THEORY OF ACCOUNTS October 2012 CPA-Board Examination

TA-PREWEEK MATERIALS (PW1)(TA: 1001Q – TA: 1005Q)

1. Which of the following best states the purpose of general-purpose financial statements?a. To disclose the market value of the firm’s assets and liabilitiesb. To determine the compliance with tax lawsc. To identify shareholdersd. To help users make decisions

2. A primary objective of financial reporting is toa. Assist investors in analyzing the economyb. Assist suppliers in determining an appropriate discount to offer a particular companyc. Assist investors in predicting prospective cash flowsd. Assists banks to determine an appropriate interest rate for their commercial loans

3. External decision makers include all of the following, except:a. Managers b. Owners c. Creditors d. Financial press

4. These financial statement users need information that will assist them in determining general trends and recent developments in the prosperity of the enterprise and the range of its activities

a. Investors b. Lenders c. General public d. Customers

5. Which of the following is not a qualitative characteristics of financial statements according to the framework?a. Materiality b. Understandability c. Comparability d. Relevance

6. The primary qualitative characteristics of accounting information include which of the following?a. Comparability b. Understandability c. Relevance d. Materiality

7. Which one of the following is a secondary qualitative characteristic of accounting information?a. Continuity b. Relevance c. Comparability d. Reliability

8. Relevance is not a function of:a. Feedback value b. Verifiability c. Timeliness d. Predictive value

9. According to the conceptual framework, which of the following is an ingredient of reliability?a. Predictive value b. Materiality c. Understandability d. Verifiability

10. For financial information to be useful there must be a linkage between the decision makers and the decision they make. This link is

a. Relevance b. Reliability c. Understandability d. Materiality

11. A firm does not know exactly how long its equipment will last. The firm decides to use shorter rather than longer useful lives for depreciating the equipment. This is an example of

a. Reliability b. Conservatism c. Materiality d. Stable monetary unit

12. Accounting traditionally has been influenced by conservatism because of thea. Probability of undetected errors in the financial statementsb. Difficulty in measuring net income on the accrual basisc. Inherent uncertainties of many accounting measurementsd. Large number of transactions in any one period

13. The environmental assumptions of accounting include all of the following, excepta. Prudence b. Separate entity c. Periodicity d. Continuity

14. Under the stable monetary unit assumption:a. All assets and liabilities are translated to pesos of constant purchasing powerb. Inflation adjustments are incorporated directly into the financial statementsc. The peso is assumed to have constant purchasing power, regardless of the time periodd. Interest rates are increased for expected inflation

15. The implementation constraints include all of the following, except:a. Materiality b. Conservatism c. Cost/benefit d. Separate entity

16. According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of

a. Consistency b. Reliability c. Cost/benefit d. Faithful representation

17. The accrual basis is most useful fora. Determining the amount of income tax an entity should payb. Predicting the short-term financial performance of an entityc. Predicting the long-term financial performance of an entityd. Determining the amount of dividends an entity should pay

18. The Conceptual Framework of Accounting deals witha. Tax laws and regulations c. Code of Ethics for professional accountantsb. SEC rules and regulations d. Concepts of capital and capital maintenance

19. The Conceptual Framework is intended to assista. The FRSC c. CPAs in public practiceb. The users of financial statements d. All of these

20. Accounting concepts are not derived froma. Inductive reasoning b. Experience c. Pragmatism d. Laws of nature

21. Generally accepted accounting principlesa. Are fundamental truths or axioms that can be derived from laws of natureb. Derive their authority from legal court proceedingsc. Derive their credibility and authority from general recognition and acceptance by the accounting profession.d. Have been specified in detail in the FRSC conceptual Framework

22. To qualify as generally accepted, accounting principles musta. Usually guide corporate managers in preparing financial statements, which will be understood by widely scattered stockholdersb. Guide corporate managers in preparing financial statements, which will be used for collective bargaining agreements with trade unionsc. Guide entrepreneur of the choice of an accounting entity like a sole proprietorship, partnership or corporation.d. Receive substantial authoritative support

23. Choose the correct statement about generally accepted accounting principles (GAAP)a. They are lawsb. The Bureau of Internal Revenue enforces GAAPc. Firms that do not comply with GAAP may suffer negative economic consequencesd. GAAP and tax principles are the same

24. Proper application of accounting principle is most dependent upon thea. Existence of specific guidelines c. External audit functionb. Oversight of regulatory bodies d. Professional judgment of the accountant

25. Once an accounting standard is established,a. The standard is continually reviewed to see if modification is necessaryb. The standard is not reviewed, unless Securities and Exchange Commission (SEC) makes a complaintc. The task of reviewing the standard to see if modification is necessary is given to PICPAd. The principle of consistency states that no revisions should ever be made to the standard

26. The process of establishing financial accounting standardsa. Is a demographic process in that a majority of practicing accountants must agree with a standard before it becomes implemented.b. Is a legislative process based on rules promulgated by government agenciesc. Is based solely on economic analysis of the effect each standard will have if it is implementedd. Is a social process which incorporates political actions of various interested user groups as well as professional research and logic

27. The purpose of International Financial Reporting Standards (IFRS) is toa. Issue enforceable standards which regulate the financial reporting of multinational entitiesb. Develop a uniform currency in which the financial transactions of entities throughout the world would be measuredc. Promote uniform accounting standards among countries of the worldd. Arbitrate accounting disputes between auditors and international entities

28. The manner in which the accounting records are organized and employed within a business is known asa. Accounting system b. Business document c. Voucher system d. Special journals

29. Which one of these is not among the criteria to consider an event as accountable?a. It must increase or decrease an element of the financial statementsb. It must have already happenc. Its amount can be measured reliablyd. It must be classified as an external event rather than an internal event

30. The double-entry concept in accounting means which of the followinga. Only two accounts affected by each transaction recordingb. The debit-credit must not be usedc. For every asset increased, a revenue or liability must also be increasedd. At least two accounts are affected by each transaction recorded

31. Which of the following is an application of the science aspect of accounting?a. Exercise of creative skill and judgmentb. Interpreting the information presented in the financial statements through ratios and trend analysisc. Applying the rules of debit and creditd. Attesting to the fairness of presentation of financial condition and operating results

32. To post in accounting means to:a. Copy the information about account changes from the ledger and place it into the journalb. Copy the information about account changes from the journal, place it into the ledger, and then delete it from the journalc. Copy the information about account changes from the journal and place it into the ledgerd. Copy the information about account changes from the source documents, and record it in the ledger

33. Accounts payable and accounts receivables are examples of:a. Permanent accounts c. Mixed balance accountsb. Temporary accounts d. Contra accounts

34. In the accounting cycle, a worksheet is prepared:a. After adjusting entries are entered in the journal and posted to the ledgerb. Before adjusting entries are entered in the journal and posted to the ledgerc. As a substitute for financial statementsd. Only for the purpose for preparing reversing entries

35. What is the normal order of accounts in the unadjusted trial balance?a. Assets, equity, income, expenses, and finally liabilityb. All accounts with debit balances, then all accounts with credit balancesc. Assets, liabilities, equityd. Assets, liabilities, equity, income, finally expenses

36. Adjusting entries are needed because an entity:a. Uses the accrual basis of accountingb. Has earned revenue during the period by selling products from its central operationc. Has expensesd. Uses the cash basis of accounting rather than the accrual basis

37. The adjusting entry at the end of the accounting year to reflect revenues earned but not yet collected or recorded will:

a. Decrease liabilities c. Not affect assetsb. Not affect income for the current period d. Increase assets

38. Which of the following would most likely be found in an adjusting entry?a. Prepaid expenses b. Accounts receivable c. Cash dividend paid d. Sales on account

39. Which of the following accounting concepts best justifies the use of accruals and deferrals?a. Cost/benefit constraint c. Continuity assumptionb. Unit-of-measure assumption d. materiality constraint

40 A control devise that helps minimize and localize accounting errors is known asa. Subsidiary ledger b. Worksheet c. Trial balance d. Chart of accounts

41. An appropriate reversing entry:a. Must be made because they are required by the accounting standards b. Is dated the first day of the next accounting periodc. Is usually made for adjusting entries that affect deferred items onlyd. Is often used to correct entries which were initially based on estimates

42. As a general rule, which of the following is not subject to reversal?a. Accrued expenses c. Prepaid expenses recorded as assets upon paymentb. Accrued revenues d. Deferred revenues recorded as revenue upon receipt

43. Which of the following is an example of a closing entry?a. Posting the ending inventory balance in a perpetual inventory systemb. Transferring an amount entered in a wrong account to the appropriate accountc. Transferring the balance in the bad debt expense account to the income summary accountd. Transferring the balance in a temporary account to a contra account

44. The last step in the accounting cycle is toa. Prepare the post-closing trial balance c. Prepare financial statementsb. Journalize and post closing entries d. Journalize and post adjusting entries

45. Which of the following reports is not a component of the financial statements according to PAS 1?a. Balance sheet c. Director’s reportb. Statement of changes in equity d. Notes to the financial statements

46. Which type of accounting change should always be accounted for in current and future periods?a. Change in accounting estimate c. Change in accounting principleb. Correction of error d. Change in reporting entity

47. Which of the following is a characteristic of a change in accounting estimate?a. It does not affect the financial statements of prior periodb. It requires the reporting of pro forma amounts of prior periodc. It never needs to be disclosedd. It should be reported through restatement of the financial statements

48. Which of the following changes should be accounted for prospectively?a. Change in the expected life of a depreciable assetb. Changing form FIFO to weighted average for merchandise inventoryc. First time presentation of consolidated financial statementsd. Correction of prior period errors

49. When a firm changes the estimated the residual value of equipmenta. Depreciation must be recomputed for each previous year based on the new residual valueb. The original cost, reduced by the new residual value, is the basis of subsequent depreciationc. The remaining book value, reduced by the new residual value, is the basis for the new depreciation d. No adjustment is needed

50. Which of the following is treated as a retrospective accounting principle change?a. A change in the residual valueb. A change from declining balance to straight-line depreciationc. A change from FIFO method to weighted average methodd. Correction of an error affecting current year’s income

51. When a public shareholding entity changes an accounting policy voluntarily, the entity shoulda. Inform shareholders prior to taking the decisionb. Account for the change retrospectivelyc. Threat the effect of the change as an extraordinary itemd. Treat the change prospectively and adjust the effect of the change in the current and future periods

52. The effect of the change in accounting policy should be reported as a(an)a. Separate line item on the face of the income statement in the year of changeb. Adjustment to the opening balance of retained earningsc. Extraordinary item in the year of the changed. Prior period adjustment in the year of change

53. A change in an amortization rate, such as on a copyright, should be accounted for:a. Retrospectivelyb. By recording a prior period adjustmentc. Prospectivelyd. Prospectively and retrospectively

54. In 2010, a firm changed from FIFO method of accounting for inventory to Weighted Average. The firm’s 2009 and 2010 comparative financial statements will reflect which method or methods?

a. 2009: Weighted Average, 2010: Weighted Averageb. 2009: FIFO, 2010: FIFOc. 2009: FIFO, 2010: Weighted Averaged. 2009: Weighted Average, 2010: FIFO

55. In 2010, a firm changed from straight-line (SL) method of depreciation to double declining balance (DDB). The firm’s 2009 and 2010 comparative financial statements will reflect which method or methods

a. 2009: SL, 2010: SLb. 2009: SL, 2010: DDBc. 2009: DDB, 2010: DDBd. 2009: SL, 2010: either SL or DDB

56. The concept of consistency is sacrificed in the accounting for which of the following items?a. Effect of change in accounting principleb. Extraordinary itemsc. Discontinued operationsd. Loss on disposal of a segment of a business

57. When an entity opts to present the income statement classifying expenses by function, which of the following is not required to be disclosed as “additional information”?

a. Depreciation expense c. Director’s remunerationb. Employee benefits expense d. Amortization expense

58. Accounting income is a concept in which:a. Income is measured as the amount of “real wealth” that an entity could consume during a period and be as well off at the end of that period as it was at the beginningb. The transactions approach is used to record income and expenses throughout the reporting periodc. Market values adjusted for the effects of inflation or deflation are used to calculate real wealthd. Income equals the change in market value of the firm’s outstanding common stock for the period

59. Which of the following is not required for the recognition of revenue?a. Receipt of cash by the seller at the time of saleb. Seller must receive an item ultimately realizable in cash, non-cash resources, or claims to cashc. The earnings process must be essentially completed. The transaction must create a measurable FS element that satisfies the definition of an income

60. The matching principle is best demonstrated by:a. Allocating advertising expense to several reporting periodsb. Recognizing rent as revenue when the cash was collectedc. Not recognizing any expense unless some revenue is recognizedd. Associating effort (cost) with accomplishment (revenue)

61. Which of the following is expensed under the principle of systematic and rational allocation?a. Salespeople’s monthly salaries c. Transportation to customersb. Insurance premiums d. Electricity to light office building

62. Which of the following expenses is not directly related to sales of products?a. Sales commissions and shipping costs c. Warranty expense on product soldb. Cost of goods sold d. Institutional advertising

63. A discontinued operation is defined as the disposal of a separate or major line of business. Any resulting gain or loss on discontinued operations is reported as a (an):

a. Prior period adjustment, after taxb. Separate item preceding extraordinary items, pretaxc. Separate item from income under continuing operation, after taxd. Extraordinary gain or loss, after tax

64. It is a subsidiary, a major line of business or geographical segment whose operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.

a. Component of an entity c. Discontinued operationb. Disposal group d. Extraordinary activities

65. What is the purpose of reporting comprehensive income?a. To report changes in equity due to transactions with ownersb. To report a measure of overall enterprise performancec. To replace net income with a better measured. To combine income form continuing operations and extraordinary items

66. Which of the following generally is considered a limitation of the statement of financial position?a. The statement of financial position reflects the current value of a businessb. Due to measurement problems, some resources and obligations of the entity are not reported in the statement of financial positionc. The statement of financial position reflects the instability of the pesod. Statement of financial position formats and classifications do not vary to reflect industry differences

67. Which of the following information is not specifically a required disclosure of PAS 1?a. Name of the reporting entity or other means of identification and any change in that information from the previous yearb. Names of major shareholders of the entityc. Level of rounding used in presenting the financial statementsd. Whether the financial statements cover the individual entities or a group of entities

68. As a general rule, the primary basis of measurement of assets upon acquisition isa. Historical cost c. Fair valueless cost to sellb. Fair value d. Discounted value

69. The valuation basis used in conventional financial statement isa. Replacement cost b. Market value c. Original cost d. A mixture of costs and values

70. Pending litigation would generally be considereda. Non-monetary liability c. Estimated liabilityb. Contingent liability d. Current liability

71. Reporting in the main body of the financial statements is required fora. Loss contingencies that are probable and can be reasonably estimatedb. Gain contingencies that are probable and can be reasonably estimatedc. Loss contingencies that are possible and can be reasonably estimatedd. All loss contingencies

72. Contingent assets shall be recognized only ifa. Probable b. Reasonably possible c. Remote d. Virtually certain

73. The elements of the equity of balance sheet of a corporation should be classified primarily by:a. Source b. Maturity date c. Class of share capital d. Liquidity

74. Which of the following should be disclosed in the summary of significant accounting policies?a. Refinancing of debt subsequent to the balance sheet dateb. Guarantees of indebtedness of othersc. Criteria for determining which investments are treated as cash equivalentd. Adequacy of pension plan assets relative to vested benefits

75. Which one of the following falls within the definition of ‘related parties’ as defined by PAS 24?a. Providers of finance in the course of their normal dealings with an enterprise by virtue only of those dealingsb. A supplier with whom a reporting entity has a one-year contract for the supply of raw materialsc. Government department and agenciesd. The wife of key management personnel who has the authority to plan, direct, and control the activities of the reporting enterprise

76. Which of the following situations will require disclosure as a related party?a. In consolidated financial statements in respect to intra-group transactionsb. In related party relationships where control exist, irrespective of whether there have been transactions between related partiesc. In financial statements of state-controlled enterprise of transactions with other state-controlled enterprised. In parent financial statements when they are made available or published with the consolidated financial statements

77. Under PAS 10, all of the following shall be classified as non-adjusting events after the reporting period, except

a. The entity announced the discontinuance of its assembly operationb. The entity entered into an agreement to purchase the freehold of its currently leased office buildingc. Destruction of a major production plant by fired. A mistake was discovered in the calculation of the allowance for uncollectible trade receivables resulting to understatement of the trade receivables

78. Which of the following is not true regarding standards for interim reporting?a. Declines in inventory value shall be deferred to future interim periodsb. Use of the gross profit method for computing cost of goods sold must be disclosedc. Costs and expenses not directly associated with interim revenue must be allocated to interim periods on a reasonable basisd. Gains and losses that arise in the interim period shall be recognized in the interim period in which they arise if they would not normally be deferred at year-end

79. What approach is required by PFRS 8 in identifying an operating segment?a. Transaction approach c. Business approachb. Capital maintenance approach d. Management approach

80. In determining whether a particular operating segment is of significant size (i.e.) to warrant disclosurea. Three tests are applied and all tests must be metb. Three tests are applied but only one must be metc. Five tests are applied and all tests must be metd. Five tests are applied but only one must be met

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