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TEST BANK

FINANCIAL ACCOUNTING THEORY


1. Which of the following statements regarding reversing entries is incorrect?
a. Deferrals are generally entered in statement of financial position accounts, thus making
reversing entries unnecessary.
b. All accruals should be reversed.
c. Adjusting entries for depreciation and bad debts are never reversed.
d. Reversing entries change amounts reported in the statement of financial position for the
previous period.

2.As part of the objective of financial reporting, assessing cash flow prospects is interpreted to
mean
a. Cash basis accounting is preferred over accrual basis accounting.
b. Information about the financial effects of cash receipts and cash payments is generally
considered the best indicator of an entitys present and continuing ability to generate
favorable cash flows.
c. Over the long run, trends in revenue and expenses are generally more meaningful than
trends in cash receipts and disbursements.
d. All of the choices are correct regarding assessing cash flow prospects.

3. Financial accounting standard-setting


a. Can be described as a social process which reflects political actions of various interested
user groups as well as a product of research and logic.
b. Is based solely on research and empirical findings.
c. Is a legalistic process based on rules promulgated by governmental agencies.
d. Is democratic in the sense that a majority of accountants must agree with a standard
before it becomes enforceable.

4.Which of the following is not a benefit associated with the Conceptual Framework?
a. A conceptual framework should increase financial statement users' understanding and
confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing
conceptual framework.
c. A coherent set of accounting standards and rules should result.
d. Business entities will need far less assistance from accountants because the financial
reporting process will be quite easy to apply.

5. When classifying assets as current and noncurrent


a. The amount at which current assets are carried and reported must reflect realizable cash
value.
b. Prepayments for items such as insurance are included in other assets rather than as
current assets as they will ultimately be expensed.
c. The time period by which current assets are distinguished from noncurrent assets is
determined by the seasonal nature of the business.
d. Assets are classified as current if they are reasonably expected to be realized in cash or
consumed during the normal operating cycle.

6.Entities should separately report all of the following, except


a. Assets and liabilities with different general liquidity characteristics.
b. Assets and liabilities that have been financed with different type of instruments.
c. Assets that differ in their expected function in the entitys central operations.
d. Liabilities that differ in their amounts, timing and nature.
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7. Which of the following components of other comprehensive income will be reclassified to


profit or loss when specific conditions are met?
a. Changes in revaluation surplus
b. Remeasurements of defined benefit plan
c. Gains and losses from investment in equity instruments measured at fair value through
other comprehensive income
d. The effective portion of gains and losses on hedging instruments in a cash flow hedge

8. Which of the following statements is incorrect regarding notes to financial statements?


a. PFRS requires specific note disclosures including disaggregation of inventories into
classifications such as merchandise, production supplies, work in process and finished
goods.
b. PFRS requires a maturity analysis for receivables.
c. PFRS requires that all notes be clear, simple to understand and nontechnical in nature.
d. All of the choices are correct regarding notes to financial statements.

9.The full disclosure principle is best described by which of the following?


a. All information related to an entity's business and operating objectives is required to be
disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is to be
included in the notes to financial statements.
c. Enough information should be disclosed in the financial statements so a person wishing
to invest in the shares of the entity can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an
informed reader.

10. An entity deals extensively with foreign entities and the financial statements reflect these
foreign currency transactions. Subsequent to the end of reporting period and before the
issuance of the financial statements, there were abnormal fluctuations in foreign currency
rates. How should the entity account for this event?
a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations in foreign exchange rate.
b. Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in
foreign exchange rate and not just adverse movements.
c. Disclose the post-reporting period event as a nonadjusting event.
d. Ignore the post-reporting period event.

11. Which of the following disclosures is not a mandated related party disclosure?
a. Relationship between parent and subsidiaries irrespective of whether there have been
transactions between those related parties.
b. Names of all the associates that an entity has dealt with during the year.
c. Name of the entitys parent and, if different, the ultimate controlling party.
d. If neither the entitys parent nor the ultimate parent produces financial statements
available for public use, then the name of the next most senior parent that does so.

12. Which of the following is a requirement for a component of an entity to be classified as a


discontinued operation?
a. Its activities must cease permanently prior to the issue of the financial statements.
b. It must comprise a separate reportable segment.
c. Its assets must have been classified as held for sale in the previous financial statements.
d. It must have been a cash-generating unit while being held for use
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13. Which of the following is the best explanation why accounting changes are classified into
different categories?
a. The materiality of the changes involved.
b. Each category involves different method of recognizing changes in the financial
statements.
c. The fact that some treatments are considered GAAP and some are not.
d. A survey of managers and their need to provide a favorable profit picture.

14. Which is the reason why entities are permitted to change accounting policy?
a. The change would allow the entity to present a more favorable profit picture.
b. The change would result in the financial statements providing more reliable and relevant
information about an entitys financial position, financial performance and cash flows.
c. The change is made by the internal auditor.
d. The change will be long-term.

15. Why is retrospective treatment of changes in accounting estimate prohibited?


a. Changes in estimate are normal recurring corrections and adjustments which are the
natural result of the accounting process.
b. The retrospective treatment for any type of presentation is not allowed.
c. Retrospective treatment of changes in accounting estimate is prohibited because PFRS
requires it.
d. The PFRS does not prohibit retrospective treatment of changes in accounting estimate but
is silent on this issue.

16. Which of the following statements is true concerning the 75% overall size test for operating
segments?
a. The total external and internal revenue of all reportable segments is 75% or more
of the entitys external revenue.
b. The total external revenue of all reportable segments is 75% or more of the
entitys total external and internal revenue.
c. The total external revenue of all reportable segments is 75% or more of the
entitys external revenue.
d. The total internal revenue of all reportable segments is 75% or more of the
entitys internal revenue.

17. Interim financial reports should include as a minimum


a. A complete set of financial statements.
b. A condensed set of financial statements and selected notes.
c. A statement of financial position and income statement only.
d. A condensed statement of financial position, income statement and statement of cash
flows.

18.A cash equivalent is a short-term, highly liquid investment that is readily convertible into
known amount of cash and
a. Is acceptable as a means to pay current liabilities.
b. Has a current market value that is greater than original cost
c. Bears an interest rate that is at least equal to the prime rate of interest at the date of
liquidation.
d. Is so near maturity that it presents insignificant risk of change in interest rate.

19. Which of the following methods of determining bad debt expense does not properly match
expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable
under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
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20. Which of the following statements is true about factoring of accounts receivable without
recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale.
b. The receivables are used as collateral for a promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost should be recognized ratably over the collection period of the
receivables.

21. PFRS requires all of the following when classifying receivables, except
a. Indicate the receivables classified as current and noncurrent.
b. Disclose any receivables pledged as collateral.
c. Disclose all significant concentrations of credit risk arising from receivables.
d. All of the choices are required by PFRS when classifying receivables.

22.When the cost of goods sold method is used to record inventory at net realizable value
a. There is a direct reduction in the selling price of the product that results in a loss being
recorded in the income statement prior to the sale.
b. A loss is recorded by debiting loss on inventory decline and crediting directly the
inventory account
c. Only the portion of the loss attributable to inventory sold during the period is recorded.
d. The net realizable value figure for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.

23.Which of the following statements is true regarding inventory writedown and recovery of
writedown?
a. Recovery of inventory writedown is prohibited under PFRS.
b. PFRS requires separate reporting of reversal of inventory writedown.
c. PFRS requires entities to record writedown in a separate loss account.
d. All of the choices are correct.

24. An entity had a plantation forest that is likely to be harvested and sold in 30 years. How
should income be accounted for?
a. No income should reported annually until first harvest and sale in 30 years.
b. Income should be measured annually and reported using a fair value approach that
recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated over the 30-year period.
d. The plantation forest should be valued every five years and the increase in value should
be reported as component of other comprehensive income.

25. Which of the following information should be disclosed in relation to biological asset and
agricultural produce?
a. Separate disclosure of the gain or loss relating to biological asset and agricultural
produce.
b. The aggregate gain or loss arising on the initial recognition of biological assets and
agricultural produce and from the change in fair value less estimated cost of disposal of
biological asset.
c. The total gain or loss from biological asset, agricultural produce, and from change in
fair value less estimated costs of disposal of biological asset.
d. There is no requirement to disclose separately any gain or losses.

26. When activities involve production through natural growth or aging of biological asset,
revenue is earned as the plant or living animal grows.
a. Completion of production basis
b. Percentage of completion approach
c. Accretion approach
d. Zero-profit approach
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27. The criteria for recognition of revenue at the completion of production of precious metals
include which of the following?
a. Sale price is reasonably assured.
b. No significant costs are involved in distributing the product.
c. Units are interchangeable.
d. All of these are required for revenue recognition at the completion of production

28.PFRS requires entities to measure financial assets based on all of the following, except
a. The business model for managing financial assets.
b. Whether the financial asset is a debt or an equity investment.
c. The contractual cash flow characteristics of the financial asset.
d. All of the choices are PFRS requirements.

29. What is the effective interest rate of a debt instrument measured at amortized cost?
a. The stated rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instrument.
c. The interest rate that exactly discounts estimated future cash payments through the
expected life of the debt instrument to the net carrying amount of the instrument.
d. The basic, risk-free interest rate.

30.When an entity holds between 20% and 50% of the outstanding ordinary shares of an
investee, which of the following statements applies?
a. The investor should always use the equity method to account for the investment.
b. The investor should use the equity method to account for the investment unless
circumstances indicate that it is unable to exercise significant influence over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability
to exercise significant influence over the investee.
d. The investor should always use the fair value method to account for the investment.

31. How is the impairment test carried out for an investment in associate?
a. The goodwill is separated from the rest of the investment and is impairment tested
individually.
b. The entire carrying amount of the investment is tested for impairment by comparing the
recoverable amount with the carrying amount.
c. The carrying amount of the investment should be compared with the market value.
d. The recoverable amounts of all investments in associates should be assessed together to
determine whether there has been an impairment on all investments.

32. Which of the following instruments would not be classified as a financial liability?
a. A preference share that will be redeemed by the issuer for cash at a future date.
b. A contract for the delivery of as many of the entitys ordinary shares as are equal in value
to a fixed amount at a future date.
c. A written call option that gives the holder the right to purchase a fixed number of the
entitys ordinary shares in return for a fixed price.
d. An issued perpetual debt instrument

33. What are the conditions for offsetting of financial assets and financial liabilities?
a. A legal right of set-off.
b. A legal right of set-off and an intention to settle net or simultaneously.
c. The existence of a clearing mechanism or other market mechanism for net settlement and
an expectation of net settlement.
d. A netting agreement and an expectation of net settlement.
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34. In which of the following circumstances is derecognition of a financial asset not


appropriate?
a. The contractual rights to the cash flows of the financial asset have expired.
b. The financial asset has been transferred and substantially all of the risks and rewards of
ownership of the transferred asset have also been transferred.
c. The financial asset has been transferred and the entity has retained substantially all of
the risks and rewards of ownership of the transferred asset.
d. The financial asset has been transferred and the entity has lost control of the transferred
asset.

35. Which of the following is not a relevant consideration when evaluating whether to
derecognize a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether substantially all of the risks and rewards of the obligation have been
transferred.

36. Which embedded derivative should not be accounted for separately?


a. An investment in a convertible bond that is designated as at fair value through other
comprehensive income.
b. An investment in a bond whose interest payments are linked to the price of gold and the
bond is designated as at fair value through other comprehensive income.
c. An investment in a bond whose interest payments are linked to the price of silver and the
bond is classified as at fair value through profit or loss.
d. A call option in an investment in an equity instrument that allows the issuer to repurchase
the instrument.

37.Which of the following nonmonetary exchange transactions has commercial substance?


a. Exchange of assets with no difference in future cash flows.
b. Exchange of products by entities in the same line of business with no difference in future
cash flows.
c. Exchange of assets with a difference in future cash flows.
d. Exchange of an equivalent interest in similar productive assets that causes the entities
involved to remain in essentially the same economic position.

38.In accounting for plant assets, which of the following outlays made subsequent to acquisition
should be fully expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time frame
originally anticipated
c. Expenditure made to maintain an existing asset so that it can function in the manner
intended
d. Expenditure made for major replacement

39.An expenditure made in connection with a machine being used should be


a. Expensed immediately if it merely extends the useful life but does not improve the
quality.
b. Expensed immediately if it merely improves the quality but does not extend the useful
life.
c. Capitalized if it maintains the machine in normal operating condition.
d. Capitalized if it increases the quantity of units produced by the machine.
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40. Borrowing costs can be capitalized as part of the cost of an asset when
a. The asset is a qualifying asset
b. The asset is a qualifying asset and it is not probable that the borrowing costs will result in
future economic benefits to the entity
c. The asset is a qualifying asset and it is probable that the borrowing costs will result in
future economic benefits to the entity but the costs cannot be measured reliably.
d. The asset is a qualifying asset and it is probable that the borrowing costs will result in
future economic benefits to the entity and the costs can be measured reliably.

41. Which of the following assets could be treated as qualifying asset for the purpose of
capitalizing interest costs?
a. Investment property
b. Investments in financial instruments
c. Inventories that are manufactured or produced in large quantity on a repetitive basis and
take a substantial period of time to get ready for use or sale
d. Biological assets

42. Which of the following statements is true regarding capitalization of interest?


a. Interest cost in connection with the purchase of land to be used as a building site should
be debited to the land account.
b. The amount of interest cost capitalized during the period should not exceed the actual
interest cost incurred.
c. When excess borrowed funds not immediately needed for construction are temporarily
invested, any interest earned should be recorded as interest revenue.
d. The minimum amount of interest to be capitalized is determined by multiplying a
weighted average interest rate by the amount of average accumulated expenditures on
qualifying assets during the period.

43. Which of the following is true regarding government grant related to asset?
a. Depreciation is higher and net income lower if the grant is recorded as deferred revenue.
b. Depreciation is higher and net income lower if the grant is an adjustment to the asset.
c. Depreciation is higher if the grant is a deferred revenue and net income is not affected.
d. Depreciation is higher if the grant is adjustment of the asset.

44. Which of the following statements is incorrect in relation to government grant?


a. Any adjustment needed when a government grant becomes repayable is accounted for as
a change in accounting estimate.
b. In respect of loan from the government at zero interest rate, an imputed interest charge
should be recognized in profit or loss.
c. Where conditions apply to a government grant, it should only be recognized when there
is reasonable assurance that the conditions will be met.
d. A government grant that becomes receivable as compensation for losses already incurred
should be recognized as income of the period in which it becomes receivable

45.The major difference between the service life of an asset and the physical life is that
a. Service life refers to the time an asset will be used and physical life refers to how long the
asset will last.
b. Physical life is the life of an asset without consideration of residual value and service life
requires the use of residual value.
c. Physical life is always longer than service life.
d. Service life refers to the length of time an asset is of use to the original owner, while
physical life refers to how long the asset will be used by all owners.

46.Of the following costs related to the development of mineral resources, which one should not
be included in depletable cost?
a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment cost associated with machinery used to extract the mineral resource
d. Intangible development cost such as drilling cost, tunnel, and shaft
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47. An entity is required to consider which of the following in developing accounting policy for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar and
related issues.
b. The definitions, recognition criteria, and measurement concepts for assets, liabilities,
income, and expenses in the Conceptual Framework.
c. Recent pronouncements of standard-setting bodies, accounting literature and accepted
industry practices.
d. Whether the accounting policy results in information that is relevant and reliable.

48. When calculating the estimate of future cash flows, which of the following cash flows
should not be included?
a. Cash flows from disposal
b. Income tax payments
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows incurred to generate the cash inflows from the continuing use of the asset.

49. An entity is considering to apply an impairment test to an individual asset or to the cash
generating unit to which the asset belongs. Which of the following statements is true?
a. If the individual asset does not generate cash inflows that are largely independent from
other assets, the cash generating unit should be identified.
b. If the individual asset generates a significant proportion of cash inflows of the entity as a
whole, the cash generating unit should not be identified.
c. If the individual asset generates an insignificant proportion of cash inflows to the entity
as a whole, the cash generating should not be identified.
d. All of these statements are true.

50. Which of the following items would qualify as an intangible asset?


a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A
program at Harvard University while working with the entity.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.

51. Which of the following disclosures is not required with respect to intangible assets?
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by competitors.

52.The reason goodwill is referred to as a master valuation account is that


a. It represents the purchase price of a business that is about to be sold.
b. It is the difference between the fair value of the net identifiable assets as compared with
the purchase price of the acquired business.
c. The value of a business is computed without consideration of goodwill and then goodwill
is added to arrive at a master valuation.
d. It is the only account in the financial statements that is based estimated value.

53. Which of the following is not one of the criteria which must be met before development costs
can be capitalized?
a. The entity has sufficient financial resources to complete the project.
b. The entity intends to complete the project and either use or sell the intangible asset.
c. The entity can reliably identify the research costs incurred to bring the project to
economic feasibility.
d. The project has achieved technical feasibility.
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54. Operating losses incurred during the start-up years of a new business should be
a. Accounted for and reported like the operating losses of any other business.
b. Written off directly against retained earnings.
c. Capitalized as a deferred charge and amortized over five years.
d. Capitalized as an intangible asset and amortized over a period not to exceed 20 years.

55. What is the relationship between present value and the concept of a liability?
a. Present value is used to measure certain liabilities.
b. Present value is not used to measure liabilities.
c. Present value is used to measure all liabilities.
d. Present value is only used to measure noncurrent liabilities.

56. Which of the following is not considered when evaluating whether or not to record a liability
for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.

57. A provision is recognized


a. When there is a legal obligation arising from a past obligating event, the probability of
the outflow of resources is more than remote but less than probable, and a reliable
estimate of the amount can be made.
b. When there is a constructive obligation as a result of a past obligating event, the outflow
of resources is probable, and a reliable estimate of the amount can be made.
c. When there is a possible obligation arising from a past event, the outflow of resources is
probable, and an approximate amount can be set aside toward the obligation.
d. When management decides that it is essential that a provision should be made.

58. An entity operates chemical plants and has a commitment of making good any damage
caused to the environment by its operations. Which of the following scenarios relating to the
entity would give rise to an environmental provision?
a. On past experience it is likely that a chemical spill which would result in having to pay
fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity's actions may damage
surrounding wildlife.
c. The government has outlined plans for a new law requiring all environmental damage to
be rectified.
d. A chemical spill from one of the entity's plants has caused harm to the surrounding area
and wildlife.

59. Which statement is incorrect where some or all of the expenditure required to settle a
provision should be reimbursed by another party?
a. The reimbursement shall be recognized only when it is virtually certain that the
reimbursement would be received if the entity settles the obligation.
b. The amount of the reimbursement shall not exceed the amount of the provision.
c. The expense relating to the provision may be presented net of the reimbursement.
d. The reimbursement shall not be treated a as separate asset and therefore netted against
the estimated liability for the provision.

60. When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization would
a. Increase if the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium.
c. Increase if the bonds were issued at a premium.
d. Increase if the bonds were issued at either a discount or a premium.
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61.A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place
a. The present value of the debt instrument must be approximated using an imputed interest
rate.
b. It should not be recorded on the books of either party until the fair value of the property
becomes evident.
c. The board of directors of the entity receiving the property should estimate a value for the
property that will serve as a basis for the transaction.
d. The directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.

62. Which of the following situations would prima facie lead to a lease being classified as an
operating lease?
a. Transfer of ownership to the lessee at the end of the lease term.
b. Option to purchase at a value below the fair value of the asset.
c. The lease term is for a major part of the assets life.
d. The present value of the minimum lease payments is 50% of the fair value of the asset.

63. Which of the following is a correct statement of one of the lease capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the economic life of the leased property.
d. The minimum lease payments excluding executory costs equal or exceed 90% of the fair
value of the leased property.

64. In a defined contribution plan, a formula is used that


a. Defines the benefits that the employee will receive at the time of retirement.
b. Ensures that pension expense and the cash funding amount will be different.
c. Requires an employer to contribute a certain sum each period based on the formula.
d. Ensures that employers are at risk to make sure funds are available at retirement.

65. In a defined benefit plan, a formula is used that


a. Requires that the benefit of gain or the risk of loss from the assets contributed to the
pension plan be borne by the employee.
b. Defines the benefits that the employee will receive at the time of retirement.
c. Requires that pension expense and the cash funding amount be the same.
d. Defines the contribution the employer is to make and no promise is made concerning the
ultimate benefits to be paid out to the employees.

66.In accounting for a defined benefit plan


a. An appropriate funding pattern must be established to ensure that enough money would
be available at retirement to meet the benefits promised.
b. The employer's responsibility is simply to make a contribution each year based on the
formula established in the plan.
c. The expense recognized each period is equal to the cash contribution.
d. The liability is determined based upon known variables that reflect future salary levels
promised to employees.

67. Which of the following is taken into account when determining the discount rate for a
defined plan?
a. Market yields at the end of reporting period on high-quality corporate bonds.
b. Investment or actuarial risk.
c. Specific risk associated with the entitys business.
d. Risk that future experience may differ from actuarial assumptions.
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68. Taxable income of a corporation
a. Differs from accounting income due to differences in interperiod allocation between the
two methods of income determination.
b. Differs from accounting income due to differences in interperiod allocation and
permanent differences between the two methods of income determination.
c. Is based on international financial reporting standards.
d. Is reported in the income statement.
69. All of the following would result to deferred tax asset, except
a. Interest expense is accrued but included in taxable income on a cash basis.
b. The accumulated depreciation on an asset is greater than accumulated tax depreciation
c. Development costs have been capitalized and amortized but were deducted in
determining taxable income in the period incurred.
d. The tax base for a machine is greater than the carrying amount.
70. Entities allocate income tax expense to all of the following, except
a. Discontinued operation
b. Prior period adjustment
c. Gross profit
d. Other comprehensive income
71.Shareholders are said to be the residual owners which means that the shareholders
a. Are entitled to a dividend every year in which the business earns a profit.
b. Have the rights to specific assets of the business.
c. Bear the ultimate risks and uncertainties and receive the benefits of ownership.
d. Can negotiate individual contracts on behalf of the entity.
72. In accordance with PIC Interpretation, costs of public offering or stock market listing of
shares should be
a. Expensed immediately
b. Considered as component of other comprehensive income
c. Deducted from equity
d. Deducted from equity, net of any related income tax benefit.
73. At the date of declaration of a small ordinary share dividend, the entry should not include
a. A credit to ordinary share dividend payable.
b. A credit to share premiumordinary.
c. A debit to retained earnings.
d. All of these are acceptable.
74. How should an entity recognize the change in the fair value of the liability in respect of a
cash-settled share-based payment transaction?
a. Should not recognize in the financial statements but disclose in the notes
b. Should recognize in the statement of changes in equity
c. Should recognize in other comprehensive income
d. Should recognize in profit or loss
75. For share appreciation rights, the measurement date for computing compensation is the
a. Date the rights mature
b. Date the share reaches a predetermined amount
c. Date of grant
d. Date of exercise
76. Earnings per share is calculated before accounting for which of the following items?
a. Preference dividend for the period
b. Ordinary dividend
c. Taxation
d. Minority interest
77. When there are two dilutive convertible securities, the one that should be used first to
recalculate earnings per share is the security with the
a. Greater earnings adjustment.
b. Greater earnings per share adjustment.
c. Smaller earnings adjustment.
d. Smaller earnings per share adjustment.
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78. Which of the following statements about the method of presenting the statement of cash
flows is correct?
a. The indirect method starts with income before income tax.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of cash
flows.
d. All of these statements are correct.
79. In preparing a statement of cash flows, cash flows from operating activities
a. Are always equal to accrual accounting income.
b. Are calculated as the difference between revenue and expenses.
c. Can be calculated by appropriately adding to or deducting from net income those items in
the income statement that do not affect cash.
d. Can be calculated by appropriately adding to or deducting from net income those items in
the income statement that do affect cash.
80. How should an unrealized gain on foreign currency transaction be presented in a statement of
cash flows?
a. As an inflow under financing activities.
b. It should be ignored as it is an unrealized gain.
c. It should be disclosed in the notes to financial statements by way of abundant precaution.
d. As an adjustment to the net income under operating activities.
81. During the current year, an entity discovered that ending inventory reported in the preceding
year was understated. How should the entity account for this understatement?
a. Adjust the beginning inventory balance in the current year.
b. Restate the financial statements with corrected balances for all periods presented
c. Adjust the ending balance of retained earnings account in the current year-end.
d. Make no entry because the error will self-correct.
82. Which disposal could qualify as discontinued operation?
a. Disposal of a component that is similar in nature to other components but has operations
and cash flows distinguishable from the rest of the entity.
b. Disposal of a component due to a major change in business strategy.
c. Disposal of a small component within the current business strategy.
d. Disposal of a component with distinguishable operations and cash flows from the rest of
the entity
83. Which is a true statement regarding disclosure for subsequent events?
a. Recognize a loss for all recognized and unrecognized subsequent events in the current
year
b. Recognize a gain or loss for any recognized subsequent event in the current year
c. Recognize a loss for a recognized subsequent event in the financial statements in the year
when the subsequent event occurs.
d. Recognize a loss for a recognized subsequent event in the current year financial
statements
84. Which statement regarding fair value through profit or loss (FVPL) is true?
a. An asset that is classified as FVPL is remeasured to fair value each reporting period and
the profit or loss is recognized in income for the period.
b. An election can be made to use the fair value through profit or loss method when an
entity security has no active market.
c. An election can be made to use the FVPL method for a held to maturity security requiring
the security to be recorded at cost and subsequently measured at amortized cost
d. An asset that is classified as FVPL is remeasured to fair value each reporting period and
the profit or loss is recognized in other comprehensive income.
85. An entity has investment property that is held to earn rental income. The entity uses the fair
value model for reporting the investment property. Which of the following statements is
true?
a. Changes in fair value are reported in profit or loss in the current period
b. Changes in fair value are reported as an extraordinary gain
c. Changes in fair value are reported in other comprehensive income for the period
d. Changes in fair value are reported as deferred revenue for the period
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86. Which of the following provides the holder the right to sell at an exercise or strike price
anytime during a specified period a gain accrues to the holder as the market price of the
underlying falls below the strike price?
a. Forward contract
b. Put option
c. Swaption
d. Call option

87. Which of the following instruments is not considered a derivative financial instrument?
a. Currency futures
b. Stock index option
c. Bank certificate of deposit
d. Interest rate swap

88. At current year-end, an entity was holding long-lived assets that it intended to sell. The entity
appropriately recognized a loss in the current year related to these assets. In the income
statement for the current year, the loss should be reported as
a. Extraordinary item
b. Component of income from continuing operations before tax
c. Component of discontinued operations net of tax
d. Component of selling or administrative expenses net of tax

89. The impairment rules for long-lived assets apply to all of the following, except
a. Building currently used in the business
b. Financial instruments
c. Land
d. Minicomputers used to run a production process

90. The required disclosures for the impairment of long-lived assets include all of the following,
except
a. The business segment affected, if applicable
b. The amount of the impairment loss and how fair value was determined
c. The recommendation of the auditor, signed and dated as of the date of discovery
d. The facts and circumstances leading to the impairment

91. Which of the following accurately describes the appropriate accounting for goodwill
acquired through a business combination?
a. It should be recorded at cost and amortized over 40-year period
b. It should be recorded at cost and amortized over a 10-year period
c. It should be recorded at cost and tested for impairment every three years
d. It should be recorded at cost and tested for impairment on an annual basis and more often
if certain events occur

92. Which of the following is a research and development cost?


a. Research and development performed under contract for others
b. Development or improvement of techniques and processes
c. Offshore oil exploration that is the primary activity of an entity
d. Market research related to a major product for the entity

93. Which of the following statements is incorrect regarding internal-use software?


a. The application and development costs should be amortized on a straight line basis unless
another systematic and rational basis is more appropriate.
b. Internal-use software is considered to be software that is marketed as a separate product
or as part of a product or process.
c. The costs of testing and installing computer hardware should be capitalized as incurred.
d. The costs of training and application maintenance should be expensed as incurred.
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94. Which of the following qualifies as an operating segment?


a. Corporate headquarters
b. North American segment whose assets are 12% of the combined assets of all segments
and management reports to the chief operating officer.
c. Eastern Europe segment which reports its results directly to the manager of the European
division, and has 20% of the entitys assets, 12% of revenue and 11% of the profit
d. South American segment whose results of operations are reported directly to the chief
operating officer, and has 5% of the entitys assets, 9% of revenue and 8% of the profit.

95. Which of the following is an inherent difficulty in the determination of the results of
operations on an interim basis?
a. Cost of sales reflects only the amount of product expense allocable to revenue recognized
as of the interim date.
b. Costs expensed in one interim period may benefit other periods.
c. Depreciation on an interim basis is a partial estimate of the actual annual amount.
d. Revenues from long-term construction contracts accounted for by the percentage of
completion method are based on annual completion and interim estimates may be
incorrect.

96. The most relevant measurement of liabilities at initial recognition and fresh start
measurement should always reflect
a. The expectation of the management
b. Historical cost
c. The credit standing of the entity
d. The single most likely minimum or maximum possible amount

97. An entity is the plaintiff in a patent infringement case. The entity has a high probability of a
favorable outcome and can reasonably estimate the amount of the settlement. What is the
proper accounting treatment of the patent infringement case?
a. No reporting is required at this time
b. A gain contingency for the minimum estimated amount of the settlement
c. Disclosure in the notes only
d. A gain contingency for estimated probable settlement

98. Which is a true statement for electing the fair value option for valuing bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation value must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.

99. An entity uses IFRS for financial reporting purposes and has several pension plans covering
various classes of employees. When may the entity net assets and liabilities of the various
plan?
a. When the estimated cash inflows and outflows are similar in pattern
b. When the assets and liabilities are both financial
c. Assets and liabilities may always be netted
d. Assets and liabilities may be netted when there is a legally enforceable right to use the
assets of one plan to settle the obligations of another plan.

100. At the middle of the current year, an entity granted employees compensatory share options.
How should the entity account for the outstanding options in calculating earnings per share
for the current year if the options are not antidilutive?
a. Include the options in the denominator of basic and diluted earnings per share for the
entire year.
b. Include the options in the denominator of diluted earnings per share weighted by the
number of months outstanding.
c. Ignore the options in the calculation of diluted earnings per share.
d. Include the options in the denominator of diluted earnings per share for the entire year.
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ANSWER

1. D 21. D 41. A 61. A 81. B


2. C 22. D 42. B 62. D 82. B
3. A 23. B 43. C 63. C 83. D
4. D 24. B 44. B 64. C 84. A
5. D 25. B 45. A 65. B 85. A
6. B 26. C 46. C 66. A 86. B
7. D 27. D 47. D 67. A 87. C
8. C 28. B 48. B 68. B 88. B
9. D 29. C 49. D 69. C 89. B
10. C 30. B 50. D 70. C 90. C
11. B 31. B 51. D 71. C 91. D
12. D 32. C 52. B 72. A 92. B
13. B 33. B 53. C 73. D 93. B
14. B 34. C 54. A 74. D 94. B
15. A 35. D 55. A 75. D 95. B
16. C 36. C 56. B 76. B 96. C
17. B 37. C 57. B 77. D 97. C
18. D 38. C 58. D 78. C 98. C
19. D 39. D 59. D 79. C 99. D
20. C 40. D 60. D 80. D 10 B

0.

END