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TRUE OR FALSE. The underlined word or phrase is the one that makes the sentence false.

If there is no underlined word, the statement is true.

22. The full disclosure principle states that the information should be provided when it is of sufficient
importance to influence the judgment and decisions of an informed user.

1. Financial accounting focuses on general-purpose reports that are intended for internal and external 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.
users. An accountant who prepares a balance sheet that does not balance had made a mistake somewhere because the balance sheet must balance. The fact that the equity represents an ownership interest and a residual claim against the net assets of an enterprise means in the event of liquidation, creditors have priority over owners in the distribution of assets. The economic entity assumption is useful only when the entity referred to is a profit-seeking business enterprise. To be reliable, accounting information must be capable of making a difference in a decision. A conceptual framework underlying financial accounting is necessary because future accounting problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary. The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent. As commonly used, the term net assets represents current assets minus current liabilities. Generally accepted accounting principles become generally accepted by agreement, often tacit agreement, rather than by formal derivation from a set of postulates and basic concepts. Accounting theory is developed without consideration of the environment within which it exists. Accrual accounting means that income is recognized when received regardless of when earned and expense is recognized when paid regardless of when incurred. If there is evidence that the entity would experience large and persistent losses or that the entitys operations are to be terminated, the going concern assumption is abandoned. Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted. When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements. Information that has been measured and reported in a similar manner for different enterprises is considered comparable. A natural business year is a twelve-month period that ends on any month when the business is at the lowest or experiencing slack season. The three elements ~ assets, liabilities, and equity ~ describe transactions, events, and circumstances that affect an enterprise during a period of time. The conservatism convention allows for the reporting of financial information in any manner the accountant desires when there is doubt surrounding a particular issue. The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information. The monetary unit assumption means that the money (peso) is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. In case where there is a conflict, the requirements of the conceptual framework shall prevail over the Philippine Financial Reporting Standards.

23. Liquidity is the availability of cash over a long term to meet financial commitments when they fall
due.

24. Under entity theory, the accounting objective is geared toward proper income determination. 25. The notes to financial statements generally summarize the items presented in the main body of the
statements. IDENTIFICATION. Try to answer these! _______________ 1. _______________ 2. _______________ 3. _______________ 4. A list of names of all account titles Balance sheet accounts The function that general ledgers serve in the accounting process The responsibility for the proper preparation of a companys financial statements rests with it. _______________ 5. The recognition or nonrecognition of business activities as accountable events _______________ 6. It refers to the financial flexibility of the enterprise. _______________ 7. It refers to the ability of the enterprise to pay currently maturing obligations. _______________ 8. The assumption on which the best indication of an enterprises present and continuing ability to generate favorable cash flows is information about enterprise earnings is based _______________ 9. The assigning of peso amounts to accountable economic transactions and events _______________ 10. In recognition of this, consolidated financial statements are prepared. _______________ 11. The number of members of FRSC _______________ 12. The level of income earned by an enterprise through efficient and effective utilization of its resources _______________ 13. Its main function is to establish and improve accounting standards that will be generally accepted in the Philippines. _______________ 14. It involves the examination of financial statements by an independent CPA for the purpose of expressing an opinion as to fairness _______________ 15. Continuation of an accounting entity in the absence of evidence to the contrary _______________ 16. A theoretical foundation which guides the ASC, preparers, and users of financial accounting information in preparation and presentation of financial statements _______________ 17. A listing of the components of account balances _______________ 18. Entries that transfer the balances in all of the nominal accounts to equity _______________ 19. The first step in the accounting cycle _______________ 20. The manner in which the accounting records are organized and employed within a business _______________ 21. An amount not paid and currently matched with earnings _______________ 22. An amount paid and not currently matched with earnings _______________ 23. An amount not received and currently matched with earnings _______________ 24. An amount received and not currently matched with earnings _______________ 25. When special journals are used, adjusting and closing entries are generally recorded in it.

MULTIPLE CHOICES. 1. They encompass the conventions, rules, and procedures necessary to define what is accepted accounting practice. a. Generally accepted accounting principles b. Accounting constraints c. Conceptual framework d. Accounting assumptions Financial statement users with a direct economic interest in a specific business include a. Financial advisers b. Regulatory bodies c. Stock markets d. Suppliers The following procedures are involved in the FRSC standard-setting process, except a. Preparation and approval by a task force established by the FRSC chairman of a draft of a proposed SFAS b. Distribution of the exposure draft for comment to PICPA members, FINEX members, and other interested parties c. Publication in the official gazette or in a newspaper of general circulation d. Approval by the Professional Regulation Commission The business reason usually given for a business to select a fiscal year different from the calendar year is a. The firms owners may have a personal preference. b. Tax laws favor firms which employ a fiscal year other than the calendar year. c. The fiscal year-end is selected to coincide with the low points in sales, production, and inventories, which may occur at some period other than the calendar year-end. d. Public accounting firms might not be able to handle the workload if all their clients were to report on a calendar-year basis. The essential characteristic/s of accounting is/are a. Communication of financial information to interested persons b. Communication of financial information about economic entities c. Identification, measurement, and communication of financial information d. All of the above Which of the following financial statements users need financial information to enable them to assess the ability of the enterprise to pay dividends? a. Investors b. Employees c. Creditors d. Suppliers 7. This requires reporting of information that has a value significant enough to affect decisions of those using the financial statements. a. Accounting entity b. Materiality c. Verifiability d. Going concern The correct order of the following steps of the accounting cycle is a. Posting, closing, adjusting, reversing b. Posting, adjusting, closing, reversing c. Posting, reversing, adjusting, closing d. Adjusting, posting, closing, reversing What is the purpose of nominal accounts? a. To provide temporary accumulations of certain account balances for a meaningful period of time b. To facilitate accounting for small amounts c. To correct errors as they are detected d. To record all transactions initially

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10. The primary purpose of the Statement of Financial Position of a business enterprise is to reflect a. The fair value of the firms assets at some moment in time b. The status of a firms assets in case of forced liquidation of the firm c. The firms potential for growth in stock values in the stock market d. Items of value, debts, and net worth 11. What is the purpose of information presented in notes to financial statements? a. To provide disclosures required by generally accepted accounting principles b. To correct improper presentation in the financial statements c. To provide recognition of amounts not included in the totals of the financial statements d. To present managements responses to auditor comments 12. Financial accounting is concerned with a. General-purpose reports on financial position and results of operations b. Specialized reports for inventory management and control c. Specialized reports for income tax computation and recognition d. General-purpose reports on changes in stock prices and future estimates of market position 13. Many CPAs join the in-house accounting staff of a business. They are said to be engaged in a. Public accounting b. Private accounting c. Government accounting d. Financial accounting

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14. The information provided by financial reporting pertains to a. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers b. Business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers c. Individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers d. An economy as a whole and to members of society as consumers, rather than to individual enterprises or industries 15. A primary objective of external financial reporting is a. Direct measurement of the value of a business enterprise b. Provision of information that is useful to present and potential investors, creditors, and others in making rational financial decisions regarding the enterprise c. Establishment of rules for accruing liabilities d. Direct measurement of the enterprises stock price 16. Financial accounting can be broadly defined as the area of accounting that prepares a. General-purpose financial statements to be used by parties internal to the business enterprise only b. Financial statements to be used by investors only c. General-purpose financial statements to be used by parties both internal and external to the business enterprise d. Financial statements to be used primarily by management 17. Its objective is to achieve uniformity in the accounting principles which are used by business enterprises around the world. a. International Accounting Standards Committee b. Financial Accounting Standards Board c. Securities and Exchange Commission d. World Bank 18. Accountants prepare financial statements at arbitrary points in time during the lifetime of an entity. This is in accordance with which basic accounting concept? a. Going concern b. Periodicity c. Unit of measure d. Accrual 19. Which of the following is an accounting constraint? a. Cost-benefit b. Conservatism c. Relevance d. Reliability

20. Which of the following is not a purpose of a conceptual framework? a. To assist FRSC in reviewing and adopting IAS b. To assist FRSC in developing accounting standards c. To assist preparers of financial statements in applying PFRS d. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of accountancy in the Philippines 21. The following are included in the scope of the ASC conceptual framework, except a. Objective of financial statements b. Qualitative characteristics that determine usefulness of financial accounting information c. Definition, recognition, and measurement of the elements of financial statements d. Generally accepted accounting principles 22. These include not only financial statements but also other information such as supplementary schedules in a corporate annual report, prospectuses, and description of major products. a. Financial statements b. Financial reports c. Notes to financial statements d. Audit reports 23. An example of a nominal account a. Customer deposits b. Capital stock c. Petty cash d. Sales returns 24. The term double-entry system refers to a. The use of real and nominal accounts b. The recording of each transaction in two parts c. The use of two journals d. The use of a journal and a ledger 25. Why are adjusting entries necessary? a. To record revenues and expenses b. To make debits equal credits c. To close nominal accounts at year-end d. To correct erroneous balances in accounts 26. Which of the following statements is a correct description of reversing entries? a. The recording of reversing entries is a mandatory step in the accounting cycle. b. Reversing entries are made at the end of the next accounting period, after recording regular transactions of the period. c. Reversing entries are identical to the adjusting entries made in the previous period. d. Reversing entries are the exact opposite of the adjustments made in the previous period.

27. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the sellers financial statements before the performance? a. Revenue for the entire proceeds b. Revenue to the extent of related costs expended c. Unearned revenue to the extent of related costs expended d. Unearned revenue for the entire proceeds 28. Asset valuation accounts are a. Assets b. Neither assets nor liabilities c. Part of stockholders equity d. Liabilities 29. Which of the following statements conforms to the realization concept? a. Equipment depreciation was assigned to a production department and then to product unit costs. b. Depreciated equipment was sold in exchange for a note receivable. c. Cash was collected on accounts receivable. d. Product unit costs were assigned to cost of good sold when the units were sold. 30. Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such cost is a. Salespersons monthly salaries b. Salespersons commissions c. Transportation to customers d. Prepaid insurance 31. Reporting inventory at the lower of cost or market is a departure from the accounting principles of a. Historical cost b. Conservatism c. Consistency d. Full disclosure 32. A voucher system is used in connection with transaction that involve only a. The receipt of cash b. The payment of cash c. Revenue and expense d. The purchase and sale of merchandise 33. Which of the following is an adjunct account? a. Cash b. Accounts receivable c. Premium on bonds payable d. Allowance for bad debts

34. An adjusting entry that records the earned portion of unearned revenue previously recorded always includes a a. Debit to an account in the asset category b. Credit to an account in the asset category c. Credit to an account in the owners equity category d. Credit to an account in the liability category 35. A company that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months service at the beginning of each new quarter. Which term appropriately describes the prepayment from the perspective of the service providers? a. Unearned revenue b. Earned revenue c. Accrued revenue d. Prepaid expense 36. Which of the following documents does not initiate an entry to be made in the accounts? a. Sales invoice b. Credit memorandum c. Purchase order d. Purchase invoice 37. If an enterprise uses special journals, in which journal would the sale of merchandise for cash be recorded? a. Sales journal b. Cash receipts journal c. General journal d. Cash disbursements journal 38. Which of the following statements regarding a trial balance is false? a. A trial balance helps to localize errors within an identifiable time period. b. A trial balance is a test of equality of the debit and credit balances in the ledger. c. A trial balance proves that no errors of any kind have been made in the accounts during the accounting period. d. A trial balance is a list of all of the open accounts in the ledger with their balances as of a given date. 39. Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are the a. Basic elements b. Basic principles c. Basic objectives d. Basic assumption

40. According to the ASC conceptual framework, which of the following is an essential characteristic of an asset? a. The claims to an assets benefits are legally enforceable. b. An asset is tangible. c. An asset is obtained at a cost. d. An asset provides future benefits. 41. An essential characteristic of a liability is that a. The obligated enterprise must pay cash to a recipient entity. b. It must be legally enforceable. c. The identity of the recipient entity must be known to the obligated entity before the time of settlement. d. The obligation must have arisen as the result of a previous transaction. 42. Which of the following best describes the distinction between expenses and losses? a. Losses are reported net of related tax effect, whereas expenses are not reported net of tax. b. Losses are extraordinary charges, whereas expenses are ordinary charges. c. Losses are material items, whereas expenses are immaterial items. d. Losses result from peripheral or incidental transactions, whereas expenses result from ongoing major or central operations of the entity. 43. An entitys revenue may result from a. A decrease in an asset from primary operations b. An increase in an asset from incidental transactions c. An increase in a liability from incidental transactions d. A decrease in a liability from primary operations 44. When is revenue recognized? a. It is probable that future economic benefits will flow to the enterprise. b. It is possible that reliably measurably future economic benefits will flow to the enterprise. c. The future economic benefits can be measured reliably. d. It is probable that reliably measurable future economic benefits will flow to the enterprise. 45. Under a loyalty agreement with another enterprise, a company will receive royalties from the assignment of a patent for 2 years. The royalties received should be reported as revenue a. At the date of the royalty agreement b. In the period earned c. In the period received d. Evenly over the life of the royalty agreement

46. Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to a. Disclosure b. Accrual accounting c. Materiality d. Matching concept 47. When bad debt expense is estimated on the basis of the percentage of past actual losses from bad debts to past net credit sales and this percentage is adjusted for anticipated conditions, the accounting concept of a. Matching is being followed. b. Matching is not being followed. c. Substance over form is being followed. d. Going concern is not being followed. 48. Costs that can be reasonably associated with specific revenues but not with specific products should be a. Charged to expense in the period incurred. b. Allocated to specific products based on the best estimate of the production processing time. c. Expensed in the period in which the related revenue is recognized. d. Capitalized and then amortized over a period not exceeding 60 months. 49. Which of the following is an application of the principle of systematic and rational allocation? a. Amortization of intangible assets b. Sales commissions c. Research and development costs d. Officers salaries 50. A patent, purchased in 2003 and amortized over a 15-year life, was determined to be worthless in 2008. The write-off of the asset in 2008 is an application of which of the following principles? a. Associating cause and effect b. Immediate recognition c. Systematic and rational allocation d. Objectivity