TRUE OR FALSE. The underlined word or phrase is the one that makes the sentence false.If there is no underlined word, the statement is true. 22. The full disclosure principle states that the information should be provided when it is of sufficient importance to influence the judgment and decisions of an informed user. 1. Financial accounting focuses on general-purpose reports that are intended for internal and external 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. users. An accountant who prepares a balance sheet that does not balance had made a mistake somewhere because the balance sheet must balance. The fact that the equity represents an ownership interest and a residual claim against the net assets of an enterprise means in the event of liquidation, creditors have priority over owners in the distribution of assets. The economic entity assumption is useful only when the entity referred to is a profit-seeking business enterprise. To be reliable, accounting information must be capable of making a difference in a decision. A conceptual framework underlying financial accounting is necessary because future accounting problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary. The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent. As commonly used, the term “net assets” represents current assets minus current liabilities. Generally accepted accounting principles become “generally accepted” by agreement, often tacit agreement, rather than by formal derivation from a set of postulates and basic concepts. Accounting theory is developed without consideration of the environment within which it exists. Accrual accounting means that income is recognized when received regardless of when earned and expense is recognized when paid regardless of when incurred. If there is evidence that the entity would experience large and persistent losses or that the entity’s operations are to be terminated, the going concern assumption is abandoned. Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted. When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements. Information that has been measured and reported in a similar manner for different enterprises is considered comparable. A natural business year is a twelve-month period that ends on any month when the business is at the lowest or experiencing slack season. The three elements ~ assets, liabilities, and equity ~ describe transactions, events, and circumstances that affect an enterprise during a period of time. The conservatism convention allows for the reporting of financial information in any manner the accountant desires when there is doubt surrounding a particular issue. The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information. The monetary unit assumption means that the money (peso) is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. In case where there is a conflict, the requirements of the conceptual framework shall prevail over the Philippine Financial Reporting Standards. 23. Liquidity is the availability of cash over a long term to meet financial commitments when they fall due. 24. Under entity theory, the accounting objective is geared toward proper income determination. 25. The notes to financial statements generally summarize the items presented in the main body of the statements. IDENTIFICATION. Try to answer these! _______________ 1. _______________ 2. _______________ 3. _______________ 4. A list of names of all account titles Balance sheet accounts The function that general ledgers serve in the accounting process The responsibility for the proper preparation of a company’s financial statements rests with it. _______________ 5. The recognition or nonrecognition of business activities as accountable events _______________ 6. It refers to the financial flexibility of the enterprise. _______________ 7. It refers to the ability of the enterprise to pay currently maturing obligations. _______________ 8. The assumption on which the best indication of an enterprise’s present and continuing ability to generate favorable cash flows is information about enterprise earnings is based _______________ 9. The assigning of peso amounts to accountable economic transactions and events _______________ 10. In recognition of this, consolidated financial statements are prepared. _______________ 11. The number of members of FRSC _______________ 12. The level of income earned by an enterprise through efficient and effective utilization of its resources _______________ 13. Its main function is to establish and improve accounting standards that will be generally accepted in the Philippines. _______________ 14. It involves the examination of financial statements by an independent CPA for the purpose of expressing an opinion as to fairness _______________ 15. Continuation of an accounting entity in the absence of evidence to the contrary _______________ 16. A theoretical foundation which guides the ASC, preparers, and users of financial accounting information in preparation and presentation of financial statements _______________ 17. A listing of the components of account balances _______________ 18. Entries that transfer the balances in all of the nominal accounts to equity _______________ 19. The first step in the accounting cycle _______________ 20. The manner in which the accounting records are organized and employed within a business _______________ 21. An amount not paid and currently matched with earnings _______________ 22. An amount paid and not currently matched with earnings _______________ 23. An amount not received and currently matched with earnings _______________ 24. An amount received and not currently matched with earnings _______________ 25. When special journals are used, adjusting and closing entries are generally recorded in it. Specialized reports for inventory management and control c. The firm’s potential for growth in stock values in the stock market d. closing. All of the above Which of the following financial statements users need financial information to enable them to assess the ability of the enterprise to pay dividends? a. d. The fair value of the firm’s assets at some moment in time b. Generally accepted accounting principles b. Publication in the official gazette or in a newspaper of general circulation d. Accounting constraints c. measurement. To present management’s responses to auditor comments 12. and inventories. reversing What is the purpose of nominal accounts? a. production. Approval by the Professional Regulation Commission The business reason usually given for a business to select a fiscal year different from the calendar year is a. and net worth 11. Creditors d. Employees c. Private accounting c. closing. General-purpose reports on changes in stock prices and future estimates of market position 13. To provide recognition of amounts not included in the totals of the financial statements d. 8. The firm’s owners may have a personal preference. and procedures necessary to define what is accepted accounting practice. adjusting. Public accounting b. Distribution of the exposure draft for comment to PICPA members. Preparation and approval by a task force established by the FRSC chairman of a draft of a proposed SFAS b. To correct improper presentation in the financial statements c. Financial accounting is concerned with a. 4. 10. The status of a firm’s assets in case of forced liquidation of the firm c. 9. General-purpose reports on financial position and results of operations b. Investors b. To record all transactions initially 2.MULTIPLE CHOICES. and communication of financial information d. . Government accounting d. debts. Suppliers 7. To facilitate accounting for small amounts c. 1. Identification. Public accounting firms might not be able to handle the workload if all their clients were to report on a calendar-year basis. rules. Many CPAs join the in-house accounting staff of a business. a. adjusting. They are said to be engaged in a. Financial accounting 5. Communication of financial information to interested persons b. Posting. The primary purpose of the Statement of Financial Position of a business enterprise is to reflect a. Tax laws favor firms which employ a fiscal year other than the calendar year. 6. Going concern The correct order of the following steps of the accounting cycle is a. Suppliers The following procedures are involved in the FRSC standard-setting process. Conceptual framework d. and other interested parties c. adjusting. reversing. Financial advisers b. reversing c. The fiscal year-end is selected to coincide with the low points in sales. Verifiability d. b. Communication of financial information about economic entities c. c. Accounting assumptions Financial statement users with a direct economic interest in a specific business include a. Regulatory bodies c. which may occur at some period other than the calendar year-end. 3. FINEX members. reversing b. closing d. except a. To provide temporary accumulations of certain account balances for a meaningful period of time b. To correct errors as they are detected d. Specialized reports for income tax computation and recognition d. closing. This requires reporting of information that has a value significant enough to affect decisions of those using the financial statements. To provide disclosures required by generally accepted accounting principles b. Materiality c. Accounting entity b. Posting. Posting. Items of value. They encompass the conventions. posting. What is the purpose of information presented in notes to financial statements? a. a. The essential characteristic/s of accounting is/are a. Stock markets d. Adjusting. and description of major products. b. An example of a nominal account a. Unit of measure d. rather than to individual enterprises or an economy as a whole or to members of society as consumers c. Provision of information that is useful to present and potential investors. Direct measurement of the value of a business enterprise b. Generally accepted accounting principles 22. To assist FRSC in developing accounting standards c. after recording regular transactions of the period. d. Direct measurement of the enterprise’s stock price 16. The term “double-entry system” refers to a. The use of a journal and a ledger 25. To assist preparers of financial statements in applying PFRS d. Financial statements to be used primarily by management 17. Capital stock c. c. Periodicity c. The use of two journals d. A primary objective of external financial reporting is a. To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of accountancy in the Philippines 21. and an economy as a whole. Reversing entries are identical to the adjusting entries made in the previous period. Its objective is to achieve uniformity in the accounting principles which are used by business enterprises around the world. Notes to financial statements d. The information provided by financial reporting pertains to a.14. World Bank 18. The recording of reversing entries is a mandatory step in the accounting cycle. This is in accordance with which basic accounting concept? a. Individual business enterprises. Definition. The following are included in the scope of the ASC conceptual framework. a. Why are adjusting entries necessary? a. prospectuses. Relevance d. Conservatism c. Customer deposits b. recognition. The recording of each transaction in two parts c. International Accounting Standards Committee b. General-purpose financial statements to be used by parties internal to the business enterprise only b. Financial statements b. Going concern b. rather than to members of society as consumers d. except a. Accountants prepare financial statements at arbitrary points in time during the lifetime of an entity. Which of the following is an accounting constraint? a. rather than to industries or an economy as a whole or to members of society as consumers b. and measurement of the elements of financial statements d. Audit reports 23. . Financial reports c. Business industries. Securities and Exchange Commission d. To record revenues and expenses b. Financial statements to be used by investors only c. General-purpose financial statements to be used by parties both internal and external to the business enterprise d. creditors. Qualitative characteristics that determine usefulness of financial accounting information c. Sales returns 24. Reversing entries are the exact opposite of the adjustments made in the previous period. rather than to individual enterprises or industries 15. To assist FRSC in reviewing and adopting IAS b. To correct erroneous balances in accounts 26. and others in making rational financial decisions regarding the enterprise c. industries. Objective of financial statements b. An economy as a whole and to members of society as consumers. a. The use of real and nominal accounts b. To make debits equal credits c. Cost-benefit b. Which of the following statements is a correct description of reversing entries? a. Petty cash d. Financial Accounting Standards Board c. Financial accounting can be broadly defined as the area of accounting that prepares a. Which of the following is not a purpose of a conceptual framework? a. Reliability 20. Reversing entries are made at the end of the next accounting period. Individual business enterprises. Establishment of rules for accruing liabilities d. Accrual 19. To close nominal accounts at year-end d. These include not only financial statements but also other information such as supplementary schedules in a corporate annual report. Which of the following documents does not initiate an entry to be made in the accounts? a. Allowance for bad debts 34. A trial balance proves that no errors of any kind have been made in the accounts during the accounting period. Basic elements b. Which of the following is an adjunct account? a. Cash disbursements journal 38. A voucher system is used in connection with transaction that involve only a. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance? a. Sales invoice b. Cash receipts journal c. These broad classes are the a. b.27. Accrued revenue d. Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. d. Which of the following statements regarding a trial balance is false? a. 39. Conservatism c. in which journal would the sale of merchandise for cash be recorded? a. Credit to an account in the asset category c. Purchase order d. Credit to an account in the owners’ equity category d. Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. Asset valuation accounts are a. Purchase invoice 37. Product unit costs were assigned to cost of good sold when the units were sold. A trial balance is a list of all of the open accounts in the ledger with their balances as of a given date. 30. Basic objectives d. Premium on bonds payable d. Salespersons’ commissions c. An adjusting entry that records the earned portion of unearned revenue previously recorded always includes a a. Which term appropriately describes the prepayment from the perspective of the service providers? a. Revenue and expense d. Unearned revenue for the entire proceeds 28. If an enterprise uses special journals. Transportation to customers d. Liabilities 29. General journal d. The receipt of cash b. Credit to an account in the liability category 35. Unearned revenue to the extent of related costs expended d. b. Cash was collected on accounts receivable. Basic principles c. Neither assets nor liabilities c. Credit memorandum c. Reporting inventory at the lower of cost or market is a departure from the accounting principles of a. The payment of cash c. The purchase and sale of merchandise 33. c. Earned revenue c. Prepaid insurance 31. Historical cost b. Unearned revenue b. Depreciated equipment was sold in exchange for a note receivable. An example of such cost is a. Prepaid expense 36. Sales journal b. Part of stockholders’ equity d. c. Cash b. Basic assumption . Revenue for the entire proceeds b. Full disclosure 32. A trial balance is a test of equality of the debit and credit balances in the ledger. Consistency d. Salespersons’ monthly salaries b. d. Assets b. Accounts receivable c. Which of the following statements conforms to the realization concept? a. Debit to an account in the asset category b. Revenue to the extent of related costs expended c. A trial balance helps to localize errors within an identifiable time period. Equipment depreciation was assigned to a production department and then to product unit costs. A company that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months’ service at the beginning of each new quarter. Losses are material items. Disclosure b. Under a loyalty agreement with another enterprise. Systematic and rational allocation d. Materiality d. Matching is not being followed. The write-off of the asset in 2008 is an application of which of the following principles? a. Substance over form is being followed. This explanation pertains to a. 48. d. Expensed in the period in which the related revenue is recognized. purchased in 2003 and amortized over a 15-year life. Immediate recognition c. c. c. An increase in a liability from incidental transactions d. d. It is probable that future economic benefits will flow to the enterprise. whereas expenses are not reported net of tax. whereas expenses are immaterial items. b. Going concern is not being followed. d. It is possible that reliably measurably future economic benefits will flow to the enterprise. Research and development costs d. The obligation must have arisen as the result of a previous transaction. Capitalized and then amortized over a period not exceeding 60 months. whereas expenses result from ongoing major or central operations of the entity. Sales commissions c. b. The future economic benefits can be measured reliably. 41. was determined to be worthless in 2008. b. b. Associating cause and effect b. c. The identity of the recipient entity must be known to the obligated entity before the time of settlement. When bad debt expense is estimated on the basis of the percentage of past actual losses from bad debts to past net credit sales and this percentage is adjusted for anticipated conditions. Evenly over the life of the royalty agreement 46. When is revenue recognized? a. In the period received d. The claims to an asset’s benefits are legally enforceable. Which of the following best describes the distinction between expenses and losses? a. Which of the following is an application of the principle of systematic and rational allocation? a. Losses result from peripheral or incidental transactions. A decrease in an asset from primary operations b. An asset is obtained at a cost. b. A patent. which of the following is an essential characteristic of an asset? a. 43. An increase in an asset from incidental transactions c. A decrease in a liability from primary operations 44. a company will receive royalties from the assignment of a patent for 2 years. 45. According to the ASC conceptual framework. d. c. Matching concept 47. An asset provides future benefits. the accounting concept of a. Matching is being followed. d. In the period earned c. Allocated to specific products based on the best estimate of the production processing time. Amortization of intangible assets b. 42. b. Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. 49. Officers’ salaries 50. whereas expenses are ordinary charges. Losses are reported net of related tax effect. Accrual accounting c. The royalties received should be reported as revenue a. c. It is probable that reliably measurable future economic benefits will flow to the enterprise. An essential characteristic of a liability is that a. An asset is tangible. Charged to expense in the period incurred. An entity’s revenue may result from a.40. Costs that can be reasonably associated with specific revenues but not with specific products should be a. c. At the date of the royalty agreement b. It must be legally enforceable. Losses are extraordinary charges. Objectivity . The obligated enterprise must pay cash to a recipient entity. d.