Conceptual Framework & Accounting Standards 7.
In which of the following circumstances is
Midterm Exam, March 10, 2025 derecognition of a financial asset not
Questionnaire appropriate?
A. The financial asset has been transferred
1. Which of the following equations is not true? and the entity has retained substantially
A. Assets + Liabilities = Owner’s Equity all of the risks and rewards of ownership
B. Assets = Liabilities + Owner’s Equity of the transferred asset.
C. Assets – Owner’s Equity = Liabilities B. The contractual rights to the cash flows of the
D. Assets – Liabilities = Owner’s Equity financial asset have expired.
C. The financial asset has been transferred and
2. Which of the following statements is false? substantially all of the risks and rewards of
A. Financial reporting should provide ownership of the transferred asset have also
information which is relevant to investment, been transferred.
credit, and public policy decisions. D. The financial asset has been transferred and
B. Once established, GAAP should never be the entity has lost control of the transferred
changed. asset.
C. Generally speaking, GAAP are those
accounting principles with substantial 8. When classifying assets as current and
authoritative support. noncurrent
D. GAAP are established to ensure the A. The amount at which current assets are
relevancy of the general-purpose financial carried and reported must reflect realizable
statements to the widespread uses of the cash value.
information by external decision-makers. B. Assets are classified as current if they are
reasonably expected to be realized in
3. Continuing Professional Development (CPD) is cash or consumed during the normal
required for: operating cycle.
A. Renewal of CPA license C. Prepayments for items such as insurance are
B. Accreditation to practice accountancy included in “other assets” rather than as
profession current assets as they will ultimately be
C. Both the renewal of the CPA license and expensed.
accreditation to practice accountancy D. The time period by which current assets are
profession distinguished from noncurrent assets is
D. Neither renewal of CPA license nor determined by the seasonal nature of the
accreditation to practice accountancy business.
profession
9. Which of the following most clearly states the
4. Which of the following accounting concepts best most important quality which an expenditure
justifies the use of accruals and deferrals? must have to be recognized as an asset on the
A. Cost/benefit constraint balance sheet?
B. Unit-measure assumption A. It must be both material and relevant.
C. Materiality constraint B. It must be a physical object.
D. Continuity assumption C. It must be used in operation of the business.
D. It must have reasonably certain future
5. A firm signs a major contract in December to benefit to the business.
construct custom machinery for a client. No work
has begun the current year, yet the footnotes to 10. It is the removal of all or part of a recognized
the firm’s financial statements discuss the nature asset or liability from the statement of financial
and peso amount of the contract. This is an position.
example of A. Write-off
A. Reliability B. Derecognition
B. Historical Cost C. Extinguishment
C. Full Disclosure D. Retirement
D. Conservatism
11. The basic components of financial statements
6. How does the conceptual framework describe include (choose the incorrect one):
the qualitative characteristics of financial A. Statement of retained earnings
statements? B. Statement of changes in equity
A. Non-qualitative aspects of financial position C. Profit (loss) statement
and financial performance D. Statement of cash flow
B. Attributes that make the information
provided in financial statements useful to 12. When classifying assets as current and
users noncurrent
C. Measure the extent to which an entity has A. The amount at which current assets are
complied with all relevant standards and carried and reported must reflect realizable
interpretations cash value.
D. Broad classes of financial effects of B. Prepayments for items such as insurance are
transactions and other events included in “other assets” rather than as
current assets as they will ultimately be D. Attributes that make the information
expensed. provided in financial statements useful to
C. The time period by which current assets are users
distinguished from noncurrent assets is
determined by the seasonal nature of the 18. In determining the cost of goods sold:
business. A. Purchase discounts are deducted from net
D. Assets are classified as current if they are purchases
reasonably expected to be realized in B. Freight out is added to net purchases
cash or consumed during the normal C. Purchase returns and allowances are
operating cycle. deducted from net purchases
D. Freight in is added to net purchases
13. An entity shall present a statement of changes in
equity showing all of the following, except 19. Which of the following is not true about
A. Profit or loss for the period accounting for inventory?
B. Changes in cash and cash equivalents A. FIFO is allowed.
during the period. B. Interest costs may not be capitalized when
C. Each item of income or expense recognized financing the purchase of inventory.
directly in equity as required by the standard C. The weighted average method is acceptable.
D. Retained earnings balance and changes D. Inventories are always valued at net
therein realizable value.
14. Which of the following generally is considered as 20. Which of the following attributes would not be
a limitation of the statement of financial position? used to measure inventory?
A. The statement of financial position reflects A. Historical cost
the current value of the entity. B. Present value of future cash flows
B. The statement of financial position reflects C. Replacement cost
the instability of the peso. D. Net realizable value
C. Due to measurement problems, some
entity resources and obligations are not 21. Which of the following statements is true
reported on the statement of financial regarding inventory writedown and recovery of
position. writedown?
D. Statements of financial position formats and A. Recovery of inventory writedown is
classifications do not vary to reflect industry prohibited under PFRS.
differences. B. PFRS requires separate reporting of
reversal of inventory writedown.
15. An expense is recognized immediately in the C. PFRS requires entities to record writedown
income statement in a separate loss account.
I. When the expenditure produces no D. All of the choices are correct.
future economic benefits.
II. When the cost incurred ceases to qualify 22. Identify the cost formula that is described in the
for recognition as an asset in the following statements:
statement of financial position. Statement 1: The cost formula in which the
A. I only recent cost of purchases was used to determine
B. Both I and II the cost of ending inventory.
C. II only Statement 2: The cost formula in which the
D. Neither I nor II average cost of each inventory item in stock is
re-calculated after every inventory purchase.
16. Which of the following is true about financial A. FIFO, Moving Average
statement requirements? B. Specific Identification, Moving Average
A. Prior year comparative financial C. FIFO, Periodic Average
statements are required. D. Specific Identification, Periodic Average
B. Income statements for three years are
required. 23. Entity A is a manufacturing company. To account
C. Statements of financial position for three for its inventories, Entity A will most certainly
years are required. apply the specific provisions of
D. There are no specific requirements regarding A. PAS 7
comparative financial statements. B. PAS 2
C. PAS 1
17. How does the conceptual framework describe D. the Conceptual Framework
the qualitative characteristics of financial
statements? 24. PAS 2 provides guidance on
A. Non-qualitative aspects of financial position A. determining the cost of inventories
and financial performance recognized as an expense when the related
B. Measure the extent to which an entity has revenue is recognized.
complied with all relevant standards and B. determining the cost of inventories
interpretations recognized as an asset.
C. Broad classes of financial effects of C. the presentation of financial statements to
transactions and other events promote comparability.
D. a and b B. Decrease Increase
C. Increase Increase
25. Moniyan Company reported the inventory at D. Decrease Decrease
P5,000,000 on December 31, 2022.
• Merchandise shipped by a vendor FOB 30. In the cash flow statement, proceeds from short-
Destination on December 26, 2023 was term or long-term bank loan received are
received on January 2, 2024. The invoice classified as cash flow from
cost of P600,000 is included in the A. Operating activities
preliminary balance. B. Investing activities
• On December 31, 2023, the entity held C. Financing activities
P500,000 of merchandise on consignment D. Revenue activities
from another entity. This merchandise is
included in the preliminary balance. 31. Which of the following is not one of the
• On December 29, 2023, merchandise classifications of cash flows in the statement of
costing P200,000 was shipped FOB shipping cash flows?
point and arrived at the customer location on A. Extracurricular activities
January 3, 2024. The merchandise is not B. Operating activities
included in the preliminary balance C. Financing activities
What amount should be reported as inventory on D. Investing activities
December 31, 2023?
A. 3,900,000 32. Cash inflows or outflows relating to income and
B. 4,400,000 expenses are generally presented under
C. 4,500,000 A. Operating activities
D. 2,500,000 B. Financing activities
C. Investing activities
26. Which of the following transactions is included in D. Not presented
the operating activities section of a cash flow
statement prepared using the indirect method? 33. Albay Company reported net income of
A. Gain on sale of plant asset. P5,000,000 for the current year. Depreciation
B. Sale of property, plant and equipment. expense was P1,900,000. The following working
C. Payment of cash dividend to the capital accounts changed:
Accounts receivable 1,100,000 increase
shareholders. Trading equity investment 1,600,000 increase
D. Issuance of common stock to the Inventory 730,000 decrease
shareholders. Nontrade note payable 1,500,000 increase
Accounts payable 1,220,000 increase
What amount should be reported as net cash
27. Which of the following statements about the
flows provided by operating activities?
method of presenting the statement of cash
A. 7,750,000
flows is correct?
B. 4,690,000
A. The direct method is more consistent with
C. 7,650,000
the primary purpose of the statement of
D. 6,150,000
cash flows.
B. The indirect method starts with income
34. Which of the following is the best explanation
before income tax.
why accounting changes are classified into
C. The direct method is known as the
different categories?
reconciliation method.
A. The materiality of the changes involved.
D. All of these statements are correct.
B. Each category involves a different
method of recognizing changes in the
28. In preparing a statement of cash flows, cash
financial statements.
flows from operating activities:
C. The fact that some treatments are
A. Can be calculated by appropriately adding to
considered GAAP and some are not.
or deducting from net income those items in
D. A survey of managers and their need to
the income statement that do affect cash.
provide a favorable profit picture.
B. Can be calculated by appropriately
adding to or deducting from net income
35. Why is retrospective treatment of changes in
those items in the income statement that
accounting estimate prohibited?
do not affect cash.
A. The retrospective treatment for any type of
C. Are always equal to accrual accounting
presentation is not allowed.
income.
B. Retrospective treatment of changes in
D. Are calculated as the difference between
accounting estimate is prohibited because
revenue and expenses.
PFRS requires it.
C. The PFRS does not prohibit retrospective
29. When preparing a statement of cash flows, a
treatment of changes in accounting estimate
decrease in advance income during a period
but is silent on this issue.
would require which of the following adjustments
D. Changes in estimate are normal recurring
in determining cash flows from operating
corrections and adjustments which are
activities?
the natural result of the accounting
Indirect Method Direct Method
process.
A. Increase Decrease
X. decrease an expense
36. If it is impracticable to determine the cumulative Using the above, if an asset account is debited,
effect of an accounting change to any of the prior what are the five possible corresponding credits?
periods, the accounting change should be A. I, IV, VI, VIII, IX
accounted for B. I, III, V, VII, IX
A. As a prior adjustment C. II, IV, VI, VIII, X
B. On a prospective basis D. II, III, V, VII, X
C. As a cumulative effect change in the income
statement 42. During the current year, an entity discovered that
D. As an adjustment to retained earnings in the ending inventory reported in the preceding year
first period presented was understated. How should the entity account
for this understatement?
37. An entity that has included in consolidated A. Adjust the beginning inventory balance in the
financial statements this year a subsidiary current year.
acquired years ago that was appropriately B. Adjust the ending balance of retained
excluded from consolidation last year should earnings account in the current year-end.
report C. Restate the financial statements with
A. An accounting change prospectively. corrected balances for all periods
B. An accounting change retrospectively. presented
C. A correction of an error. D. Make no entry because the error will self-
D. Neither an accounting change nor a correct.
correction of an error.
43. An entity deals extensively with foreign entities
38. A voluntary change in accounting method may and the financial statements reflect these foreign
only be made if currency transactions. Subsequent to the end of
A. A new standard mandates the change in the reporting period and before the issuance of
method the financial statements, there were abnormal
B. The new method provides reliable and fluctuations in foreign currency rates. How
more relevant information should the entity account for this event?
C. Management prefers the new method A. Adjust the foreign exchange year-end
D. There is no prohibition for the change. balances to reflect the abnormal adverse
fluctuations in foreign exchange rate.
39. Dean has completed the posting process for the B. Adjust the foreign exchange year-end
month of June and has prepared a trial balance balances to reflect all the abnormal
in which the debits total ₱11,000 and the credits fluctuations in foreign exchange rate and not
total ₱11,100. Which of the following errors just adverse movements.
would be the most likely candidate in causing the C. Disclose the post-reporting period event
trial balance not to balance by ₱100? as a non-adjusting event.
A. A ₱100 debit was posted as a ₱100 credit D. Ignore the post-reporting period event.
B. A ₱100 debit was posted as a ₱100 credit
and a ₱100 credit was posted as a ₱100 44. Which of the following events after the reporting
debit period are treated as adjusting events?
C. A ₱50 debit was posted as a ₱50 credit A. The entity’s building is razed by fire. It is
D. The purchase of supplies on account was probable that the entity will be held liable for
never posted to the general ledger damages and a reliable estimate can be
made for the expected outflow.
40. A company using a perpetual inventory system B. A significant decline in the fair value of
neglected to record a purchase of merchandise investments in stocks.
on account at year-end. This merchandise was C. Discovery of prior-period fraud or errors.
omitted from the year-end physical count. How D. A majority portion of the entity’s outstanding
will these errors affect assets, liabilities, and shares is sold to a single acquirer.
stockholders’ equity at year-end and net income
for the year? 45. On December 31, 20X1, Ref Co. reported profit
Assets Liabities Stockholder’s Net
Equity Income of ₱10,000,000 before any possible adjustment.
A.
B.
No effect
No effect
Overstate
Overstate
Overstate
Understate
Overstate
Understate
In addition, Ref Co. reported its inventories at a
C. Understate Understate No effect No effect net realizable value of ₱80,000. The cost of the
D. Understate No effect Understate Understate
inventories is ₱100,000. Shortly after December
31, 20X1, but before the financial statements
41. Consider the following:
were authorized for issue, the inventories were
I. increase an asset
sold for a net sale proceeds of ₱70,000. What
II. decrease an asset
amount of adjusted profit is reported in Ref Co.’s
III. increase a liability
statement of profit or loss and other
IV. decrease a liability
comprehensive income for the year ended
V. increase owner's equity
December 31, 20X1?
VI. decrease owner's equity
A. 10,010,000
VII. increase a revenue
B. 10,000,000
VIII. decrease a revenue
C. 9,990,000
IX. increase an expense
D. 9,970,000
46. According to PAS 10, non-adjusting events after
the reporting period
A. require adjustments of amounts in the
financial statements.
B. do not require adjustments of amounts in the
financial statements, but are disclosed in the
notes.
C. do not require adjustments of amounts in
the financial statements, but are
disclosed in the notes if they are material.
D. are ignored.
47. Which of the following is the most likely to result
in a deferred tax liability?
A. Expenses and losses that are deductible
after they are recognized in financial income.
B. Revenues or gains that are taxable before
they are recognized in financial income.
C. Expenses and losses that are deductible
before they are recognized in financial
income.
D. Revenues or gains that are recognized in
financial income but are never included in
taxable income.
48. When accounting for income taxes, a temporary
difference occurs in which of the following
scenarios?
A. An item is included in the calculation of net
income, but is neither taxable nor deductible.
B. An item is included in the calculation of
net income in one year and in taxable
income in a different year.
C. An item is no longer taxable due to a change
in the tax law.
D. The accrual method of accounting is used.
49. Which of the following is true regarding reporting
deferred taxes in financial statements prepared
in accordance with IFRS?
A. Deferred tax assets and liabilities are
classified as current and noncurrent based
on their expiration dates.
B. Deferred tax assets and liabilities are
classified as noncurrent.
C. Deferred tax assets are always netted with
deferred tax liabilities to arrive at one amount
presented on the balance sheet.
D. Deferred taxes of one jurisdiction are offset
against another jurisdiction in the netting
process.
50. A taxable temporary difference arises when a
revenue item is reported for tax purposes in a
period
After it is Before it is
reported in reported in
financial income financial income
A. Yes Yes
B. Yes No
C. No Yes
D. No No