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Pre-week Summary I – Oct 2006 Page 1 FINANCIAL ACCOUNTINGAccounting and Financial Accounting Concepts 1 Overview of Accounting Which of the following statements about the nature of accounting is not true? a. Accounting is the language of business. b. Accounting identifies, measures and communicates ...

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Pre-week Summary I – Oct 2006

Page 1

FINANCIAL ACCOUNTING

Accounting and Financial Accounting Concepts 1.0 Overview of Accounting 1.

Which of the following statements about the nature of accounting is not true? a. Accounting is the language of business. b. Accounting identifies, measures and communicates financial information about economic entities for use by both external and internal users in making economic decisions c. Before accounting can render communication services, an economic entity should first be created d. Accounting communication services are available only to publicly accountable, medium-sized and small industries and not to micro entities

2.

Which of the following statements regarding accounting theory is [are} true? I . Accounting concepts are human made II. Accounting Theory can be defined as a coherent set of hypothetical, conceptual and pragmatic principles that form a general frame of reference for a field of inquiry III. Accounting theory has developed primarily in response to government regulations. Statement 1 Statement II Statement III Statement I Statement II Statement III a. true false true c. false true false b. true true false d. true true true 3.

Which of the following statements does not properly describe the fact that the Accountancy Profession is a communication profession? a. Financial statements should use terminology within the level of understanding of the statement user. b. Financial statements can be expressed in the Spanish or Chinese language c. Financial statements, as far as possible, should show information that can be verified from documentary evidence in order to gain the confidence of statement users d. Financial statements can be expressed in any dialect of a country

4.

Which one of the following is an application of the science aspect of Accounting? a. Exercise of creative skill and judgment b. Interpreting the information presented in the financial statements through ratios and trend analysis c. Use of an accounting equation to express the relationship of accountable events d. Attesting to the fairness of presentation of financial condition and operating results

5.

The art aspect of accounting is applied in the following circumstances except when a. The accountant refers to a body of organized knowledge in processing accounting information.

b. A provision is recognized on the basis of the company lawyer’s professional opinion that there is a strong probability that the company will lose in a lawsuit in the corridor of P 5 M to P 8 M c. The accountant chooses the most appropriate method of inventory valuation for the entity. d.. The external auditor gives an unqualified opinion that the financial statements are fairly presented in conformity with generally accepted accounting principles 6.

Which of the following statements is incorrect? a. General purpose financial statements were developed primarily because all outside party users have the same information needs b.The double-entry system of accounting has been used for centuries. c. The practice of accounting requires considerable professional judgment d.The objective of external financial statements is to communicate the economic effects of completed transactions and other events in the entity

7.

The branch of accounting that focuses on general purpose reports on financial position and results of operations is known as a. Financial accounting c. Bookkeeping b. Auditing d. Management Accounting

8.

Which of the following applies to financial accounting? a.

yes yes no no 9.

b.

c. d Information meets specific needs of particular statement users no no no Emphasizes objective data no no yes Future-oriented no yes no Basically concerned with income determination and asset valuation yes yes no The following descriptions pertain to limitations of financial accounting and financial statements except a. Historical in nature c. Centered on quantifiable information d. Records information on the b. Use of estimates basis of business papers

Accounting standard setting (institutions and process) 10. According to the Preface to International Financial Reporting Standards, which of the following are objectives of the IASB? I. To harmonize financial reporting between IFRS and US GAAP and the European II. To work actively with national standard setters III. To promote the use and strict application of financial accounting standards c. II and III a. I and II b. I and III d. I, II and III 11. Which of the following are parts of the “due process” of the IASB in issuing a new International Financial Reporting Standard? I. Establishing an advisory committee to give advice II. Developing and publishing a discussion document for public comment III Issuance of an interpretation as authoritative guidance IV Reviewing compliance and enforcement procedures V

Issuance of the final standard with number and title

V

Issuance of the final standard with number and title

a. I II & III only I, II, III, IV & V

b. I, II & V only

c. I, II, III & IV only

d.

12. As an assistance to the IASB and the accountancy profession and the public it serves, which of the following should IFRIC consider issuing an interpretation? I. Newly identified financial reporting issues not specifically addressed in IFRSs II. Issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop. III. Accounting issues affecting specific industry or specific country jurisdictions. IV. Issues where the IASB members cannot have a common agreement. a. I and II only b. I, II and III c. II, III and IV only d.. I, II, III and IV only 13. Which of the following statements about international accounting standards is true? a. Legal and psychological hurdles to achieving common reporting standards will be fully overcome by the year 2012, the time frame set for convergence between IAS and US GAAP b. Accounting professionals in the USA consider US GAAP superior to IAS and has no intention to adopt International Accounting Standards.. c. The IASB is able to enforce its standards by prohibiting the listing of companies which do not comply on stock exchanges which sell internationally. d. The International Accounting Standards Board (IASB) was established with the purpose of narrowing the range of divergence in accounting standards throughout the world. 14. Which one of the following bodies is responsible for reviewing accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance, whit a view to reaching consensus as to the appropriate accounting treatment? a. International Financial Reporting Interpretations Committee (IFRIC) b. Standards Advisory Council (SAC) c. International Accounting Standards Board (IASB) d. International Accounting Standards Committee Foundation (IASC Foundation) 15. Which of the following statements relating to the FRSC and standard setting process in the Philippines. Which of these is (are) true? I. All members of the FRSC should be CPAs II. The Financial Reporting Standards Council (FRSC) Board of Accountancy (BOA) and Professional Regulation Commission (PRC) are all involved in the standard setting process, with PRC as the final approving authority. a. Only I is true b. Only II is true c. I and II are true d. and II are false

I

16. Who among the following may be nominated for membership in Financial Reporting Standards Council? a. A member of FINEX who is a CPA and is a Finance Officer of the company he represents b. The BIR Commissioner who is a LAWYER c. A director of the Securities and Exchange Commission who is not a CPA d. A Deputy governor of the Central Bank who is not a CPA

The Conceptual Framework 17. The objectives of financial reporting for business enterprises are based on a. the need for conservative information b. the needs of the users of the information c. the need to comply with financial accounting standards d. the need to report on management’s stewardship 18. Which statement is false concerning users and their information needs? a. Lenders are interested in information that enables them to determine whether their loans and the interest on these loans will be paid when due. b. The providers of risk capital and their advisers are concerned with the risk inherent in and return provided by their investments. c. Government and its agencies have an interest in information about the continuance of an enterprise, especially when they have long-term involvement or are dependent on the enterprise. d. Employees and their representative groups are interested in information about the stability and profitability of their employees. 19. Which of the following statements regarding users of financial information is correct? a. External decision makers can obtain whatever financial data they need and whenever they need it. b. Accounting information is prepared for and useful to only outside decision makers c. The members of the Board of Directors are not internal rather than external users of financial information d. Managers of an entity are considered to be internal decision makers. 20.

Which one of the following term best describes the amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal? a . Fair value c. Residual value b. Realizable value d. Value in use

21. Are the following statements regarding the term 'profit' true or false? (1) Profit is any amount over and above that is required to maintain the capital at the beginning of the period. (2) Profit is the residual amount that remains after expenses have been deducted from income. Statement (1) Statement (2) Statement 1) Statement (2) a. False False c. True False d. True b False True True 22.

Which of the following statements best describes the term 'going concern'? a. When current liabilities of an entity exceed current assets b. The ability of the entity to continue in operation for the foreseeable future c. The potential to contribute to the flow of cash and cash equivalents to the entity d. The expenses of an entity exceed its income

23.

Which of the following terms best describes the relationship of the assets, liabilities and equity of an entity? a. Financial performance b . Financial position c. Future economic benefit d. Obligation

24.

Which of the following terms best describes assets recorded at the amount that represents the immediate purchase cost of an equivalent asset? a. Historical cost b. Realizable value c. Present value d. Current cost

25. Which of the following is true of the qualitative characteristic of 'understandability' in relation to information in financial statements? a. Users should be willing to study the information with reasonable diligence b. Users are expected to have significant business knowledge c. Financial statements should exclude complex matters d. Financial statements should be fee from material error 26. Which of the following terms describing information in the financial statements are properly matched? a. Understandable and comparable c. Prudent and relevant b. Reliable and verifiable d. Unbiased and neutral 27. Which of the following is the best description of 'reliability' in relation to information in financial statements? a. Influence on the economic decisions of users c. Inclusion of a degree of caution b. Freedom from material error and bias d. Comprehensibility to users 28. This is the quality of information that influences the economic decisions of financial statement users? a. Relevance b. Reliability c. Understandability d. Comparability 29. According to the IASB Framework for the preparation and presentation of financial statements, which TWO of the following are examples of 'expenses'? I. A loss on the disposal of a non-current asset II A decrease in equity arising from a distribution to equity participants III A decrease in economic benefits during the accounting period IV A reduction in income for the accounting period c. I and III d. a. I and II b. II and III III and IV 30. If accounting information is timely, and has predictive as well as feedback value, then it is considered to be a. verifiable c. reliable b. relevant d. understandable 31. Which of the following accounting concepts states that before a transaction is recorded, sufficient evidence must exist to allow two or more knowledgeable individuals to reach essentially the same conclusion about the transaction? c. Reliability quality a. Continuity assumption b. Separate entity assumption d. Materiality constraint 32. Which of the following statements about prudence and conservatism is (are) true? I. Conservatism is not a concept in the IASB Conceptual Framework II. Prudence is the same as conservatism III. Conservatism is intentional bias --- downward bias in recognizing profits and assets and an upward bias in recognizing expenses and liabilities IV. Prudence is the inclusion of a degree of caution in the exercise of judgments needed in making the estimates required under conditions of uncertainty c. I, III and IV only a. I, II and III only

b. II, III and IV only 33.

d.

I, II, III and IV

In the first week of December, 2011, Elisa Company signs a major contract to develop an accounting information system for Edward Inc. No work is begun the current year, yet the notes to the financial statements discusses the nature and peso amount of the contract. This is an example of: a. completeness or full disclosure c. relevance b. historical cost d. conservatism

34. A company reports only its total accounts receivable balance in its balance sheet, as opposed to a complete listing of its individual customer balances. This is an example of a. consistency b. materiality c. cost/benefit d. conservatism 35. Which of the following statements is true with regard to the accountant’s concept of Materiality? a. Materiality is the threshold of recognition as to what accountable events will be recognized in the balance sheet and which will be recognized in the income statement. b. Materiality judgments generally may be based solely on the magnitude of the item c. Materiality judgments generally may be made without consideration of the magnitude of the item involved. d. Relevant items are always material 36. According to the Conceptual Framework, which of the following is not a primary qualitative characteristic that make the information provided in financial statements useful to users? c Materiality a. Comparability b. Relevance d Understandability 37. Are the following statements in relation to materiality true or false, according to PAS 1 (1) Materiality of items depends on their individual or collective influence on the economic decisions of users (2) Materiality of an item depends on its absolute size and nature (3) Materiality serves as the threshold of recognition in deciding whether a financial information is relevant to be included in the statement of financial position or to the income statement Statement (1) Statement (2) Statement (3) a. true false true b. true true false c. false false fakse d. true false false 38. Comparability of financial information depends on A B Consistency Yes Yes Regular reporting periods Yes No

C No No

D No Yes

39. 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. providing relevant data at the expense of reliability b. invoking the materiality constraint rather than cost benefit constraint c. conservatism d. maintaining consistency

40. Which of the following situations violates the concept of reliability? a. Financial statements were issued nine months late b. Report on segments having the same expected risks and growth rates to analysts estimating future periods c. Financial statements included property with a carrying amount increased to management’s estimate of market value d. Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results. 41.

Which of the following statements about the qualitative characteristics is (are) true? I. Relevance is the capacity of information to make a difference in decision by helping users form predictions about outcome of past, present and future events or confirm /correct prior expectations II. The quality of reliability assures readers that the financial information is free from bias and faithfully represents what it purports to show, including adequate disclosure of significant information III. Under the IASB Framework for the Preparation and presentation of financial statements, conservatism is not a concept that is recognized as a qualitative objective. d. I, a. I and II only b. I and III only c. II and III only II and III 42. Which TWO of the following are listed in the IASB Framework as 'underlying assumptions' regarding financial statements? A The financial statements are prepared under the accrual basis B. The entity can be viewed as a going concern C. The financial statements are reliable D Accounting policies are consistently applied a. A and B b. B and C c. B and D d. and D 43.

C

Which TWO of the following statements concerning the provisions of the Conceptual Framework are correct? I. The Framework provides that transactions must be accounted for in accordance with their legal form II. The primary responsibility for the preparation and presentation of the financial statements of the entity rests with both its management and its external auditor III. It is not proper that financial statements should exclude complex matters simply in order to achieve understandability IV Where any conflict arises between the Framework and an accounting standard, the requirements of the accounting standards should prevail d. a. I and II b. I and IV c. II and III III and IV Basic Assumptions of Accounting 44. Richard Santos is the owner and manager of Santos Landscaping Services. Santos purchased a new station wagon for personal use and a dump truck to be used in the business. Which of the following assumptions, principles, or constraints would be violated if both station wagon and dump truck are

recorded as assets of the business? a. Materiality constraint assumption b. Conservatism constraint assumption

c. Continuity d.

Separate entity

45.

Adjusting entries are needed because in reporting financial data an entity I. Adopts the accrual assumption II Reports on transactions that overlap accounting periods III. Adopts the going concern assumption a. I only b. I and II only c. II and III d. I, II and III 46.

Fatima Inc. is a company whose securities are traded on over-the-counter market. It controls Portugal Corp. Consolidated financial statements are prepared in recognition of the accounting concept of b. Materiality c. Legal entity a. Economic entity d. Flexibility 47.

Which one of the following statements best describes the term “going concern”? a. When current liabilities of an entity exceeds current assets b. The ability of the entity to continue in operation for. the foreseeable future c. The potential to contribute to the flow of cash and cash equivalents to the entity d. The expenses of an entity exceed its income Principles of Recognition and Measurement (Assets, Liabilities, Equity, Revenue, Expense) 48. Are the following statements regarding “recognition” true or false? (1) An accountable item is deemed “recognized” if it is recorded in the journals and ledgers. (2) Recognition is the process of determining the amounts at which elements of the financial statements are to be recognized, (3) Recognition is the process of incorporating in the financial statements an ...