Theory of Accounts

Bonds Payable:

1. Bond with a face value of P5.0 million carrying a stated interest rate
of 12% payable semiannually on March 1 and September 1 were issued on
July 1. The total proceeds from the issue amounted to P5, 200, 000. The
best explanation for the excess amount received over the face is

a. The bonds were issued at a premium plus accrued interest

b. The bonds were sold at a higher effective interest rate
c. The bonds were issued at face value plus accrued interest
d. No explanation is possible without knowing the maturity date of
the bond issue

2. When the interest payment dates of a bond are April 1 and October 1,
and a bond issue is sold on June 1, the amount of cash received by LMN
Company will be

a. Decreased by accrued interest from June 1 to October 1.

b. Decreased by accrued interest from April 1 to June 1.
c. Increased by accrued interest from June 1 to October 1.
d. Increased by accrued interest from April 1 to June 1.

3. Bond issuance costs, including the printing costs and legal fees
associated with the issuance, should be

a. expensed in the period when the debt is issued.

b. recorded as a reduction in the carrying value of bonds payable.
c. reported as expense in the period the bonds mature or are retired.
d. accumulated in a deferred charge account and amortized over the
life of the bonds.

4. When the effective-interest method is used to amortize bond premium or

discount of serial bond, the periodic amortization will

a. increase if the bonds were issued at a premium

b. increase if the bonds were issued at a discount
c. decrease if the bonds were issued at either a discount or a premium
d. increase if the bonds were issued at either a discount or a premium

5. Limelight Corporation has bonds outstanding during a year in which the

market rate of interest has risen. The entity elected the fair value
option. What will the entity report for the year?

a. Interest expense and a loss

b. Interest expense and a gain
c. A gain and no interest expense
d. A loss and no interest expense

6. Ezzy Company neglected to amortize the premium on outstanding bonds

payable. What is the effect of the failure to record premium
amortization on nterest expense and bond carrying amount, respectively?

a. Understate and understate

b. Understate and overstate
c. Overstate and overstate
d. Overstate and understate

7. An extinguishment of bonds payable originally issued at premium is made

by purchase of the bonds between interest dates. Which statement is
true at the time of extinguishment?
 a. Any cost issuing the bonds must be amortized up to the purchase
date.
b. The premium must be amortized up to the purchase date.
c. Interest must be accrued from the last interest date to the
purchase date.
d. All of these statements are true.

8. When the effective-interest method is used to amortize bond premium or

discount, the periodic amortization will

a. increase if the bonds were issued at a premium

b. decrease if the bonds were issued at a premium
c. increase if the bonds were issued at a discount
d. increase if the bonds were issued at either a discount or a premium

9. A corporation issues bonds with detachable warrants. The amount to be

recorded as share premium is preferably

a. zero
b. equal to the market value of the warrants
c. calculated as the excess of the proceeds over the fair value of
the bonds
d. calculated as the excess of the proceeds over the face value of
the bonds

10. The interest rate written in the terms of the bond indenture is
known as

a. coupon rate
b. nominal rate/stated rate
c. Stated rate
d. Coupon rate, nominal rate, or stated rate

11. If the bonds were issued at a premium, this indicates that

a. The market rate of interest exceeded the stated rate

b. The nominal rate of interest exceeded the market rate
c. The market and nominal rates coincided
d. No necessary relationship exists between the two rates

12. If the bonds are issued between interest dates, the entry of the
issuing entity could include a

a. Debit to interest payable

b. Credit to interest receivable
c. Credit to interest expense
d. Credit to unearned interest

13. The amortization of a premium on bonds payable

a. Decreases the balance of the bonds payable

b. Increases the amount of interest expense reported
c. Decreases the carrying amount of the bonds payable
d. Increases the cash payment to bondholders

14. How would the carrying value of a bond payable be affected by

amortization of each of the following? (discount; premium)

a. no effect, no effect
b. increase, no effect
c. increase, decrease
d. decrease, increase
15. In accounting for Fair Value Option of measuring bonds payable:

I. There is no amortization of bond discount and bond premium.

II. Any Transaction cost or bond issue cost should be expensed

immediately.

16. In relation to PFRS 9 (Bond Investment):

I. The said standard mandates that interest income classified at fair

value through other comprehensive income must be calculated using
nominal rate and included in profit or loss.

II. The said standard provide that interest income for irrevocable
designation at fair value option is based on the nominal interest rate
rather than the effective interest rate.

17. In the amortization schedule for discount on bonds payable, total

effective interest over the term to maturity is equal to the amount of
discount plus the total interest paid.

18. DEF Corporation has bonds outstanding during 2018 in which the
market rate of interest has risen. DEF elected the fair value option.
It will report interest expense and a gain for 2018.

19. The major difference between convertible bonds and bonds issued
with share warrants is that upon exercise of the warrants the holder
has to pay a certain amount to obtain the shares.

20. The conversion of bonds payable into ordinary shares is usually

recorded by carrying amount method.

21. When bonds are acquired between interest dates, the purchase price
normally includes the accrued interest.

22. In the classification of bond investments, the company may elect

a security by irrevocable designation to financial asset at fair value
through other comprehensive income.

23. In accounting for interest method, amortization of premium

decrease from period to period.

24. The effective interest method of amortizing discount provides for

increasing amortization and decreasing interest income.

25. Zero-coupon bonds result in zero interest expense for the issuer.

26. Most corporate bonds are debenture bonds.

27. A corporation issues bonds with detachable warrants. The amount to

be recorded as share premium is preferably calculated as the excess of
the proceeds over the face value of the bonds.

28. The net amount of bond liability that appears on the statement of
financial position is the face value of the bond plus related premium
or minus related discount.

29. When interest expense is calculated using the effective interest

method, interest expense equal the carrying amount of the bonds
multiplied by the effective interest rate.
 30. When bonds are retired prior to maturity with proceeds from a new
bond issue any gain or loss from the early extinguishment should be
recognized in income from continuing operations.

31. Blue Company issued a bond with a stated rate of interest that is
less than the effective interest rate. The bond was issued on one of
the interest payment dates. The entity shall report on the first payment
date an interest that is lower than the cash payment to bondholders.
Answers:
1. A 8. D 15.1 T 20. T 27. F
2. D 9. C 15.2 T 21. T 28. T
3. C 10. D 16.1 F 22. F 29. T
4. C 11. B 16.2 T 23. F 30. T
5. B 12. C 17. T 24. F 31. F
6. C 13. C 18. T 25. F
7. D 14. C 19. T 26. T

Shareholders’ Equity:

1. Convertible preference share is one which gives the holder the right to
exchange for other securities (e.g., ordinary shares and bonds) of the
issuing corporation.

2. A callable preference share is an equity instrument rather than a

financial liability because the option of the issuer to redeem the share
for cash does not satisfy the “textbook” definition of a financial
liability.

3. If shares are issued to extinguish a financial liability, the initial

measurement of the shares issued using the 2nd priority should be based
on the fair value of the shares issued.

4. If shares are issued for noncash consideration, the proceeds shall be

measured based on the fair value of the noncash consideration received.

5. The prohibition to issue shares at a discount refers to the original

issue of a share and subsequent transfer of such share by the
corporation.

6. If shares are issued for services, the shares shall be recorded at the
fair value of the shares issued.

7. Treasury shares can be legally reissued at a discount with discount

liability.

8. If the treasury shares are acquired for noncash consideration, the cost
is usually measured by the carrying amount of the noncash asset
surrendered.

9. MNO Corporation issued preference shares with detachable warrants to

purchase ordinary shares. The issue price exceeded the sum of the
warrants' fair value and the preference shares’ par value. The fair
value of the preference shares is not determinable. The amount to be
assigned to the share warrants outstanding is the proportion of the
proceeds that the share warrants’ fair value bears to the preference
shares par value.
10. When an entity calls in all of the preference shares for less than
the original issue price, the difference from the original issue price
should be charged to against retained earnings.

11. Contributed capital does not include capital resulting from

reissuance of treasury shares at a price above acquisition price.

12. If shares are issued to extinguish a financial liability, t he

initial measurement of the shares issued is fair value of liability
extinguished.

13. Redeemable preference share is a preference share

I. That provides for mandatory redemption by the holder for a

fixed or determinable amount at a future date.
II. That gives the holder the right to redeem the instrument for
a fixed or determinable amount at a future date.

14. Which of the following transactions would not lead to the

recognition of a share premium?

a. Issuance of convertible bonds

b. Donation of land by shareholders
c. Appropriation of retained earnings for treasury share
d. Gain on sale of shares as a result of exercise of stock rights

15. Brown Corporation’s retirement of its treasury shares resulted in

the par value exceeding the cost. The difference should be

a. Debited to retained earnings

b. Debited to share premium from previous treasury stock transactions
(sales/retirement) of the same class
c. Credited to share premium relating to the same issue
d. Debited to share premium to the extent of the c redit when the
stock was issued.

16. Green Company acquired some of its own common shares at a price
greater than the par value and original issue price but less than their
book value. Green uses the cost method of accounting for treasury stock.
What is the impact of this acquisition on total stockholders’ equity
and the book value per common share?

a. increase, increase
b. increase, decrease
c. decrease, increase
d. decrease, decrease

17. The following statements relate to retirement of treasury shares.

Which statement is not valid?

a. The number of shares issued is reduced.

b. If the retirement results in a gain, such gain shall be credited
to retained earnings.
c. If an entity’s share capital is retired, the share capital
account is reduced by its par.
d. If the retirement results in a loss, such loss should be debited
to share premium from original issuance first, share premium
from treasury shares second and last to retained earnings.
18. Treasury shares was acquired for cash at more than its par value
and then subsequently sold for cash at more than its acquisition price.
What is the effect on share premium from treasury share transaction?
(Purchase of TS; Sale of TS)
a. no effect; no effect
b. no effect; increased
c. decreased; increased
d. decreased; no effect

19. Any loss incurred from the sale of treasury shares shall be charged
to

a. Share premium from treasury shares and then retained earnings.

b. Retained earnings and then share premium from treasury shares
c. Loss on sale of treasury shares to be reported as other expense
d. Share premium from original issuance, share premium from treasury
shares and then retained earnings.

20. How would the declaration of a liquidating dividend by a

corporation affect each of the following? (Contributed Capital; Total
Shareholders’ equity)
a. decrease, no effect
b. no effect, decrease
c. no effect, no effect
d. decrease, decrease

21. Redeemable preference share is a preference share

I. That provides for mandatory redemption by the issuer for a

fixed or determinable amount at a future date.

II. That gives the holder the right to require the issuer to redeem
the instrument for a fixed or determinable amount at a future
date.

22. When shares without par value are sold, the proceeds shall be
credited to share capital.

23. If shares are issued for noncash consideration, the proceeds shall
be measured based on the fair value of the shares issued.

24. When shares are issued for services received, the measure is
secondarily equal to fair value of such services.

25. When treasury shares are acquired for noncash consideration, it is

measured by the fair value of the treasury shares.

26. When treasury shares are reissued for noncash consideration, the
proceeds shall be measured by fair value of the noncash considerati on
received.

27. Share option is issued to shareholders of a corporation to acquire

its unissued shares within a specified time at a specified price.

28. An entity issued rights to its existing shareholder to purchase

unissued ordinary shares at more than par value. Share premium would be
recorded when the rights become exercisable.

29. A redeemable preference share shall be classified in the statement

of financial position as either current or noncurrent liability
depending on the redemption date.
 30. A redeemable preference share is a preference share that give the
holder the right to require the issuer to redeem the instrument for a
fixed or determinable amount at a future date.

Answers:

1. T 8. T 14. C 21. 1 T 27. F

2. T 9. F 15. C 21. 2 T 28. F

3. F 10. F 16. C 22. F 29. T

4. T 11. F 17. B 23. F 30. T

5. F 12. F 18. B 24. F

6. F 13.1 F 19. A 25. F

7. F 13.2 T 20. B 26. T

BVPS/EPS:

1. Dividends in arrears usually does not include current dividends.

2. In the absence of any statement to the contrary, the ordinary share has
preference as to assets.

3. Subscription receivable should be deducted from the subscribed share

capital in the computation of share capital outstanding.

4. A nonparticipating preference share is one that is en titled to receive

only the dividends equal to the fixed rate.

5. Preference as to assets, the preference shareholders are entitled to

payment not only for the liquidation value but also for the current
dividends.

6. Preference as to dividends does not mean that preference shareholders

have an absolute right to dividends.

7. In determining basic earnings per share, dividend of non -convertible

preference share should be:

a. disregarded
b. deducted from net income only if declared
c. added back to net income whether declared or not
d. deducted from net income whether declared or not

8. Earnings per share should be presented even if they are negative, i.e.
loss per share.

9. Earnings per share amounts calculated for discontinued operations shall

be disclosed either on the face of the income statement or in the notes
to the statement

10. Preference as to assets, the preference shareholders are entitled

to payment not only for the liquidation value but also for the dividends
in arrears

11. A nonparticipating preference share is one which is entitled to

receive dividends in excess of the basic fixed rate.
 12. If only one preference share is participating, the rate of the
participating preference shall be used as a basis for ordinary share
dividend.

13. In case where there are two classes of preference share with
different dividend rates and both are participating, the lower rate
shall be the basis for allocation to the ordinary share.

14. The preference share may have a call price and this is considered
for book value computation.

15. The call price is the amount which the preference shareholders
normally receive upon the liquidation of the corporation.

16. San Miguel Corporation has outstanding ordinary share and

nonparticipating, noncumulative preference shares. The liquidation
value of the preference shares is equal to the par value. The book value
per share is unaffected by:

a. A 2-for-1 split of the ordinary shares

b. The payment of a previously declared cash dividend on the
ordinary shares
c. The declaration of a share dividend on preference payable in
preference shares when the market price of the preference is
equal to the par value.
d. The declaration of a share dividend on ordinary shares payable
in ordinary shares when the market price of the preference is
equal to the par value.

17. Options and warrants are dilutive if the exercise price or option
price is less than the average market price of the ordinary
share

18. Needless to say, the basic earnings per share would remain the
same whether outstanding during the year or converted during the
year.

19. Preference as to dividends means that preference shareholders have

an absolute right to dividends.

20. Subscription receivable should not be deducted from the subscribed

share capital in the computation of share capital outstanding.

Answers:

1. F 5. F 9. T 13. T 17. T

2. F 6. T 10. T 14. F 18. F

3. F 7. B 11. F 15. F 19. F

4. T 8. T 12. T 16. B 20. T

Lease:

1. In accounting for operating lease:

I. Initial direct cost incurred by lessor shall be added to the

carrying amount of the leased asset and recognized as an expense over
the lease term on the same basis as the lease income.
 II. Lease bonus received by the lessor from the lessee is recognized
as earned rent income to be amortized over the lease term.

III. Any lease bonus received by the lessor from the lessee is
recognized as unearned rent income to be amortized over the remaining
life of the asset.

2. If a sale and leaseback transaction results in a finance lease, any

excess of proceeds over the carrying amount shall not be immediately
recognized as income by a seller-lessee. Instead, it shall be deferred
and amortized over the lease term.

3. In a sale and leaseback transaction, if the sale price is established

at fair value under an operating lease, any gain or loss that pertains
to the right transferred to the buyer-lessor is recognized.

4. The classification of a lease is normally carried out at the

commencement date.

5. Inception date is the date the initial recognition of the assets,

liabilities, income or expenses resulting from the lease.

6. All of the following could lead to a finance lease, except

a. If the lessee cancels the lease, the lessor’s losses associated

with the cancellation are borne by the lessee.
b. The leased asset is of specialized nature such that only the
lessee can use it without major modification.

c. The lessee has the ability to continue the lease for a secondary
period at a rent which is substantially the same as the market
rate.
d. Gains and losses from the fluctuation in the fair value of the
residual fall to the lessee.

7. A cancelable lease is deemed non-cancelable when (choose incorrect one)

a. The lease can be canceled without the permission of the lessor

b. The lease can be canceled only upon the occurrence of a remote
contingency
c. The lease can be canceled only upon payment of a penalty of
such magnitude that the lessee shall be discouraged from
canceling the lease
d. The lessee, upon cancellation, enters into a new lease for the
same or an equivalent asset with the same lessor

8. When the transfer of asset is not a sale, the seller-lessee shall

continue to recognize the transferred asset and shall recognize a
financial liability equal to the transfer proceeds by crediting lease
liability.

9. Any excess fair value over sales price shall be accounted for as
additional financing provided by the buyer-lessor to seller-lessee.

10. The lease liability is measured as present value of lease payments.

11. The cost of right of use asset is equal to a fraction whose

numerator is the fair value and whose denominator is the present value
of lease liability multiplied by the carrying amount of the asset.

12. In a direct finance lease, the initial direct cost paid by the
lessor is added to the cost of the asset to get the net investment in
the lease.
 13. Gross investment is equal to the gross rentals for the entire lease
term plus the absolute amount of the residual value, whether guaranteed
or unguaranteed.

14. In direct financing lease, the inclusion of the initial direct

cost in the net investment in the lease will have the effect of spreading
the initial direct cost over the lease term and reduce the interest
income from the finance lease.

15. In sales type lease, sales is the amount equal to the net
investment in the lease or fair value of the asset, whichever is lower.

16. In a lease that is recorded as a sales type lease by the lessor,

interest revenue shall be recognized over the lease term using the
interest method.

17. In sales type lease, cost of goods sold is equal to the cost of
the asset minus the present value of unguaranteed residual value minus
the initial direct cost paid by the lessor

18. Initial direct cost incurred by the lessor shall be added to the
carrying amount of the underlying asset and recognized as expense over
the lease term on the same basis as the lease income.

19. Any lease bonus received by the lessor from the lessee is
recognized as unearned rent income to be amortized over the remaining
life of the asset.

Answers:

1.1 T 4. F 9. F 14. T 19. F

1.2 F 5. F 10. T 15. T

1.3 F 6. C 11. F 16. T

2. F 7. A 12. T 17. F

3. F 8. T 13. T 18. T

Loans Receivable

1. When direct origination cost is higher than origination fee, the stated
rate is lower than the effective rate. (F)

2. When direct origination cost is lower than origination fee, the stated
rate is higher than the effective rate. (F)

Income Tax (PAS 12):

1. An entity’s financial reporting basis of its plant assets is less than

the tax basis because it uses a different method of reporting
depreciation for financial reporting purposes and tax purposes. If it
has no other temporary differences, the entity should report a

a. Current tax asset

b. Deferred tax liability
c. Deferred tax asset
d. Current tax payable
 2. My Company records an unrealized gain on short-term investment
securities. This would result in what type of difference and i n what
type of deferred income tax?

a. Temporary, Liability
b. Temporary, Asset
c. Permanent, Liability
d. Permanent, Asset

3. Temporary differences arise when revenues are taxable (After they are
recognized in financial income; Before they are recognized in financial
income)

a. No; No
b. No; Yes
c. Yes; No
d. Yes; Yes

4. Current tax expense is the aggregate amount included in the

determination of profit or loss for a period in respect of current tax
and deferred tax.

5. An installment sale is included in financial income at the time of sale

and included in taxable income will give rise to a deferred tax asset.

Answers:

1. A 2. A 3. D 4. F 5. F

Liabilities:

1. When a third party operates the loyalty program, the consideration

allocated to the award credits is initially recognized as deferred
revenue and subsequently recognized as revenue when the award credits
are redeemed.

2. In accrual approach for warranty, the estimate is reviewed to

determine the reasonableness and accuracy. Any difference between
estimate and actual cost is a change in estimate.

3. When gift certificates are redeemed, forfeited gift certificates is

debited.

4. In accounting for provision, where there is a continuous range of

possible outcomes and each point in the range is as likely as any
other, the expected value is used.

Answers:

1. F 2. T 3. F 4. F
PPE (PAS 16):

1. In a “basket” or “lump-sum” purchase of assets, which of the following

best describes the process by which the historical cost of the various
assets acquired should be determined?

a. Allocation of the total cost to the individual assets on the

basis of the historical cost of the individual assets to their
original owner.
b. Allocation of the total cost to the individual assets on the
basis of the fair market value of the individual assets at the
time of the basket purchase
c. Recording of the individual assets at their current value with
recognition of a gain or loss for the difference between the
price paid for the assets and the total value of the individual
assets
d. Recording of the individual assets at their original historical
cost to the seller with a gain or loss recognized at the
difference between the total of the original historical cost
figures and the price paid in the basket purchase.

2. Under PAS 16, if a property is acquired on credit and paid beyond the
discount period, purchase discount lost and property, plant and
equipment accounts are credited.

3. Whether cash discount taken or not, the property, plant and equipment
must be net of such discount.

Answers:

1. B

2. F

3. T

Cash and Cash Equivalents:

1. The following statements relate to Bank Overdraft. Which of the following
statement is/are true:
I. It is stated that generally overdrafts are not permitted in the
Philippines.

II. When an entity maintains two or more accounts in one bank and one
account in an overdraft, such overdraft can be offset against the
other bank account with a credit balance.

III. Overdraft can also be offset with other bank account if the amount
is not material.

IV. “Bank overdraft, net of other bank account” is used when debit
balance is greater than credit cash balance.

2. Cash in closed bank should be reported as noncurrent asset either as

long term investment or other noncurrent asset.

3. Cash in foreign banks with exchange restrictions and earning interest

should be reported as noncurrent asset specifically, other noncurrent
assets.
 4. If material, deposits in foreign bank which are subject to foreign
exchange restriction and is earning interest should be classified
separately as long-term investment with appropriate disclosure.

5. A company’s own post-dated check issued to the supplier will be restored

to cash as of the reporting period.

6. A compensating balance which is legally restricted as to withdrawal in

relation to long-term debt is presented as other noncurrent asset.

7. Which item should be reported a current assets?

a. Cash segregated for payment of long-term bonds payable.

b. Cash set aside for the acquisition of furniture and fixtures.
c. Restricted compensating balance for which the related loan is short
term.
d. Restricted compensating balance for which the related loan is long
term.

8. Credit memo will cause the cash balance per ledger to be higher than
that reported by the bank, all other things being equal.

9. Outstanding checks will cause the cash balance per ledger to be greater
than the balance reported by the bank, all other things being equal.

10.The cash amount reported in the statements of financial position must

be the balance reported in the bank statement.

11.Bank service charge will cause the cash balance per ledger to be higher
than that reported by the bank, all other things being equal.

12. Which of the following is true about erroneous bank credit?

a. Cash balance per book is overstated.

b. Receipts per bank is overstated
c. It should be recorded as a credit to cash in bank account
d. It should be added to balance per bank in preparing bank
reconciliation.

13. Overstatement of check in payment of salaries of the prior month and

corrected in the current month will understate the receipt of the current
month.

14.Overstatement of check in payment of salaries of the cu rrent month and

corrected following month will understate the disbursement of the
current month.

15. The term cash equivalent refers to demand credit instruments such as
money order and bank drafts.

16. The purpose of establishing a petty cash fund is to keep enough cash
on hand to cover payment of small amounts or things are hurriedly
bought or customers are entertained.

17.It is stated that generally overdrafts are permitted in the

Philippines.

18. When an entity maintains two or more accounts in one bank and one
account in an overdraft, such overdraft can be offset against the other
bank account with a debit balance.

Answers:
1.1 T 3. F 8. F 13. F 18. T
1.2 F 4. T 9. F 14. F
1.3 T 5. T 10. F 15. F
1.4 F 6. F 11. T 16. T
2. F 7. C 12. B 17. F

Cash Flow:

1. Information about the cash flows of an entity is useful in providing

users of financial statements with a basis to assess the ability of the
entity to generate cash and cash equivalents and the needs of the entity
to utilize those cash flows.

2. An entity shall prepare a statement of cash flows in accordance with

the requirements of IAS 7 and may present it as an integral part of its
financial statements for each period for which financial statements are
presented.

3. Examples of cash flows from operating activities are the following

except:

a. cash payments to manufacture or acquire assets held for rental to

others and subsequently held for sale.
b. cash receipts and payments from contracts held for dealing or trading
purposes.
c. cash payments to and on behalf of employees.
d. cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets.

4. Examples of cash flows from investing activities are the following

except:

a. cash receipts and payments from contracts held for dealing or trading
purposes.
b. cash receipts from futures contracts, forward contracts and swap
contracts.
c. cash receipts from sales of equity or debt instruments of other
entities and interest in joint ventures.
d. cash payments to acquire property, plant and equipment,
intangibles and other long-term assets.

5. Examples of cash flows from financing activities are the following

except:

a. cash repayments of amounts borrowed;

b. cash payments by a lessee for the reduction of the outstanding
liability relating to a finance lease;
c. cash proceeds from issuing shares or other equity instruments;
d. cash receipts from the repayment of advances and loans made to other
parties (other than advances and loans of a financial institution)

6. Interest paid and interest and dividends received may be classified as

operating cash flows because they enter into the determination of profit
or loss.

7. Dividends paid may be classified as a financing cash flow because they

are a cost of obtaining financial resources.
8. Cash flows from investing activities are primarily derived from the
principal revenue-producing activities of the entity.

9. Cash flows from operating activities generally result from the

transactions and other events that enter into the determination of
profit or loss.

10. Star Company purchases a land and the seller accepts payment partly
in equity shares and partly in collateral trust bonds of the company.
The transaction shall be treated in the statement of cash flows as which
of the following?

a. Ignore the transaction totally since it is a noncash transaction.

b. The transaction does not belong in a statement of cash flows and
shall be disclosed only in the notes to the financial statements.
c. The purchase of the land is investing cash outflow and the issuance
of collateral trust bond financing cash flow while the issuance of
shares is investing cash flow.
d. The purchase of the land is investing cash flow and the issuance of
shares and the collateral trust bonds are financing cash inflows.

11. How should gain on sale of an office building owned by the entity
be presented in a statement of cash flows?

a. As an inflow in the investing activities section because it pertains

to a long-term asset.
b. As an inflow in the financing activities section because the building
was constructed with a long-term loan from a bank that needs to be
repaid from the sale proceeds.
c. As an adjustment to the net income in the operating activities
section prepared under the indirect method.
d. As an adjustment to the net income in the operating activities
section prepared under the direct method.

12. An entity shall report cash flows from operating activities using:

(a) the direct method, whereby major classes of gross cash receipts
and gross cash payments are disclosed.

(b) the indirect method, whereby profit or loss is adjusted for the
effects of transactions of non-cash nature, any deferrals or
accruals of past or future operating cash receipts or payments, and
items of income or expense associated with investing or financing
cash flows.

a. A only
b. Both A and B
c. Either A or B
d. Neither A nor B

13. In the computation of indirect method, which of the following

is/are true?

I. Noncash expenses are added back to net income to eliminate the effect
they had on net income.

II. Decreases in nontrade current liabilities are deducted from the net
income.

14. In preparing a statement of cash flows, sale of treasury stock at

an amount greater than cost would be classified as a financial activity.
 15. If a debt repayment includes both principal and interest, he
interest is presented as an operating outflow and the principal as a
financing outflow.

16. In a statement of cash flow, which of the following would increase

reported cash flows from operating activities using the direct method?
(Ignore income tax consideration)

a. Dividends received from investments

b. Gain on sale of equipment
c. Gain on early retirement of bonds
d. Change from straight-line to accelerated depreciation.

17. Cash payments to suppliers for goods and services is a cash inflow
from financing activities.

18. Cash payments to acquire equity or debt instruments of other

entities and interests in joint ventures are cash outflows for financing
activities.

19. An entity shall report separately cash flows arising from investing
activities using

a. Direct method
b. Indirect method
c. Either direct method or indirect method
d. Neither direct method nor indirect method

20. The statement of cash flows repots all of the following, EXCEPT:

a. investing transactions
b. the net change in cash for period
c. the free cash flows generated during the period
d. the cash effects of operations during the period.

21. The statement of cash flows provides answers to all of the

following questions, EXCEPT:

a.
What was the cash used for during the period?
b.
Where did the cash come from during the period?
c.
What was the change in the cash balance during the period?
d.
What is the impact of inflation on the cash balance at the end of
the year?
22. Preparing the statement of cash flows, using indirect method,
involves all of the following, EXCEPT:

a. cash provided by operations

b. change in cash during the period
c. cash collections from customers during the period
d. cash provided by or used in investing and financing activities.

Answers:
1. T 6. T 11. C 15. T 20. C
2. F 7. T 12. C 16. A 21. D
3. D 8. F 13.1 F 17. F 22. D
4. A 9. T 13.2 T 18. F
5. D 10. B 14. T 19. A
Investments:
1. The following transfers/reclassifications of financial are permitted,
except:
a. Transfer from amortized cost to fair value through other
comprehensive income
b. Reclassification of non-derivative financial assets out of the fair
value through profit or loss category if the financial as set is no
longer held for the purpose of selling it in the near term in
particular circumstances
c. Reclassification of non-derivative financial assets designated at
fair value through profit or loss by the entity upon initial
recognition out of the fair value through profit or loss category.
d. Transfer from the fair value through other comprehensive income to
the loans and receivable category a financial asset that would have
met the definition of loans and receivables (if the financial asset
had not been designated a fair value through other comprehensive
income), if the entity has the intention and ability to collect
contractual cash flows.

2. On January 5, 2018, an investee acquired 30% of the ordinary shares of

another entity. In the current year, the investee had net earnings which
exceed the dividends paid. The investor mistakenly recorded these
transactions using the cost method instead of the equity method of
accounting. What effect would this have on investment account, net
income, and retained earnings, respectively?

a. Overstate, overstate, overstate

b. Overstate, understate, understate
c. Understate, overstate, understate
d. Understate, understate, understate

3. In reclassification from amortization cost to FVPL, the difference

between the previous carrying amount and the fair value is recognized
in profit or loss.

4. In reclassification from FVOCI to amortized cost, the cumulative gain

or loss previously recognized in other comprehensive income is
reclassified to profit or loss at reclassification date.

5. A gain or loss on sale of trading bond investments is the difference

between

a. sale price and fair value

b. sale price and carrying amount
c. fair value and carrying amount
d. face amount and carrying amount

6. When bonds are acquired between interest dates, the purchase price
normally includes the accrued interest.

7. In the classification of bond investments, the company may elect a

security by irrevocable designation to financial asset at fair value
through other comprehensive income.

8. In accounting for interest method, amortization of premium decreases

from period to period.

9. The effective interest method of amortizing discount provides for

increasing amortization and decreasing interest income.
 10. In relation to PFRS 9 (Bond Investments), which among the
statements is/ are true:

I. The said standard mandates that interest income classified at fair

value through other comprehensive income must be calculated using
nominal rate and included in profit or loss.

II. The said standard provides that interest income for irrevocable
designation at fair value option is based on the nominal interest rate
rather than the effective interest rate.

Answers:
1. C 4. F 7. F 10.1 F
2. D 5. B 8. F 10.2 T
3. T 6. T 9. F