether or not to hold the company’s stock.
(c) Whether or not the company should add a new product line.
(d) Whether or not to ask for an increase in employees’ benefit during union contract
negotiations. C

13. These are the basic notions or fundamental premises on which the accounting process is based.
(a) accounting assumptions (c) generally accepted accounting principles
(b) accounting standards (d) accounting concepts A

14. Revenue may be recognized:

(a) at the time of the delivery of goods sold to customers.
(b) when the sales commitments have been fulfilled.
(c) at the point completed production of goods which has firmly established market values and
assured marketability.
(d) all of the above. D

15. Realized income generally refers to the:

(a) recognition of gain when there is good evidence that an asset has changed in value.
(b) recording of revenue at the time when cash is received from the sale of a commodity or
service.
(c) accounting for income in the period in which it is actually earned.
(d) recognition of revenue when there is sufficient objective evidence to determine with a fair
degree of certainty the final amount to be received from operations. D

16. Generally, revenue should be recognized at a point when:

(a) management decides it is appropriate to do so.
(b) the product is available for sale to the ultimate consumer.
(c) an exchange has taken place and the earnings process is virtually complete.
(d) a customer’s order for a definite amount of merchandise has been received for shipment at
FOB destination later. C

17. Choose the incorrect statement.

(a) The objective of external financial statements is to communicate the economic effects of
completed transactions and other events in the entity.
(b) General purpose financial statements were developed primary because all outside users
have the same information needs.
(c) The double- entry system of accounting has been used for centuries.
(d) The practice of accounting requires considerable professional judgment. B

18. The primary qualitative characteristics of accounting information include which of the following:
a) Comparability(including consistency) (c) Relevance
b) Understandability (d) Materiality C

19. 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 B

20. The term “matching costs and revenues” means that:

(a) All costs should be allocated to certain accounting periods on the basis of the effect on
revenues.
 (b) Costs which can be associated directly with specific revenue should be carried forward on
the balance sheet until the associated revenue is recognized.
(c) Costs should be carried forward to future accounting periods if they have not resulted in
revenue during the current accounting period.
(d) If costs are charged off as expense in the accounting period when they are actually
incurred, they will be matched properly with revenues earned during that accounting period.
D

21. The most important single purpose of the general accounting reports of a corporation is that:
(a) they show a fair valuation of the assets used in the business.
(b) they help in the fair determination of the assets used in the business.
(c) they are useful in the accomplishment of the business’ stewardship function.
(d) They serve as a useful tool in making economic decisions. D

22. It is the quality of information that assures readers that the information is free from bias or
error and faithfully represents what it purports to show.
(a) understandability (c) reliability
(b) relevance (d) comparability C

23. Verifiability of financial accounting information is synonymous with:

(a) faithful representation (c) prudence
(b) substance over form (d) completeness
A

24. The going concern or continuity assumption is critical to financial accounting. The assumption
(a) Is always maintained for all firms for all years.
(b) Supports the use of historical cost valuation for assets rather than market values.
(c) Means that a corporation has definite ending date.
(d) Requires that we immediately expense prepaid accounts because they do not represent a
future cash inflow. B

25. A company reports only its total account receivable balance in its balance sheet, as opposed to
a complete listing of its individual customer balances. This is an example of
(a) Consistency (c) Cost/benefit
(b) Materiality (d) Conservatism C

26. John Company does not know exactly how long its equipment will last. It decides to use shorter
rather than longer useful life for depreciating the equipment. What accounting concept is being
applied in this decision?
(a) reliability (c) materiality
(b) relevance (d) conservatism D

27. A firm’s accounting policy is to immediately expense the cost of metal wastebaskets it
purchases for use by its employees at their desks. The total cost of wastebaskets in any year is
P1,000 and the firm has P6 billion in total assets. The firm expects the wastebaskets to last
indefinitely. The firm
(a) is violating GAAP.
(b) is invoking the relevance principle constraint.
(c) is invoking the materiality constraint.
(d) is violating the materiality constraint. C

28. It is the exercise of care and caution in dealing with uncertainties in measurement so as not to
overstate assets and income and not understated liabilities and expenses.
(a) completeness (c) faithful representation
(b) prudence (d) neutrality B

29. The recognition of periodic depreciation expense on company-owned automobiles requires

estimating both salvage or residual value, and the useful life of the vehicles. The use of
estimates in this case is an example of
(a) conservatism
(b) maintaining consistency
(c) invoking the materiality constraint rather than cost benefit constraint
(d) providing relevant data at the expense of reliability D

30. The matching concept:

(a) Requires that a debit is matched or posted for every credit.
(b) Is the name applied to the process of associating expenses with revenues.
(c) Treats all costs as being directly related to revenue generation.
(d) Treats all costs as expenses. B
31. Revenue is recognized when:
(a) It is collected in cash (c) Service is rendered and collection is probable
(b) Service is rendered (d) The contract is signed. C

32. Under which of the following will revenues and expenses most likely be reported in the period
they are earned or incurred?
(a) Cash basis accounting
(b) Accrual basis accounting
(c) A combination of accrual and cash basis accounting
(d) Single entry accounting B

33. Which of the following is the incorrect basis for recognizing the expense indicated?
(a) Sales commission expense on the basis of relationship with sales.
(b) Administrative salaries expense recognized as incurred.
(c) Depreciation expense on the basis of time.
(d) Cost of goods sold expense on a subjective or arbitrary basis. D

34. Which of the following distinguishes the personal transactions of business owners from business
transactions?
(a) Unit-of-measure assumption (c) Materiality constraint
(b) Full-disclosure principle (d) Separate entity assumption D

35. When an P300 asset with a six-year estimated useful life is recorded as an expense at the date
of purchase, this is an application of the:
(a) Matching principle (c) Materiality constraint
(b) Cost principle (d) Separate assumption C

36. A large international corporation immediately expenses the P500 cost of a small item of office
equipment. This is an example of:
(a) Reliability (c) Materiality
(b) Conservatism (d) An accounting error C

37. Estimating bad debt expense for the period is based primarily on the:
(a) Cost principle (d) Revenue principle
(b) Conservatism (e) Matching principle E
(c) Full-disclose principle

38. The materiality constraint:

(a) Is only relevant when preparing annual financial statements as opposed to quarterly
statements.
(b) Is applicable only for low-cost items that cost less than, say, P500.
(c) Is the only defense for gross negligence by a Certified Public Accountant.
(d) Does not necessarily imply that an immaterial amount can be ignored for accounting
purposes. D

39. When a corporation buys a share of its own stock, the recording must conform to the:
(a) Matching principle (c) Accrual principle
(b) Revenue principle (d) Cost principle D

40. A corporation reports the sale of some of its stock to a stockholder in its financial statements,
and the stockholder reports the same transaction as an investment. Therefore,
(a) The revenue principle has been violated.
(b) The separate entity assumption has been violated.
(c) The double entry accounting concept has been violated. D
(d) No accounting report has been violated.