DySAS Center for CPA Review (DCCPAR)

2nd Floor Mitra Bldg. (Mercury Drug) San Pedro St., Davao City

FINANCIAL ACCOUNTING
Review Material

Weekend Session Oct 2005

Mr. John C. Frivaldo, MBA, CPA

FRAMEWORK OF ACCOUNTING

1. The historical cost concept measures assets on the basis of: (a) the replacement cost of assets on the balance sheet (b) the amount of cash for which the assets could be sold (c) an appraisal by the auditors (d) the fair market value of assets on the day they were acquired

2. The concept that requires assets and liabilities to be recorded at their original costs and not to be adjusted for change in value is: (a) the concept of quantifiability (c) the matching concept (b) the historical cost concept (d) the concept of conservatism B 3. Leo wrapped his family station wagon around a very large tree. Which of the following assumptions will prevent Leo from reporting the loss of his automobile on the balance sheet of his family-owned-and-operation liquor store? (a) the historical cost assumption (c) the corporate assumption (b) the going concern assumption (d) the entity assumption D 4. Under the accountants interpretation of measuring income and reporting financial position, which of the following would be of least importance? (a) capital contributions and withdrawals during the period (b) the current values of net assets during the period (c) the historical cost of net assets at the end of the period (d) income statement transactions during the period B 5. In financial accounting, gains may be defined as: (a) total receipts of cash (b) total receipts of cash in excess of the historical costs of the assets being sold (c) total revenues (d) total increases in net assets other than revenues

6. Revenues may be defined as: (a) increases in assets from all sources (b) the amount of capital invested by the owners of a business (c) the reduction of liabilities previously owed (d) the increases in assets resulting from supplying goods and services to customers D 7. In financial accounting, revenues and expenses are often included in the determination of net income even though no cash receipts or disbursements have occurred. This practice is based on the concept of: (a) time period (c) going concern (b) historical cost (d) accrual basis D 8. The development of a theoretical basis for accounting concepts and objectives is referred to as: (a) historical cost accounting (c) accounting principles (b) conceptual framework (d) financial accounting B

9. In simplified terms, the revenue realization rule states that revenue should be recognized when: (a) an exchange price has been determined and the earnings process is essentially complete (b) an exchange of cash resulting in an earning process has occurred (c) net assets have increased (d) liabilities have been reduced A

10. The qualitative objective in accounting that information should be made available without delay before decisions are to be made. (a) relevance (c) completeness (b) timeliness (d) understandability B 11. Fundamental assumptions related to the economic environment in which accounting operates are called: (a) accounting principles (c) accounting concepts (b) accounting postulates (d) accounting theories B 12. In cases of any departure from conformity with GAAP, the CPA must indicate: A B C D Nature of departure Yes Yes No No Approximate effects thereof No Yes No Yes 13. The basis for valuing or recording transactions where cash is not involved: (a) historical cost (c) selling price (b) fair value (d) scrap value 14. The following are related to objectivity except: (a) arms length-transactions (c) periodicity (b) neutrality (d) verifiability 15. The following are related to comparability, except: (a) representational faithfulness (c) consistency (b) periodicity (d) uniformity 16. Early accounting records were used primarily by: (a) owners and managers (c) creditors and managers (b) owners and creditors (d) creditors and suppliers 17. Periodicity refers to: (a) the entire life of the entity. (b) the natural life of the business. (c) a chain of one-year segments. (d) any period covered by a report.

18. Going concern refers to the assumption that the: (a) firm will continue to operate. (b) firm operations are soon to be terminated. (c) firm cannot fulfill existing commitments. (d) firm is suffering from huge losses. 19. The matching principle provides guidance in accounting for: (a) owners equity (c) liabilities (b) expense (d) assets 20. What is the primary criterion by which accounting information can be judged? (a) consistency (c) usefulness for decision-making (b) predictive value (d) comparability

21. Generally accepted accounting principles are: (a) a set of standards and rules that are recognized as a general guide for financial reporting. (b) usually established by the bureau of internal revenue. (c) the guidelines used to resolve ethical dilemmas. (d) fundamental truths that can be derived from the laws of nature. A 22. This refers to the tendency of accountants to resolve uncertainty in a way least likely to overstate assets and revenues? (a) comparability (c) conservatism (b) materiality (d) consistency C 23. Choose the incorrect statement. (a) The objective of the external financial statements is to communicate the economic effects of completed transactions and other events on the entity. (b) The practice of accounting requires considerable professional judgment. (c) Security analysis use information from financial statements and other sources to projects future earnings. (d) The assessment of earnings quality has become an exact science. D 24. Which of the following statement is correct? (a) Certified Public Accountants are not independent for the benefit of the users of the financial statements, because they are paid by the client. (b) Accounting concepts, principles and standards are just as broad and general today as they were sixty years old. (c) Due the excellent work of the ASC, there are very few choices among alternative accounting policies today. (d) Disclosure notes are an integral part of the financial statements. D 25. Choose the incorrect statement. (a) Benefits provide by accounting procedures should exceed their cost. (b) The Securities and Exchange Commission (SEC) exerts influence on the development of the accounting standards. (c) The primary function of the Financial Reporting Standards Council (FRSC) is to develop and enforce auditing standards. (d) The double-entry system of accounting has been used for centuries. C 26. External decision makers include all of the following except: (a) managers (c) creditors (b) owners (d) financial press

27. General-purpose financial statements report financial information relevant to: (a) Investors only (c) Government users only (b) Creditors only (d) Investors, creditors and government users. D 28. Choose the correct statement about generally accepted accounting principles (GAAP): (a) They are laws. (b) The Bureau of Internal Revenue enforces GAAP. (c) Firms that do not comply with GAAP may suffer negative economic consequences. (d) GAAP and tax principles are the same. C 29. Which of the following best states the purpose of general-purpose financial statements? (a) To disclose the marker value of the firms assets and liabilities. (b) To determine compliance with tax laws. (c) To identify shareholders. (d) To help users make decisions. D

30. Choose the correct statement about audits of corporate financial statements: (a) Outside auditors (CPAs) are paid by the Philippine government for auditing the financial statements of corporation. (b) The Bureau of Internal Revenue performs audits of corporations financial statements. (c) Public corporations (those whose stock are traded on exchanges) are subject to annual audit as to their compliance with GAAP. (d) It is the employees of the firm being audited who perform the annual audit of the financial statements of that firm. C 31. Which of the following areas within the accounting field has as its main purpose serving the information needs of arties outside the reporting firm? (a) Financial accounting (c) Managerial accounting (b) Tax accounting (d) Auditing A 32. The primary responsibility of an independent auditor who is a CPA is to: (a) Verify the accuracy of the amounts determined by the client. (b) Assess whether the management is honest. (c) Evaluate the fair presentation of the companys eternal financial statements. (d) Prepare current financial reports for the client. C 33. Which of the following statements about international accounting standards is true? (a) International standards are enforceable world-wide in order to allow for judgments regarding international investments. (b) Legal and psychological hurdles to achieving common reporting standards have already been overcome. (c) The International Accounting Standards Committee (IASC) was established with the purpose of narrowing the range of divergence in accounting standards used throughout the world. (d) The IASC is able to enforce its standards by prohibiting the listing of companies which do not comply on stock exchanges which sell internationally. C 34. Which of the following is an internal user of a companys financial information? (a) Company treasurer (c) Bank lending to the company (b) Stockholder of the company (d) Union representative A 35. Which of the following is not a decision that external users of a companys financial information would make? (a) Whether or not to extend credit to the company. (b) Whether or not to hold the companys stock. (c) Whether or not the company should add a new product line. (d) Whether or not to ask for an increase in employees benefit during union contract negotiations. C 36. Critical thinking is most important in which of the following problem-solving steps? (a) Recognizing a problem (b) Identifying alternatives solutions (c) Evaluating the alternatives (d) Selecting a solution from among the alternatives C 37. Choose the incorrect statement. (a) The objective of external financial statements is to communicate the economic effects of completed transactions and other events in the entity. (b) General purpose financial statements were developed primary because all outside users have the same information needs. (c) The double-entry system of accounting has been used for centuries. (d) The practice of accounting requires considerable professional judgment. B

38. Choose the incorrect statement. (a) Disclosures notes facilitate the evaluation of enterprise position and performance because they include information which helps to explain the quality earnings. (b) Disclosure notes are an integral part of financial statements. (c) Companies often look for opportunities to smooth earnings. (d) Accounting concepts, principles and standards are just as broad and general today as they were sixty years ago. D 39. Which of the following statement is true? (a) Recent developments in accounting standards have not addressed the problem of using accounting techniques to smooth earnings. (b) Benefits provided by accounting procedures should exceed their cost. (c) Certified Public Accountants are not independent for the benefit of the client. (d) The Certified Management Accountant (CMA) is an independent accountant whose primary function is to perform the attest (i.e., audit) function. B 40. Which of the following is the incorrect statement? (a) Theory can be defined as a coherent set of hypothetical, conceptual, and pragmatic principles forming a general frame of reference for a field of inquiry. (b) Accounting theory has developed primarily in response to government regulations. (c) Concepts are components of theory. (d) Accounting concepts are human-made. B