Midterm Exam in Conceptual Framework and Accounting Standards

Source: CPA Review Schools

1. Philippine Financial Reporting Standards include all of the following, except

A. Philippine Financial Reporting Standards equivalent to IFRS issued by IASB.

B. Philippine Accounting Standards equivalent to IAS issued by IASC.

C. Philippine Interpretations equivalent to IFRIC and SIC Interpretations, and Interpretations developed by
PIC.

D. Framework for the Preparation and Presentation of Financial Statements.

2. Which statement is incorrect concerning the Framework?

A. The Framework is not a PFRS and therefore does not define standard for any particular measurement or
disclosure issue.

B. The Framework is concerned with general purpose financial statements including consolidated financial
statements.

C. In cases of conflict, the requirements of the Framework prevail over those of the relevant PFRS.

D. The Framework applies to the financial statements of all commercial, industrial and business reporting
entities, whether in public or private sector.

3. What is the basic purpose of the Framework?

I. To assist FRSC in developing accounting standards those represent GAAP in the Philippines.

II. To assist FRSC in reviewing and adopting existing international accounting standards.

III. To assist preparers of financial statements in applying accounting standards and in dealing with topics
those have yet to form the subject of accounting standards.

A. I and II only
B. I and III only
C. II and III only
D. I, II and III

4. Which is not within the scope of the Framework?

A. Generally accepted accounting principles

B. Objective of financial statements

C. Qualitative characteristics of financial statements

D. Recognition and measurement of basic elements

5. These users are interested in information about the continuance of an entity, especially when they have a
long-term involvement with or are dependent on the entity.

A. Customers

B. Employees

C. Trade unions

D. Suppliers

6. Which statement is true in relation to the objective of financial statements?

I. Financial statements meet the common and specific needs of most users.

II. Financial statements provide all of the information that users may need to make economic decisions since
they largely portray the financial effects of past events and do not necessarily provide nonfinancial
information.

III. Financial statements show the results of the stewardship of management or the accountability of
management for the resources entrusted to it.

A. I and II only
B. I and III only
C. II and III only
D. III only

7. Information has the quality of relevance when

I. It influences the economic decisions of users by helping them evaluate past, present or future events or
confirming or correcting their past evaluations.

II. 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.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

8. To be reliable (choose the correct one)

A. The information must represent faithfully the transactions it purports to represent.

B. Transactions are accounted for in accordance with their legal from and not with their substance and
economic reality.

C. The information must be neutral, that is, free from bias.

D. The information must be complete within the bounds of materiality and cost.

9. The exercise of prudence allows which of the following?

A. The creation of hidden reserves or excessive provisions.

B. The deliberate understatement of assets and income.

C. The deliberate overstatement of liabilities and expenses.

D. Selecting an accounting alternative that has the least favorable impact on owner’s equity.

10. Which statement is incorrect concerning constraints on relevant and reliable information?

A. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy
the economic decision-making needs of users.

B. The balance between benefit and cost is a pervasive constraint rather than a qualitative characteristic.

C. The cost of providing information should exceed the benefits derived from the information.

D. To provide information on a timely basis, it may often be necessary to report before all aspects of
transaction or event are known, thus impairing reliability.

11. Which statement is incorrect concerning materiality?

A. Information is material if its omission or misstatement could influence the economic decision of users
taken on the basis of the financial statements.

B. Materiality depends on the absolute size of the item or error judged in the particular circumstances of its
omission or misstatement.

C. Materiality provides a threshold or cutoff point for useful information rather than being a primary
qualitative characteristic.

D. Materiality of items depends on their individual or collective influence on the economic decision of users.

12. Which of the following statements is true in relation to the term “understandability”?
I. An essential quality of information provided in financial statements is that it is readily understandable by
users.

II. Information about complex matters even if relevant should be excluded from financial statements merely
on the grounds that it may be too difficult for certain users to understand.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

13. An important implication of this qualitative characteristic is that users are informed of the accounting
policies employed, changes in those policies and the effects of such changes.

A. Consistency

B. Comparability

C. Full disclosure

D. Materiality

14. Which of the following statements in relation to “comparability” is true?

I. The need for comparability should not be confused with where uniformity and should not be allowed to
become an impediment to the introduction of improved accounting standards.

II. It is appropriate for an entity to leave its accounting policies unchanged when more relevant and reliable
alternatives exist.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

15.Technically, this arises in the course of the ordinary regular activities of an entity 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

16. Current cost is the

A. Amount of cash or cash equivalent paid or the fair value of the consideration given at the time of
acquisition.

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.

17. Which is the correct sequence for recording transactions and preparing financial statements?

A. Journal, ledger, trial balance, financial statements

B. Ledger, trial balance, journal, financial statements

C. Financial statements, trial balance, ledger, journal

D. Ledger, journal, trial balance, financial statements

18. Which financial statement covers a period of time?

A. Statement of financial position

B. Income statement

C. Statement of cash flows

D. Both income statement and statement of cash flows

19. It is the accounting device that is used to store the recorded monetary information from the entity’s
transactions and events.

A. Account

B. Journal

C. Ledger

D. Source document

20. Accumulated depreciation is an example of

A. Nominal and adjunct account

B. Real and adjunct account

C. Nominal and contra account

D. Real and contra account

21. Which an example of a nominal and contra account?

A. Freight in

B. Sales discount

C. Purchases

D. Allowance for doubtful accounts

22. The debit and credit analysis of a transaction normally takes place

A. Before an entity is recorded in a journal.

B. When the entry is posted to the ledger.

C. When the trial balance is prepared.

D. At some other point in the accounting cycle.

23. Double entry system means

A. Only two accounts are affected by each transactions recording.

B. A transaction is recorded twice, once in the journal and the other in the ledger.

C. For every asset increased, a revenue or liability must also be increased.

D. At least two accounts are affected by each transaction recording.

24. What function do accounting journals serve in the accounting process?

A. Recording

B. Classifying

C. Summarizing

D. Interpreting

25. What function do general ledgers serve in the accounting process?

A. Reporting

B. Summarizing

C. Classifying

D. Recording

26. Transposition is an

A. Error of interchanging the figures

B. Error of placing the decimal point

C. Error of not recording the transaction

D. Error, which if not detected, is automatically compensated or corrected in the next accounting period.

27. The error of posting P100, 000 as P10,000 can be detected by

A. Dividing the out-of-balance amount by 2.

B. Totaling each account’s balance in the ledger.

C. Dividing the out-of-balance amount by 9.

D. Examining the chart of accounts.

28. Which of the following would not be a correct form for an adjusting entry?

A. A debit to revenue and a credit to liability

B. A debit to an expense and a credit to a liability

C. A debit to a liability and a credit to revenue

D. A debit to an asset and a credit to a liability

29. Which of the following best defines an accrual?

A. Adjusting entries where cash flows precedes revenue or expense recognition

B. Adjusting entries where revenue or expense recognition precedes cash flow

C. Adjusting entries where cash flow and revenue or expense recognition are simultaneous

D. Adjusting entries where revenue and expenses are recognized in the absence of cash flow
30. The purpose of adjusting entries is to

A. Prepare revenue and expense accounts for recording the transactions of the next period.

B. Apply the realization principle and the matching principle to transaction affecting two or more accounting
periods.

C. Adjust daily the balances in asset, liability, revenue, expense accounts for the effects of business
transactions.

D. Adjust the capital account for the revenue, expense and withdrawal transactions which occurred during the
year.

31. The adjusting entry for income collected in advance which was credited originally to income will

A. Decrease liability

B. Increase asset

C. Decrease an income account

D. Increase equity

32. The adjusting entry for income earned but not yet collected will

A. Increase liability

B. Increase asset

C. Decrease asset

D. Decrease liability

33. If an expense has been incurred but not yet recorded, the year-end adjusting entry would involve

A. A liability and an asset

B. A liability and revenue

C. An expense and an asset

D. A receivable and revenue

34. Which of the following accounts is not closed out?

A. Accumulated depreciation
B. Depreciation expense

C. Dividends

D. Interest revenue

35. Reversing entries apply to

A. All adjusting entries

B. All deferrals

C. All accruals

D. All closing entries

36. Financial statements are structured representation of the financial position and financial performance of
an entity. To meet the objective of providing information about financial position, financial performance and
cash flows of an entity, financial statements should provide information about all of the following, except

A. Assets, liabilities and equity

B. Income and expenses, including gains and losses

C. Contributions by and distribution to owners in their capacity as owners.

D. Nature of the entity’s business activities

37. Which statement is true concerning fair presentation of financial statements?

I. Fair presentation requires the faithful representation of the effects of transactions, other events and
condition.

II. In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable SEC and
tax regulations.

A. I only
B. II only
C. Both I and II
D. Niether I nor II

38. Which statement is incorrect concerning “materiality and aggregation”?

A. An entity shall present separately each material class of similar items.

B. An entity shall present separately material items of a dissimilar nature or function.

C. If a line item is not individually material, it is aggregated with other items either in the financial statements
or in the notes.

D. An entity shall provide a specific disclosure required by PFRS even if the information is not material.

39. The line items in the statement of financial position include all of the following, except

A. Investment property

B. Total of assets classified as held for sale

C. Biological assets

D. Property, plant and equipment analyzed by class

40. When an entity breaches an undertaking under a long-term loan agreement on or before the end of the
reporting period with the effect that the liability becomes payable on demand

I. The liability is classified as current if the lender has agreed after the reporting period and before the
issuance of the statements no to demand payment as a consequence of the breach.

II. The liability is classified as noncurrent if the lender agreed on or before the end of the reporting period to
provide a grace period for at least twelve months after the reporting period within which to rectify the
breach.

A. I only
B. II only
C. Either I or II
D. Neither I nor II

41. Other comprehensive income includes all of the following, except

A. Gain and loss arising from translating the financial statements of a foreign operation.

B. Gain and loss on remeasuring available for sale financial asset.

C. The effective portion of gain and loss on hedging instrument in a cash flow hedge.

D. Dividend paid to shareholders.

42. These are amounts reclassified to profit or loss in the current period that were recognized in other
comprehensive income in the current or previous period.

A. Prior period errors

B. Reclassification adjustments
C. Unusual and irregular items

D. Correcting entries

43. What is the “first item” presented in the notes to financial statements?

A. Statement of compliance with PFRS.

B. Summary of significant accounting policies.

C. Supporting information for items presented in of the financial statements.

D. Other disclosures, including contingent liabilities, unrecognized contractual commitments and nonfinancial
disclosures.

44. Nonfinancial disclosures include all of the following, except

A. The unlimited life of the entity

B. The domicile and legal form of the entity, its country of incorporation and registered office address.

C. Description of the nature of the entity’s operations and its principal activities.

D. The name of the parent and the ultimate parent of the group.

45. which of the following statements is true regarding events after reporting period?

I. Adjusting events after reporting period are events that provide evidence of conditions that existed at the
end of the reporting period.

II. Nonadjusting events after reporting period are events that are indicative of conditions that arose after the
end of reporting period.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

46. Adjusting events after reporting period include all of the following, except

A. The settlement of a court case after the issuance of the financial statements that confirms that the entity
has a present obligation.

B. The bankruptcy of a customer which occurs after the reporting period and before issuance of statements
resulting to a loss on a trade receivable account.

C. The discovery of fraud or errors after reporting period and before issuance of statements that show that
the financial statements were incorrect.
D. Determination after the reporting period and before the issuance of the statements of the cost of assets
purchased before the end of reporting period.

47. Nonadjusting events after reporting period include all of the following, except

A. A major business combination after the reporting period.

B. Expropriation of major assets by government after reporting period.

C. Destruction of a major production plant by fire on or before the end of reporting period.

D. Announcing a plan to discontinue an operation after reporting period.

48. A party is related to an entity if the party, directly or indirectly through one or more intermediaries

I. Controls, is controlled by or is under common control with the entity.

II. Has an interest in the entity that gives it significant influence over the entity.

III. Has joint control over the entity.

A. A and II only
B. I and III only
C. II and III only
D. I, II and III

49. Which of the following is not related party of an entity?

A. A shareholder of the entity owning 30% of the ordinary shares

B. An entity providing banking facilities to the entity

C. An associate of the entity

D. Key management personnel of the entity

50. A related party transaction is a transfer of resources, services or obligations between

A. Related parties, regardless of whether a price is charged.

B. Related parties only when a price is charged.

C. unrelated parties, regardless of whether a price is charged.

D. unrelated parties only when a price is charged.

51. These are the specific principles, bases, conventions, rules and practice applied by an entity in preparing
and presenting financial statements.

A. Accounting policies

B. Accounting principles

C. Accounting standards

D. Accounting concepts

52. It is an adjustment of the carrying amount of an asset or a liability or the amount of the periodic
consumption of an asset that results from the assessment of the present status and expected future benefit
and obligation associated with the asset and liability.

A. Change in accounting estimate

B. Change in accounting policy

C. Correction of a prior period error

D. Change in reporting entity

53. This means “applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied”.

A. Retrospective application

B. Retrospective restatement

C. Prospective application

D. Prospective restatement

54. This means “applying a new accounting policy to transactions occurring after that date at which the policy
changed”.

A. Retrospective application

B. Prospective application

C. Retrospective restatement

D. Prospective restatement

55. This means “correcting the recognition, measurement and disclosure of amounts of elements of financial
statements as if a prior period error never occurred.”
A. Retrospective application

B. Retrospective restatement

C. Prospective application

D. Prospective restatement

56. An entity changes its accounting policy if

I. It is required by law.

II. The change will result in providing reliable and more relevant information about the entity’s financial
position financial performance and cash flows.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

57. A change in accounting policy includes

I. Adoption of an accounting policy for events or transactions that differ in substance from previously
occurring events or transactions.

II. The adoption of a new accounting policy for events or transactions which did not occur previously or
that were immaterial.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

58. When it is difficult to distinguish a change in an accounting policy from a change in an accounting
estimate, the change is treated as

A. Change in accounting estimate with appropriate disclosure

B. Change in accounting policy

C. Correction of an error

D. Initial adoption of an accounting policy

59. An entity shall prepare a statement of cash flows and present it as

A. Supplementary financial statement

B. Note to financial statement

C. Supporting schedule for the amount appearing as cash and cash equivalent

D. An integral part of the entity’s basic financial statements.

60. An entity purchased a three-month Treasury bill. In preparing the entity’s statement of cash flows, this
purchase would

A. Be treated as outflow from operating activities.

B. Be treated as outflow from investing activities

C. Be treated as outflow from financing activities

D. Have no effect

61. Bank borrowing are generally considered

A. Operating activities

B. Investing activities

C. Financing activities

D. Borrowing activities

62. Operating activities include all of the following, except

A. Cash receipts from royalties, fees, commissions and other revenue.

B. Cash payments to and in behalf of employees

C. Cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other
policy benefits

D. Cash receipts from sales of property, plant and equipment, intangible assets and other long-term assets.

63. Financing activities include all of the following, except

A. Cash proceeds from issuing shares and other equity instruments.

B. Cash payments to owners to acquire or redeem the entity’s shares.

C. Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease

D. Cash advances and loans made to other parties, other than advances and loans made by a financial
institution.
64. Noncash investing and financing transactions include all of the following, except

A. The acquisition of asset either by assuming directly related liability or by, means of a finance lease.

B. The acquisition of an entity by means of an equity issue.

C. The conversion of debt to equity.

D. Noncash items such as depreciation provisions, deferred taxes and unrealized foreign currency gains and
losses.

65. An entity shall report cash flows from operating activities using

A. Direct method

B. Indirect method

C. Either direct method or indirect method

D. Neither direct method nor indirect method

66. The direct method of presenting the operating activities is the method whereby

I. The major classes of gross cash receipts and gross cash payments are disclosed.

II. Net income or loss is adjusted for the effects of transactions of a noncash nature, any deferrals or accruals
of past of future operating cash receipts or payments, and items of income or expense associated with
investing or financing cash flows.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

67. Cash advances and loans made by financial institutions are usually classified as

A. Operating activities

B. Investing activities

C. Financing activities

D. Component of cash and cash equivalent

68. Interest payments to lenders and other creditors are usually classified as cash outflows for

A. Operating activities
B. Borrowing activities

C. Lending activities

D. Financing activities

69. Dividend payments to owners are usually classified as cash outflows for

A. Operating activities

B. Investing activities

C. Financing activities

D. Ordinary activities

70. Alternatively, which of the following cash flows should be classified as operating cash flows?

A. Interest paid

B. Interest received

C. Dividend received

D. Dividend paid

71. Dividends received from equity investee shall be presented in the statement of cash flows as

A. Deduction from cash flows from operating activities

B. Addition to cash flows from operating activities

C. Deduction from cash flows from investing activities

D. Addition to cash flows from investing activities.

72. Which of the following cash flows does not appear in a statement of cash flows using indirect method?

A. Net cash flow from operating activities

B. Cash received from customers

C. Cash inflow from sale of equipment

D. Cash outflow for dividend payment

73. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash flow from
investing activities equals the carrying amount of the equipment
A. Plus the gain

B. Plus the gain and less the amount of tax attribute to the gain

C. Plus both the gain and the amount of tax attributable to the gain

D. With no addition or subtraction

74. The amortization of bond premium related to long-term debt shall be presented in a statement of cash
flows prepared using the indirect method as

A. Inflow and outflow of cash

B. Outflow of cash

C. Deduction from net income in the adjustments to reconcile net income to cash from operating activities.

D. Addition to net income in the adjustments to reconcile net income to cash from operating activities.

75. When preparing a statement of cash flows using the direct method, amortization of goodwill is

A. Shown as an increase in cash flows from operating activities

B. Shown as a reduction in cash flows from operating activities

C. Included with supplemental disclosures of noncash transactions

D. Not reported in the statement of cash flows or related disclosures.

-End of exam-