INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

PEABLANCA, CAGAYAN
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY
PRELIM EXAM IN INTEGRATED ACCOUNTING, PART 2
NAME: _______________________________________________________

SCORE: ______/50

General Instructions: Answer the following questions correctly. Write your

answers on the space provided. All form of erasing, altering or tampering
of answer or the answer sheet will render no point. Use ink pens only. God
bless!

Test 1: MORSE TYPE. Please refer to the table below for your answers.
ANSWER
A
B
C
D
E
F
G
H

S1
TRUE
TRUE
TRUE
FALSE
FALSE
FALSE
FALSE
TRUE

S2
TRUE
TRUE
FALSE
FALSE
FALSE
TRUE
TRUE
FALSE

S3
TRUE
FALSE
FALSE
FALSE
TRUE
TRUE
FALSE
TRUE

1.
S1: The two groups identified as the principal users of external financial information are investors
and creditors.
S2: External financial information is generally more highly summarized than the information
reported internally.
S3: The auditor's report that accompanies the financial statements is based on evidence gathered
by the auditor from the detailed records and documents maintained by the company and from a review of
the controls over the accounting system.
2.
S1: The Securities and Exchange Commission recommends, but does not require, that all
nationally registered companies have an annual independent audit as protection for the shareholders.
S2: The standard three-paragraph auditor's report deemphasizes the separate responsibilities of
management and the auditors for the accounting system and the information in the financial statements.
S3: The Financial Accounting Standards Board is an independent organization consisting of
seven part-time board members who are permitted to retain limited connections with their firms or
institutions after assuming membership on the Board.
3.
S1: Following the research of a major project by a task force, the FASB issues a Discussion
Memorandum that identifies the principal issues involved.
S2: The primary responsibilities of the Emerging Issues Task Force are to identify new accounting
issues for which no authoritative statements exist and to discuss alternative approaches to the issues and
arrive at a consensus statement that provides guidance until such time as they may be addressed by the
FASB.

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S3: Generally accepted accounting principles have, in most cases, eliminated the need for
accountants to exercise professional judgment in interpreting and applying accounting standards.
4.
S1: Sinking fund assets consisting of cash and securities held for the redemption of bonds or
stocks are normally classified as investments.
S2: When a bond issue classified as a long-term obligation becomes payable within a year, it
should normally be reclassified and presented as a current liability.
S3. All current assets are reported at their estimated realizable values.
5.
S1: Short-term obligations expected to be refinanced with long-term debt are normally classified
as long-term debt.
S2: Plant rearrangement costs and developmental and improvement costs are frequently
reported as land, buildings, and equipment.
S3: The long-term rights and privileges of a physical nature acquired for use in business
operations are often reported under the heading "Intangible assets."
6.
S1: Any obligation that is due on demand or will become due on demand within one year from the
balance sheet date should be classified as current.
S2: A contingent liability is a definite obligation with only the amount of the obligation in question
and subject to estimation at the balance sheet date.
S3: Current assets are normally listed on the balance sheet in the order of their dollar value.
7.

S1: In current practice, the most common revenue recognition point is "point-of-sale."
S2: The cost recovery method of revenue recognition is often used for certain precious metals
and agricultural products that are supported by government price guarantees.
S3: Gains are inflows or other enhancements of assets of an entity or settlement of its liabilities
from delivering or producing goods, rendering services, or other activities that constitute the entity's major
operations.
8.
S1: Losses are decreases in equity from incidental transactions of an entity and from all other
transactions and events affecting the entity except those that result from expenses or distributions to
owners.
S2: Most losses such as losses from the sale of used equipment, losses from natural
catastrophes, and losses from disposition of investments are examples of expenses that are directly
related to revenues for the period.
S3: Most administrative costs, such as salaries and utilities, are recognized as periodic expenses.
9.
S1: Under generally accepted accounting principles, revenue recognition normally occurs when
cash is received.
S2: Revenues and gains are generally recognized when they are realized or realizable and they
have been earned through substantial completion of the activities involved in the earnings process.
S3: Costs of collection, bad debt losses from uncollectible receivables, and possible product
warranty costs are examples of expenses that are directly related to revenues for the period.
10.

S1: Certificates of deposit and money market savings certificates are examples of time deposits.
S2: Demand deposits would include amounts in checking, savings, and money market deposit
accounts.
S3: Deposits in foreign banks are always reported as receivables.
11

S1: A cash overdraft should be reported as a current liability.

S2: Compensating balance requirements as a result of short-term financing arrangements are
reported separately in the investment section of the balance sheet.
S3: A trade discount is offered by some companies to encourage customers to pay bills promptly.
12.
S1: A bank reconciliation should be prepared by the individual responsible for cash receipts and
disbursements.
S2: In a bank reconciliation statement, the amount of a not-sufficient-funds check must be added
to the depositor's cash balance in determining the correct cash balance.
S3: In a bank reconciliation statement, an outstanding check must be subtracted from the bank
statement balance in determining the correct cash balance.
13.
S1: Revenues and gains are generally recognized when they are realized or realizable and they
have been earned through substantial completion of the activities involved in the earnings process..
S2: The proportional performance method has been developed to reflect revenue earned on
service contracts under which many acts of service are to be performed before the contract is completed.
S3: The completed-contract method was developed to relate recognition of revenue on long-term
construction-type contracts to the activities of a firm in fulfilling these contracts.

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14.
S1: Beginning with the Tax Reform Act of 1986, the tax laws eliminated the use of the completedcontract method.
S2: The most popular input measure under percentage-of-completion accounting is the cost-tocost method.
S3: Estimates of architects and engineers of percentage-of-completion are not acceptable under
generally accepted accounting principles.
15.
S1: At the conclusion of a construction contract, the balance in Construction in Progress will be
exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-ofcompletion method.
S2: If analysis of construction contracts indicates that there will be an overall loss on the contract,
the loss should immediately be recognized in full under the completed-contract method and the
percentage-of-completion method.
S3: As construction contract estimates change, retroactive adjustments are required if the amount
is material.
16.
S1: An investment in stock is initially recorded at cost and all commissions, taxes, and other fees
are expensed as incurred, under both the cost and equity methods.
S2: Under some circumstances, consolidated financial statements are appropriate even though
the parent company owns less than 50 percent of the voting stock of the subsidiary.
S3: Accounting practice allows companies not to consolidate certain majority-owned subsidiaries
if these subsidiaries have "nonhomogeneous" operations, a large minority interest, or a foreign location.
17.
S1: The cost method of accounting should always be used when the investor does not exercise
significant influence over the investee.
S2: The equity method may not be appropriate in some cases even though the investor owns
more than 20 percent of the voting stock of the investee.
S3: As a general rule, consolidated financial statements should be prepared only when the parent
corporation owns 80 percent or more of the outstanding common stock of the subsidiary.
18.
S1: Under the cost method, the investment account is periodically adjusted to reflect changes in
the underlying net assets of the investee.
S2: When an investment in equity securities has been accounted for under the equity method, but
circumstances dictate a change to the cost method, retroactive application of the cost method is required.
S3: When the purchase price of stock is greater than the underlying book value of the investee's
net assets as a result of a difference between the fair values and book values of depreciable assets, an
adjustment is made by the investor to the income reported by the investee in applying the equity method.
19.
S1: The three main categories of accounting changes are change in estimate, change in
principle, and correction of prior period errors.
S2: Pro forma statements should be prepared for a change in accounting estimate.
S3: Changes in accounting estimates are considered to be part of the normal accounting process
and not corrections or changes of past periods.
20.
S1: A change in the percentage used in determining uncollectible accounts receivable is a change
in accounting principle.
S2: A change from a principle that is not generally accepted to one that is generally accepted is
considered to be a correction of an error.
S3: A change in accounting principle, as defined in APB Opinion No. 20, includes the initial
adoption of an accounting principle as a result of transactions or events that had not occurred in previous
periods.
TEST 2. MULTIPLE CHOICES. Answer the question correctly.
21. The use of the gross profit method assumes
a. the amount of gross profit is the same as in prior years.
b. sales and cost of goods sold have not changed from previous years.
c. inventory values have not increased from previous years.
d. the relationship between selling price and cost of goods sold is similar to prior years.
22. The gross profit method of estimating inventory would not be useful when
a. a periodic system is in use and inventories are required for interim statements.
b. inventories have been destroyed or lost by fire, theft, or other casualty, and the specific data required
for inventory valuation are not available.
c. there is a significant change in the mix of products being sold.
d. the relationship between gross profit and sales remains stable over time.
23. The gross profit method of inventory valuation is invalid when
a. there is substantial increase in the quantity of inventory during the year.

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b. there is substantial increase in the cost of inventory during the year.

c. the gross margin percentage changes significantly during the year.
d. all ending inventory is destroyed by fire before it can be counted.
24. When the current year's ending inventory amount is overstated,
a. the current year's cost of goods sold is overstated.
b. the current year's total assets are understated.
c. the current year's net income is overstated.
d. the next year's income is overstated.
25. If the ending inventory balance is understated, net income of the same period
a. will be overstated.
b. will be understated.
c. will be unaffected.
d. cannot be determined from the above information.
26. An overstatement of ending inventory in Period 1 would result in income of Period 2 being
a. overstated.
b. understated.
c. correctly stated.
d. The answer cannot be determined from the information given.
27. Which statement is true about the gross profit method?
a. It may not be used to estimate inventories for annual statements.
b. It may not be used to estimate inventories for interim statements.
c. It may not be used by insurers of inventory.
d. It may not be used for internal estimates of inventory.
28. Which of the following will result if the current year's ending inventory amount is understated in the
cost of goods sold calculation?
a. Cost of goods sold will be overstated.
b. Total assets will be overstated.
c. Net income will be overstated.
d. Both a and c.
29. If ending inventory on December 31, 2004, is overstated by $30,000, what is the effect on net income
for 2005?
a. Net income is overstated by $30,000.
b. Net income is understated by $30,000.
c. Net income is overstated by $60,000.
d. The answer cannot be determined from the information given.
30. The retail inventory method is characterized by
a. the recording of sales at cost.
b. the recording of purchases at selling price.
c. the reporting of year-end inventory at retail in the financial statements.
d. the recording of markups at retail and markdowns at cost.
31. When comparing the allowance method of accounting for bad debts with the direct write-off method,
which of the following is true?
a. The direct write-off method is exact and also better illustrates the matching principle.
b. The allowance method is less exact but it better illustrates the matching principle.
c. The direct write-off method is theoretically superior.
d. The direct write-off method requires two separate entries to write off an uncollectible account.
32. When the allowance method of recognizing bad debt expense is used, the entry to record the write-off
of a specific uncollectible account would decrease
a. allowance for doubtful accounts.
b. net income.
c. net realizable value of accounts receivable.
d. working capital.
33. When a specific customer's account is written off by a company using the allowance method, the
effect on net income and the net realizable value of the accounts receivable is
Net Realizable Value
Net Income
of Accounts Receivable
a.
None
None
b.
Decrease
Decrease

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c.
d.

Increase
Decrease

Increase
None

34. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of a small account previously written off would
a. increase net income.
b. increase the allowance for doubtful accounts.
c. decrease net income.
d. decrease the allowance for doubtful accounts.
35. A method of estimating bad debts that focuses on the balance sheet rather than the income statement
is the allowance method based on
a. direct write-off.
b. aging the trade receivable accounts.
c. credit sales.
d. specific accounts determined to be uncollectible.
36.

The entry
Accounts Receivable xxx
Allowance for Uncollectible Accounts
would be made when
a. a customer pays its account balance
b. a customer defaults on its account.
c. a previously defaulted customer pays its outstanding balance.
d. estimated uncollectible receivables are too low.

xxx

37. What is the accounting principle underlying the recognition of an estimated liability for warranties in
the period of product sale?
a. Matching
b. Materiality
c. Full Disclosure
d. Conservatism
38. In calculating a company's accounts receivable turnover, which of the following sets of factors would
be used?
a. Net income and average accounts receivable
b. Average accounts receivable and average total assets
c. Average accounts receivable and net credit sales
d. Net credit sales and average stockholders' equity
39. Which of the following factors are used to compute the number of days' sales in accounts receivable?
a. Inventory turnover and 365 days
b. Net sales and average inventory
c. Accounts receivable turnover and 365 days
d. Average accounts receivable and cost of goods sold
40. Which of the following would not be classified as cash?
a. Personal checks
b. Travelers' checks
c. Cashiers' checks
d. Postdated checks
41.
a.
b.
c.
d.

Which of the following would not be classified as an operating activity?

Interest income
Income tax expense
Dividend income
Payment of dividends

42. Cash flows from investing activities would be decreased by which of the following?
a. Issuance of bonds
b. Issuance of common stock
c. Purchase of long-term investments
d. Payment of dividends
43. In a statement of cash flows, payments to acquire bonds or mortgages of other entities should be
classified as cash outflows for
a. lending activities.
b. operating activities.

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c. investing activities.
d. financing activities.
44. In a statement of cash flows (indirect method), an increase in inventories should be presented as
a. an inflow of cash.
b. an inflow and outflow of cash.
c. an addition to net income.
d. a deduction from net income from continuing operations.
45. Patriot Corporation purchased a 3-month U.S. Treasury bill. In preparing Patriot's statement of cash
flows, this purchase would
a. have no effect.
b. be treated as an outflow from operating activities.
c. be treated as an outflow from investing activities.
d. be treated as an outflow from financing activities.
46. Which of the following would be an addition to net income when using the indirect method to derive
net cash flows from operating activities?
a. Payment of cash dividends
b. Decrease in accounts payable
c. Increase in merchandise inventory
d. Loss on sale of machinery and equipment
47. Which of the following would be an example of an investing activity?
a. Issuance of long-term bonds
b. Issuance of common stock
c. Payment of cash dividends
d. Sale of plant assets
48. In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash outflows for
a. borrowing activities.
b. operating activities.
c. investing activities.
d. financing activities.
49. In a statement of cash flows, which of the following would increase reported cash flows from operating
activities using the direct method?
a. Collection of a note receivable
b. Dividends received from investments
c. Gain on purchase of treasury stock
d. Gain on sale of equipment
50. Which of the following would be subtracted from net income when using the indirect method to derive
net cash flows from operating activities?
a. Decrease in salaries and wages payable
b. Loss on sale of investments
c. Decrease in net accounts receivable
d. Depreciation expense
-------------------------------------------------- END OF PRELIM EXAM -------------------------------------------------Those who like me, raise your hands. Those who dont, raise your STANDARDS.
--- Miriam Defensor-Santiago

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