Batch 18 1st Preboard (TOA) PDF

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DySAS Center for CPA Review2F & 3F Mitra Building, San Pedro Street, Davao City Tel. No. (082) 224-43-20: E-mail Address – dysasrev@yahooTheory of Accounts John C. Frivaldo, CPA, MBA FIRST PRE-BOARD EXAMINATION July 4, 2009 @ 8:00 – 10:00 AM ==================================================...

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DySASCe nt erf orCPA Re vi ew 2F & 3F Mitra Building, San Pedro Street, Davao City Tel. No. (082) 224-43-20: E-mail Address – [email protected] Theory of Accounts John C. Frivaldo, CPA, MBA FIRST PRE-BOARD EXAMINATION July 4, 2009 @ 8:00 – 10:00 AM =========================================================== INSTRUCTIONS: Select the best answer by marking with Pencil No. 1 the letter of your choice. Follow the marking (one vertical line) as indicated on the Answer Sheet provided. Be sure that you are using the correct Answer Sheet for this subject. Also, mark the proper SET (either SET A OR SET B) for appropriate computer checking. STRICTLY NO ERASURES ALLOWED. 1.

Choose the correct statement. (a) Financial accounting is a social science and cannot be influenced by changes in legal, political, business and social environments. (b) Financial accounting is an information system designed to provide information primarily to the internal users. (c) General-purpose financial statements must be prepared by a certified public accountant. (d) The preparation of general-purpose financial statements is usually based on the assumption that the primary users of the information are external decision makers. D

2.

Which of the following statements is false? (a) Financial reporting should provide information which is relevant to investment, credit and public policy decisions. (b) Generally speaking, GAAP are those accounting principles with substantial authoritative support. (c) GAAP are established to ensure the relevancy of the general-purpose financial statements to the widespread uses of the information by external decision makers. (d) Once established, GAAP should never be changed. D

3.

A firm signs a major contract in December to construct custom machinery for a client. No work is begun the current year yet the footnotes to the firm’s financial statements discuss the nature and peso amount of the contract. This is an example of (a) reliability (c) historical cost (b) full disclosure (d) conservatism B

4.

The sales manager of a firm has the use of a blue company-owned automobile to use to visit potential customers. The sales manager owns her own identical car except that it is red. The manager paid for the red car with funds earned from her employment as sales manager. The firm will report the cost of the blue auto in its balance sheet, but not the red auto. This is an example of (a) Reliability (c) Separate entity (b) Matching (d) Going concern C

5.

The recognition of periodic depreciation expense on company-owned automobiles requires estimating both salvage or residual value, and the useful life of the vehicles. The use of estimates in this case is an example of (a) conservatism (b) maintaining consistency (c) invoking the materiality constraint rather than cost benefit constraint (d) providing relevant data at the expense of reliability D

6.

A firm purchased P40,000 of supplies in its first year of operations but used up only P30,000 of the supplies during the year. Therefore, (a) Under the relevance characteristics, the firm should expense P40,000 (b) Because the firm is a going concern, the firm should record P40,000 of supplies in the balance sheet at the end of the year. (c) Under the materiality constraint, it makes no difference what the firm does with respect to accounting for supplies (d) Under the matching concept, the firm should report P30,000 of expense. D

7.

Which of the following is the incorrect basis for recognizing the expense indicated? (a) Sales commission expense on the basis of relationship with sales. (b) Administrative salaries expense recognized as incurred. (c) Depreciation expense on the basis of time. (d) Cost of goods sold expense on a subjective or arbitrary basis.

D

8.

A corporation needed a new warehouse; a contractor quoted a P250,000 prices to construct it. The corporation believed that it could build the warehouse for P215,000 and decided to use company employees to construct the warehouse. The final construction cost incurred by the corporation was P240,000 but the asset was recorded at P250,000. This is in violation of the: (a) time period assumption (c) cost principle (b) matching principle (d) revenue principle C

9.

Which of the following accounting concepts best justifies the use of accruals and deferrals? (a) Cost/benefit constraint (c) Continuity assumption (b) Unit-measure assumption (d) Materiality constraint C

10.

Which of the following most clearly states the most important quality which an expenditure must have to be recognized as an asset on the balance sheet? (a) It must be both material and relevant (b) It must have reasonably certain future benefit to the business. (c) It must be a physical object (d) It must be used in operation of the business. B

11.

How many of the following transactions would appear on the statement of cash flows or in its subschedules? I. Sold and issued new shares of common stock, P30,000. II. Purchased a new machine and paid for it in full by issuing company’s own common stock. III. Purchased land for cash, P20,000. IV. Sales revenue, P500,000. (a) One (b) Two (c) Three (d) Four C

12.

In a statement of cash flows: (a) net cash flow from operating activities is always the same as net income. (b) net cash flow from operating activities must be the same as net increase in cash during the period. (c) net cash flow from operating activities may be less than or greater than net income. (d) net cash flow from operating activities is always greater than net income. C

13.

Which of the following would least likely be shown in one of the three activity sections of the statement of cash flows? (a) refinancing a bond issue currently due with a new bond issue (b) an increase in trade accounts receivable over the period (c) purchase of a subsidiary corporation (d) a decrease in long-term notes payable over the period A

14.

Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? (a) depreciation expense for the period (b) the change in deferred taxes (c) the amount by which equity income recognized exceeds cash received (d) all of the above D

15.

Which statement is true for gains and losses from capital asset sales? (a) They do not affect cash and are excluded from the statement of cash flows. (b) They are included in cash flows from operating activities. (c) They are included in cash flows from investing activities. (d) They are included in cash flows from financing activities.

B

16.

Which of the following statements is false? (a) A negative cash flow can occur in a year in which net income is positive. (b) An increase in accounts receivable represents accounts not yet collected in cash. (c) An increase in accounts payable represents accounts not yet collected in cash. (d) To obtain cash flow from operations, the reported net income must be adjusted.

C

17.

Which of the following could lead to cash flow problem? (a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers (b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers (c) Obsolete inventory, increasing notes payable, easing of credit of suppliers. (d) Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers B

18.

Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to: (a) disclosure (c) materiality (b) accrual accounting (d) the matching process B

19.

A tabular statement or summary of balances (debit and credit) carried forward after an actual or constructive closing of books of accounts, kept according to principles of accounting, is more commonly known as: (a) balance sheet (c) schedule (b) statement of accounts (d) trial balance A

20.

Current assets are shown on the balance sheet to include inventories, prepaid salaries, store supplies, marketable securities, notes receivable, accrued rental income and others, which ought to be arranged in the order of: (a) their materiality (c) their quantifiability (b) their marketability (d) their liquidity D

21.

Which of the following is a current asset? (a) cash surrender value of a life insurance policy, where the company is the beneficiary (b) investment in marketable securities for the purpose of controlling the issuing company (c) cash designated for the purchase of tangible fixed assets (d) trade installments receivable normally collectible in 24 months D

22.

Of the following asset items, which one is termed current? (a) advances to subsidiaries and affiliates (c) marketable securities (b) cash surrender value of life insurance policy (d) depreciable assets

C

Which should not be classified as a current asset? (a) cash surrender value of life insurance (c) prepaid expenses (b) temporary investment (d) deposit made with suppliers

A

23.

24.

Liquid assets usually do not include: (a) goods being made under contract (b) 90-day treasury bill

(c) common stock held as investments (d) goodwill D

25.

Revenue is derived from these activities: (a) selling products, rendering services, permitting others to use enterprise resources, disposing of resources other than products (b) selling products, rendering services, adjustment of revenue of prior periods, proceeds from borrowings (c) selling products, rendering services, investment by owners (d) all of the above A

26.

The basic components of financial statements include (choose the incorrect one): (a) statement of changes in equity (c) statement of retained earnings (b) statement of earnings (d) cash flow statement C

27.

Disclosure of accounting policies: (a) requires description of every accounting policy followed by a reporting entity (b) provides a specific listing of all types of accounting policies which must be disclosed (c) requires disclosure of the format for the statement of changes in financial position (d) requires description of all significant accounting policies to be included as an integral part of the financial statements D

28.

Which of the following should be disclosed in the summary of significant accounting policies? (a) rent expense amount (c) methods of amortizing intangibles (b) maturity dates of long-term debt (d) composition of plant assets C

29.

An example of inventory accounting policy that should be disclosed is the: (a) effect of inventory profits caused by inflation (b) composition of inventory into raw materials, work in process, and finished goods (c) identification of major suppliers (d) method used for inventory pricing D

30.

Development stage enterprises should present financial statements in conformity with: (a) special accounting and reporting practices (b) generally accepted accounting principles of established operating enterprises together with certain additional disclosures (c) generally accepted accounting principles, except that all costs can be deferred regardless of recoverability (d) generally accepted accounting principles, except that revenue can be offset against certain deferred costs. B

31. The financial capital concept requires that net assets should be stated at? (a) historical cost (b) current cost (c) historical cost adjusted for changes in purchasing power (d) current cost adjusted for changes in purchasing power

A

32. Under the financial capital concept, a profit is earned only if: (a) the monetary amount of net assets at the end of the period exceeds the monetary amount of net assets of the beginning of the period. (b) the monetary amount of net assets at the beginning of the period exceeds the monetary amount of net assets of the end of the period. (c) the monetary amount of net assets at the beginning of the period exceeds the monetary amount of net assets of the end of the period, after excluding any distributions to and contributions from owners. (d) the monetary amount of net assets at the end of the period exceeds the monetary amount of net assets of the beginning of the period, after excluding any distributions to and contributions from owners. D 33. Under the physical capital concept, a profit is earned only if: (a) the physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period. (b) the physical productive capacity of the entity at the beginning of the period exceeds the physical productive capacity at the end of the period. (c) the physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to and contributions from owners. (d) the physical productive capacity of the entity at the beginning of the period exceeds the physical productive capacity at the end of the period, after excluding any distributions to and contributions from owners. C 34. As a minimum, the face of the income statement shall include certain line items. Additional line items, headings and subtotals shall be presented on the face of the income statement: I. When such presentation is relevant to an understanding of the entity’s financial performance. II. When such presentation is relevant to an understanding of the entity’s financial position. (a) I only (c) both I and II (b) II only (d) neither I nor II A

35. Which statement is incorrect concerning the presentation of the income statement? (a) The nature of expense method means that expenses are aggregated according to their nature, for example, depreciation, purchases, employee benefits and advertising. (b) The function of expense method classifies expenses according to their function as part of cost of sales, cost of distribution and cost of administrative activities. (c) Because the nature of expense method or the function of expense method has merit for the different types of entities, the standard requires management to select the more relevant and reliable presentation. (d) If the function of expense method is used, no additional disclosure is required about the nature of expenses. D 36. Which statement is incorrect concerning the income statement? (a) All items of income and expense recognized in a period shall be included in profit or loss unless a Standard or an Interpretation requires otherwise. (b) An entity shall present extraordinary items separately on the face of the income statement or in the notes. (c) When items of income and expense are material, their nature and amount shall be disclosed separately. (d) An entity shall disclose either on the face of the income statement or the statement of changes in equity, or in the notes, the amount of dividends as distributions to equity holders during the period and the related amount per share. B 37. Under a strict transaction approach to income measurement, which of the following would not be considered a transaction? (a) Sale of goods at 25% markup (b) Payment of salaries (c) Adjustment of inventory to lower of cost or market when market is below cost (d) Exchange of inventory valued at regular selling price for an equipment C 38. An entity classifies expenses by logistics, quality control, manufacturing, plant engineering, sales and marketing, research and development, finance and administration. The classification basis is by: (a) Object of expenditure (c) Area of responsibility (b) Services received (d) Function performed D 39. An entity sold one of its ships and used the proceeds to acquire a new ship. The excess of the proceeds over the net book value of the ship sold should be treated as: (a) a gain from discontinued operations, net of income tax (b) part of continuing operations (c) as extraordinary gain, net of income tax (d) a reduction of the cost of the new ship B 40. As a result of a six-month dry spell which benefited its tobacco plantation, an entity realized a 30% increase in its usual gains from operating the plantation. A six-month dry spell has never before occurred within the vicinity of the entity’s tobacco plantation and is not expected to recur in the foreseeable future. The gain should be: (a) reported with the results of continuing operations but appropriate disclosure of the gain should be made in the notes (b) segregated from the results of continuing operations and also shown separately in the income statement (c) reported as component of equity (d) reported in the statement of retained earnings A 41. Which of the following events would most likely have no effect on net income of the current year assuming that all the amounts involved are material? (a) Sale in the current year of a parcel of land which was contributed by a stockholder (b) Writing off in the current year the value of the stocks previously purchased due to the bankruptcy and closure of the issuing company (c) Settlement in the current year by way of litigation of previously unrecognized damages from serious accident that occurred in prior year (d) Collection in the current year of a receivable which was written off in prior year D...