JOSE MARIA COLLEGE
Philippine Japan Friendship Highway, Sasa, Davao City
COLLEGE OF BUSINESS EDUCATION
Pre – Review 1 Class: Theories of Accounts
2nd Semester – S.Y: 2020 -2021
DIAGNOSTIC EXAMINATION
Name :_ Date :_
Instructor : JOHN PAUL S. TAN, CPA, MDM, CATP
This is a diagnostic test. This is not a graded examination. The objective of this test is to determine
the extent of knowledge you have retained at this point. The result will help your instructors as to
the level of learning to be facilitated during the next five months. Answer the questions to the best
you can. Remember that when you will eventually take the CPA board examination, there is no one
you can ask for help or confer with but yourself. Let us practice that here and NOW.
Instruction: Read and understand the statements carefully. Write your answer on the separate
answer sheet provided. Strictly no erasures! No credit will be given to an altered final answer.
1. According PAS 1, the overall principles of financial statements preparation include the
following except that
a. There should be an explicit statement that all the applicable PFRSs and PASs were
appropriately applied in the preparation of the financial statements.
b. Management should select and apply accounting policies that are in conformity with ASC
standards
c. There is no instance when offsetting is allowed in the presentation of financial information.
d. Financial statements should be prepared on a going concern basis.
2. External financial statements, according to FRSC “Framework for the Preparation and Presentation
of Financial Statements, should provide all of the following information except:
a. Information that is useful to present and potential investors and creditors and other users in
making rational investment, credit and other decisions.
b. Information that is comprehensible to those who have a reasonable understanding of business and
economic activities and are willing to study information with reasonable diligence.
c. Information for planning the future of the entity, implementing those plans, and for controlling daily
operations.
d. Information to help present and potential investors and creditors and other users in assessing the
amounts, timing and uncertainty of prospective cash receipts.
3. Which is incorrect concerning financial statements?
a. The Board of Directors, in discharging its responsibilities, reviews and approves the financial
statements before these are submitted to the stockholders of the enterprise.
b. Comparative information should not be disclosed in respect of the previous period for all
numerical and non-quantitative information in the financial statements.
c. Additional line items, headings, and subtotals should be presented on the face of the balance
sheet when such is needed to present fairly the enterprise’s financial position
d. When financial statements are not presented on a going concern basis, such fact must be
disclosed.
4. Which information is normally not included in the “notes to financial statements” of a reporting entity?
a. A statement of compliance with PFRS and PAS
b. A statement of measurement basis for the financial statements and accounting policies applied
c. Supporting information for line items presented and aggregated
d. A statement of cash inflows and outflows from operating, financing and investing activities
5. Which of the following information is not a specifically required disclosure of PAS 1?
a. Name of the reporting entity or other means of identification, and any change in that
information
from the previous year.
b. Names of major / significant shareholders of the entity
c. Level of rounding used in presenting the financial statements
d. Whether the financial statements cover the individual entity or a going concern.
6. Which one of the following is not required to be presented as minimum line item information on the
face of the balance sheet, according to PAS 1?
a. Investment property
c. Biological assets
b. Investment, accounted for under equity method
d. Contingent liability
7. Which of the following is not a current asset?
a. A school’s Petty cash (undeposited cash)
b. Cash surrender value of life insurance policy where the company is the beneficiary
c. Work in process which will take three years to age before becoming available for sale
term investment expected to be realized within one year from the balance sheet date
d. Short-
8. According to PAS 1, Presentation of Financial Statements, which of the following is not
among the criteria in classifying a liability as current?
a. It is expected to be settled in the entity’s normal operating cycle
b. It is due to be settled within twelve months after the balance sheet date
c. The entity has an unconditional right to defer settlement of the liability for at least twelve months
the balance sheet date
d. It is held primarily for the purpose of being traded
after
9. When an entity opts to present the income statement classifying expenses by function, which of the
Following is not required to be disclosed as “additional information?”
a. Depreciation expense c. Director’s remuneration b. Employee benefits expense
d. Amortization expense
10.As a minimum, PAS 1 the requires that the face of the balance sheet should include certain line
items. However, additional line items, headings and subtotals should be presented on the face of
the balance sheet
I. When a Statement of Financial Accounting Standards requires it.
II. When such presentation is necessary to present fairly the enterprise’s financial position
a. Both I and II b. Neither I nor II c. I only d. II only
11. Which of the following is true about the operating cycle concept?
a. It causes the distinction between current and non-current items to depend on whether they will
cash within one year.
b. It permits some assets to be classified as current even though they are more than one year
removed from becoming cash
c. It affects the income statement but not the statement of cash flows
d. With the requirement in PAS 1 for an annual reporting period, the operating cycle concept is
rendered obsolete.
affect
12. Entity breaches an undertaking under a long-term loan agreement, on or before balance
sheet date,
such liability continues to be classified as non-current if the lender has agreed a. After balance sheet
date, before the FS are authorized for issue, not to demand payment b. Before balance sheet date, before
the FS are authorized for issue, not to demand payment c. By the balance sheet date, before the FS are
authorized for issue, to provide a grace period of at least twelve months after the balance sheet date
d. After the balance sheet date, after the FS are authorized for issue, to provide a grace period of at
least twelve months after the balance sheet date
13. MYOB Corp. owed the following notes payable, which will mature during the coming year, 2008.
The corporation plans to settle the notes as follows:
Note Payable to A - To be settled by delivery of merchandise to the holder Note Payable to B - To be
settled by giving the creditor their long-term investment in RC Corporation ordinary shares.
Note Payable to C - Originally long-term, will be refinanced through an agreement signed on March 31,
2008. MYOB has the discretion to refinance the liability. MYOB’s 2007 financial statements were
authorized for issue on March 20, 2008, and were submitted to the audit committee on April 5, 2008.
How should this information be presented in the liabilities section of MYOB’s December 31, 2007
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balance sheet?
Note Payable to A Note Payable to B Note Payable to C a. Current Current Current
b. Current Current Non-current c. Current Non-current Current d. Current Noncurrent Non-current
14. Per PAS No.1 – Presentation of FS, in the absence of a Standard or Interpretation that specifically
applies to a transaction or event, management shall develop and apply accounting policy that results
in relevant and reliable information. Which of following is the least likely source of such
alternative?
a. The requirements and guidance on Standards /Interpretations on similar and related issues b. The
definition, recognition criteria and measurement concepts for assets, liabilities, income and expenses in
the Framework.
c. Most recent pronouncements of other standard setting bodies that use a similar conceptual
framework to develop accounting standards and accepted practice.
d. Textbooks and other accounting literature to the extent that these do not conflict with existing
Standards and Interpretations
15.An entity (other than a financial institution) receives dividends from its investment in shares. How
should it disclose the dividends received in the cash flow statement prepared under PAS 7? a..
Operating cash inflow
b. Either as operating cash inflow or as investing cash inflow
c. Either as operating cash inflow or as financing cash inflow
d. As an adjustment in the “operating activities” section of the cash flow because it is included in the
net income for the year as a cash inflow in the “financing activities” section of the cash flow statement.
16.An entity purchases a building and the seller accepts payment partly in equity shares and partly in
debentures of the entity. This transaction should be treated in the cash flow statement as follows: a.
The purchase of the building should be investing cash outflow and the issuance of shares and the
debentures financing cash outflows.
b. The purchase of the building should be investing cash outflow and the issuance of debentures
financing cash outflows while the issuance of shares investing cash outflow. c. This does not belong
in a cash flow statement and should be disclosed only in the notes to the financial statements.
d. Ignore the transaction totally since it is a non-cash transaction. No mention is required in either the
cash flow statement or anywhere else in the financial statement
17. Which of the following is not a negative element under the Property, Plant and Equipment
classification?
a. Accumulated depletion of a mineral-bearing property
b. Accumulated depreciation of paved parking-lot
c. Accumulated depreciation and impairment of building
d. Reserve for Building Expansion
18. Donna Company purchased a 3-month BSP treasury bill. Donna’s policy is to treat as cash
equivalent all highly liquid investments with an original maturity of 3 months or less when
purchased. How should this purchase be reported in Don’s statement of cash flows? a. As an
outflow from operating activities c. As an outflow from financing activities b. As an outflow from
investing activities d. Not reported
19. Eula Company owns 2% of Powers Retailers. A property dividend distributed by Powers consisted
of merchandise with a fair value lower than the listed retail price. Eula in turn, gave the merchandise
to its employees as a holiday bonus. How should Eula report the receipt and distribution of the
merchandise in its cash flow statement?
a. As both an inflow and outflow for operating activities
b. As both an inflow and outflow for investing activities
c. As an inflow for investing activities and outflow for operating activities
d. As a non-cash activity
20. Bankard, Inc. a credit card company, has gross receipts of P 10 M and gross payments of P 6 M
arising out of its credit card transactions. Jaka Corporation, a large-scale manufacturing company
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with several branches all over Luzon has gross receipts from sales of P 50 M and gross
disbursements on trade payables of P 42 M. Under present GAAP, which of these companies can
show their receipts and disbursements at net, in its statement of cash flows? a. Bankard, Inc. only c.
Both Bankard Inc, and Jaka Corporation b. Jaka Corporation only d. Neither Bankard Inc., nor Jaka
Corporation
21.Which information is normally not included in the “notes to financial statements” of a reporting entity?
a. A statement of compliance with PFRS and PAS
b. A statement of measurement basis for the financial statements and accounting policies applied c.
Supporting information for line items presented and aggregated
d. A statement of cash inflows and outflows from operating, financing and investing activities
22. How should repayment of a long-term comprising repayment of the principal amount and interest due
to date on the loan be treated in a cash flow statement?
a. The repayment of the principal portion of the loan is a cash flow belonging in the “investing
activities” section; the interest payment belongs either in the “operating activities” section” or the
“financing activities” section
b. The repayment of the principal portion of the loan is a cash flow shown in the “investing
activities” section or the “investing activities” section
c. The repayment of the principal portion of the loan is a cash flow shown in the “investing
activities” section; the interest payment should be netted against interest received on bank deposits
and the net amount of interest is disclosed in the “operating activities” section.
23. Which of the following statements regarding the income statement is correct? a. The balance sheet
and the income statement are related in the sense that the contents of the income statement are
results of the movement of the assets, liabilities and equity accounts. b. If an enterprise prepares
its income statement using the function of expense method, it should include in its disclosures a
schedule of expenses classified according to nature.
c. The income statement describes the total change in owners’ equity during the period d.
The income statement reveals the net earnings of the enterprise for a given date.
24. An indirect approach of measuring income is
a. Transactions approach
b. Double-entry approach
c. Net assets approach
d. Sunk cost
25. Other operating expenses include
a. Interest expense c. Patent amortization
b. Product warranty costs d. Unrealized Loss on inventory write-down
26. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility.
Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities
b. The firm’s ability to respond and adopt to financial adversity and unexpected and opportunities c.
The firm’s ability to pay its debts as they mature.
d. The firm’s ability to invest in a number of projects with different objectives and costs
27. A transaction that is material in amount, unusual in nature, and infrequent in occurrence, otherwise
described as “extraordinary items” should be presented separately as
a. Component of income from ordinary activities, but not net of applicable income tax. b.
Component of income from ordinary activities, net of applicable income tax. c. Extraordinary
item, a separate line item, net of applicable income tax
d. Prior period adjustment, but not net of applicable income tax.
28. Which of the following is a characteristic of a change in accounting
estimate? a. It usually need not be disclosed.
b. It does not affect the financial statements of prior periods
c. It should be reported through the restatement of the financial statements d.
It makes necessary the reporting of pro-forma amounts for prior periods.
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29. Which one of the following changes should be reported by not restating the financial statements of
prior periods is the change from?
a. FIFO method of inventory pricing to the weighted average method
b. Cost recovery method to percentage of completion
c. Sum-of-years digits method to the straight-line method
d LIFO method of inventory pricing to FIFO method
30. Under present GAAP, a change in accounting policy can be given prospective application
a. When ordered by management
b. When it is impracticable to determine the amount of adjustment to the opening balance of
retained earnings
c. When the amount of adjustment to the opening balance of retained earnings can be reasonably
determined
d. In no case at all.
31. The total performance of an entity is shown
a. In the Income Statement only
b. In the Statement of Changes in Equity only
c. In both the Income Statement and Statement of Changes in Equity
d. In some other financial statement than the Income Statement and Statement of Changes in
Equity
32.The effect of a change in accounting policy that is inseparable from the effect of a change in
accounting estimate should be reported
a. By restating the financial statements of all prior periods presented.
b. As a correction of an error.
c. As a component of income from continuing operations, in the period of change and future periods
the change affects both.
d. As a separate disclosure after income from continuing operations, in the period of change and
future periods, if the change affects both.
if
33. Investor Inc., owns 40% of Ali Corporation. During the calendar year 2002, Ali had net earnings of
P100,000 and paid dividends of P 10,000. Investor mistakenly recorded these transactions using the cost
method rather than the equity method of accounting. What effect would this have on the investment
account, net earnings, and retained earnings respectively?
a. understate, overstate, overstate c. overstate, overstate, overstate b. overstate, understate,
understate d. understate, understate, understate
34. Technically, offsetting in financial statements is accomplished when
a. Accumulated depreciation is shown as a deduction from the carrying amount of property and
equipment.
b. Sales returns and allowances are deducted from Revenue from Sales to arrive at Net Sales. c.
Current liabilities are deducted from current assets to arrive at working capital d. Deferred Tax Liabilities
are shown net of Deferred Tax Assets after complying with certain criteria in the applicable accounting
standard.
35. The “accounting policies” section of the notes to financial statements should describe
a. Only the measurement basis in preparing the financial statements.
b. Only the specific accounting policies followed by the enterprise.
c. Both the measurement basis and accounting policies followed.
d. Nature of the enterprise’s operations and its principal activities.
36. Which is true concerning the ASC Conceptual Framework?
I. The conceptual framework is a theoretical foundation that underlie the preparation and
presentation of basic financial statements for external users.
II. The framework is not a Statement of Financial Accounting Standards and does not define
standard for any particular measurement or disclosure issue
III. If there is a conflict between a provision in the Framework and that of a Statement of Financial
Accounting Standard, the Framework should prevail.
a. I only b. I and II only c. II and III only d. I, II and III 37. Which is not a basic purpose of a
conceptual framework?
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a. To assist the ASC in developing accounting standards and in the review and adoption of
International Accounting Standards
b. To assist preparers of financial statements in applying ASC accounting standards. c. To assist the
Board of Accountancy in promulgating rules and regulations affecting the practice of accountancy in
the Philippines
d. To assist ASC in reviewing and adopting International Accounting Standards
38. According to the ASC Framework, who has the primary responsibility for the financial statements of
an entity?
a. Owners b. Management c. External auditor d. Internal auditor
39. The main function of this body is to establish and improve accounting standards that will be generally
accepted in the Philippines
a. Philippine Institute of CPAs c. Professional Regulation Commission b. Board of Accountancy d.
Financial Reporting Standards Council
40. According to the ASC Conceptual framework, comprehensive income excludes changes in equity
resulting from which of the following?
a. Correction of prior period errors c. Unrealized loss on noncurrent marketable equity
securities
b. Revaluation surplus d. Dividends paid to stockholders
41. According to the ASC Conceptual framework, which of the following is an essential characteristic of
an asset?
a. An asset provides future benefits. c. An asset is obtained at a cost b. The claims to an asset’s benefits
are legally enforceable. d. An asset is exclusively owned
42. Which of the following is an appropriate basis for recognizing an asset?
a. On December 5,2019, AA Corporation entered into a commitment to buy 10,000 units of
Commodity X at a fixed price of P10 each, to be delivered early March, 2020. On Dec. 31,
2019, the selling price of Commodity X decreased to P 9.20 per unit.
b. The board of directors of BB Corporation approved a resolution authorizing the acquisition of a
delivery truck next year.
c. CC Company purchased machinery from EE Corp., still in transit, terms, FOB shipping point. . d. DD
Company purchased merchandise on December 28, 2001 under terms “sale on trial”.
43. Which of the following events or circumstances would justify reporting an asset above its acquisition
cost under present GAAP?
a. The market value of an investment in debt securities is lower than acquisition cost and the
investment is classified as a current asset.
b. The market value of an investment in ordinary shares accounted for under the equity method is
higher than the acquisition cost.
c. An investment in ordinary shares is accounted for under the equity method and the investee reports a
net income for the year.
d. An investment in ordinary shares is accounted for under the equity method and the investee declares a
cash dividend during the current year.
44. According to the ASC Conceptual framework, the process of reporting an item in the financial
statements of an entity is
a. Matching b. Allocation c. Realization d. Recognition
45. Which of the following expenditure subsequent to acquisition of an asset is capitalizable?
a. Major repairs on a building that did not prolong the life of the building.
b. Cost of a successful defense of a patent infringement suit
c. Replacement of a motor part of a machinery that did not increase either its productive capacity or its
scrap but reduced its operating costs
d. Research and development aimed at improvement of a patented product
46. Which of the following is a characteristic of liabilities rather than of owners’ equity? a. The
capital providers’ claim is residual in the event of liquidation of the business. b. The capital
providers normally have the right to exercise control over business operations. c. The capital
providers frequently are entitled to receive interest payments
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d. The obligation to the capital provider does not mature.
47. The primary factor that distinguishes a capital from a revenue expenditure is
a. The period in which the expenditure was made
b. Whether or not the expected benefit will extend beyond the current accounting period.
account to be charged
c. The
d. The materiality of the expenditure
48. A compensating balance is best reflected by which of the following?
a. A savings account maintained at the bank equal to the amount of all outstanding loans b. An
amount of capital stock held in the company’s treasury equal to outstanding loan commitments
c. The portion of any demand deposit, time deposit, or certificate of deposit maintained by a corporation
which constitute support for existing borrowing arrangements of the corporation with the lending
institution.
d. A balance held in a time or demand deposit account that is equal to the interest currently due on a
loan
49. When a specific customer’s account is written off by a company using the allowance method, the
effect on net income and the net realizable value of the accounts receivable is
Net income Net Realizable Value of Accounts Receivable
a. None None
b. Decrease Decrease
c. Increase Increase
d. Decrease None
50. Which one of the following is included in the scope of PAS 2 – Inventories but excluded from the
measurement rule?
a. Land held for resale by subdivision company or real estate developer
b. Damaged merchandise inventory of a retailer
c. Biological assets held for regular sale
d. Finished goods produced
51. A 90-day, 15% interest-bearing note receivable is sold to a bank with recourse after being held for
60 days. The proceeds are calculated using an 18% interest rate. The amount credited to notes
receivable at the date of the discounting transactions would be
a. the same as the cash proceeds c. the face value of the note
b. less than the face value of the note d. maturity value of the note
52. Which of the following is not a financial asset?
a. Cash
b. An equity instrument of another entity
c. A contract that may or will be settled in the entity’s own equity instrument and is not classified as
an equity instrument and is not classified as an equity instrument of the entity
d. Prepaid expenses
53. According to the conceptual framework, the objectives of financial reporting for business
enterprises are based on:
a. Generally accepted accounting principles.
b. Reporting on management's stewardship.
c. The need for conservatism.
d. The needs of the users of the information.
54. According to the conceptual framework, the usefulness of providing information in financial statements
is subject to the constraint of:
a. Consistency.
b. Cost-benefit.
c. Reliability.
d. Representational faithfulness.
55. According to the conceptual framework, which of the following attributes would not be used to
measure inventory?
a. Historical cost.
b. Replacement cost.
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c. Net realizable value.
d. Present value of future
56. According to the conceptual framework, which of the following situations violates the concept of
reliability?
a. Data on segments having the same expected risks and growth rates are reported to analysts
estimating future profits.
b. Financial statements are issued nine months late.
c. Management reports to stockholders regularly refer to new projects undertaken, but the financial
statements never report project results.
d. Financial statements include property with a carrying amount increased to management's
estimate of
market value.
57. What is the underlying concept that supports the immediate recognition of a contingent loss?
a. Substance over form.
b. Consistency.
c. Matching.
d. Conservatism.
58. According to the conceptual framework, the process of reporting an item in the financial statements of
an entity is:
a. Allocation.
b. Matching.
c. Realization.
d. Recognition.
59. What are the Statements of Financial Accounting Concepts intended to establish? a. Generally
accepted accounting principles in financial reporting by business enterprises. b. The meaning of
"Present fairly in accordance with generally accepted accounting principles." c. The objectives and
concepts for use in developing standards of financial accounting and reporting. d. The hierarchy of
sources of generally accepted accounting principles.
60. During a period when an enterprise is under the direction of a particular management, its financial
statements will directly provide information about:
a. Both enterprise performance and management performance.
b. Management performance but not directly provide information about enterprise performance.
c. Enterprise performance but not directly provide information about management performance.
d. Neither enterprise performance nor management performance.
61. According to the conceptual framework, which of the following statements conforms to the realization
concept?
a. Equipment depreciation was assigned to a production department and then to product unit costs.
b. Depreciated equipment was sold in exchange for a note receivable.
c. Cash was collected on accounts receivable.
d. Product unit costs were assigned to cost of goods sold when the units were sold.
62. According to the conceptual framework, which of the following relates to both relevance and
reliability?
a. Comparability.
b. Feedback value.
c. Verifiability.
d. Timeliness.
63. Which of the following is true regarding the comparison of managerial to financial accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting has a past focus and financial accounting has a future focus. c. The
emphasis on managerial accounting is relevance and the emphasis on financial accounting is
timeliness.
d. Managerial accounting need not follow generally accepted accounting principles (GAAP) while
financial accounting must follow them.
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64. Which of the following is a generally accepted accounting principle that illustrates the practice of
conservatism during a particular reporting period?
a. Capitalization of research and development costs.
b. Accrual of a contingency deemed to be reasonably possible.
c. Reporting investments with appreciated market values at market value.
d. Reporting inventory at the lower of cost or market value.
65. According to the conceptual framework, the quality of information that helps users increase the
likelihood of correctly forecasting the outcome of past or present events is called: a. Feedback
value.
b. Predictive value.
c. Representational faithfulness.
d. Reliability.
66. Which of the following assumptions means that money is the common denominator of economic
activity and provides an appropriate basis for accounting measurement and analysis? a. Going
concern.
b. Periodicity.
c. Monetary unit.
d. Economic entity.
67. For Php 500.00 a month, Rawl Co. visits its customers' premises and performs insect control services.
If customers experience problems between regularly scheduled visits, Rawl makes service calls at no
additional charge. Instead of paying monthly, customers may pay an annual fee of Php 5,400.00 in
advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue:
a. When the cash is collected.
b. At the end of the fiscal year.
c. At the end of the contract year after all of the services have been performed.
d. Evenly over the contract year as the services are performed.
68.Which of the following statements about the Financial Accounting Standards Council (FRSC) is (are)
true?
I. The FRSC has created a new body, the Philippine Interpretations Committee (PIC) which has the
responsibility for establishing and improving generally accepted accounting principles locally. II. The
FRSC is the current Philippine accounting standard-setting body which superseded the Accounting
Standards Council by virtue of the Philippine Accountancy Act of 2004. III. All four sectors of the
Accountancy profession as well as regulatory bodies are represented in the FRSC.
a. I only b. I and II only c. II and III only d. I, II and III are true 69.Which is not part of the accounting
standards setting process in the Philippines? a. Preparation and approval by a Task Force of a draft of
proposed Accounting Standards b. Distribution of the exposure draft for comments to PICPA members,
FINEX members and other Interested parties
c. Publication in a newspaper of general circulation
d. Approval by the Professional Regulation Commission
70.Which of the following statements is incorrect?
a. The accrual assumption states that revenues should be recognized when earned even if cash is not
yet received and expenses should be recognized when benefits are received even if unpaid b. In
accordance with the unit of measure assumption, accountants normally revise the amounts to
reflect the changing purchasing power of money due to inflation and deflation. c. In accordance with the
going concern assumption, the life of the business is presumed to be indefinite
d. Expenses are matched with revenue, not the reverse
71. A company does not include in the notes to financial statements a strike that is pending at balance
sheet date, which according to the company’s legal counsel, may cause a possible material loss to the
company. The qualitative objective that is most clearly violated in this situation is a. Reliability b.
Understandability c. Prudence d. Neutrality
72.Which of the following is an appropriate basis for recognizing an asset?
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a. On November 30, ,2019, Sheridan Corp. entered into a commitment to buy 20,000 units of
Commodity X at a fixed price of P100 each, to be delivered early February, 2020. On Dec. 31,
2019, the selling price of Commodity X decreased to P 92 per unit.
b. The board of directors of Penelope Corp. approved a resolution authorizing the acquisition of a
delivery truck next year.
c. Kidrock Corporation signed a renewable, 10-year lease contract for the use of a building that has
a useful life of 20 years. The lease contract does not provide for a transfer of property nor a
bargain purchase option at the end of the lease term.
d. Gibson Company purchased merchandise on December 28, 2019 under terms “sale or return”.
73.Which of the following events or circumstances would justify reporting an asset above its acquisition
cost under present GAAP?
a. The market value of an investment in debt securities is higher than acquisition cost and the
investment is classified as a current asset.
b. The market value of an investment in common stock accounted for under the equity method is
higher than the acquisition cost.
c. An investment in common stock is accounted for under the equity method and the investee
reports a net income for the year.
d. An investment in common stock is accounted for under the equity method and the investee
declares a cash dividend during the current year.
74. The following statements relate to liabilities. Which statement is (are) true?
I. Liabilities may also be measured by estimates of a definitive character when the amount of the
liability cannot be measured precisely.
II. Liabilities may be eliminated by incurring another liability, or, at times, by forgiveness. III. All
monetary liabilities should be stated at their present (discounted) values. IV. Liabilities arising from
nonreciprocal transfers are recognized when the corresponding money, goods, or services are received.
a. Statement I is true c. Statements I & II are true b. Statement III is true d. Statements
III and IV are true
75. The overall principles of statement presentation include the following principles except: a. Financial
statements should comply with all the requirements of each applicable SFAS and each applicable
Interpretation of the ASC.
b. Each material item should be presented separately and immaterial items need not be presented
nor disclosed in the financial statements provided it is justifiable.
c. Consistency of presentation should be observed in the presentation of financial statements d.
Financial statements should be prepared on a going-concern basis.
76. Technically, offsetting in financial statements is accomplished when
a. Accumulated depreciation is shown as a deduction from the carrying amount of property and
equipment.
b. Sales returns and allowances are deducted from Revenue from Sales to arrive at Net Sales. c.
Current liabilities are deducted from current assets to arrive at working capital d. Cash receipts and
payments for items in which the turnover is quick, the amounts are large, and
the maturities are short may be shown in the cash flows statement on a net
basis.
77.According to the ASC Conceptual framework, the process of reporting an item in the financial
statements of an entity is
a. Matching b. Allocation c. Realization d. Recognition
78.According to the conceptual framework, which of the following statements conforms to the
realization concept?
a. Cash was collected on accounts receivable.
b. Product unit costs were assigned to cost of goods sold when the units were sold. c.
An impaired asset was sold for cash.
d. Equipment depreciation was assigned to a production department and then to product
unit costs.
79. Ideally, assets which are in the form of claims to receive cash should be valued
at a. Face value c. Net realizable value b. Present value of future cash flows d.
Acquisition cost
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Pre – Review 1 Class: Theories of Accounts
80. The historical cost of assets and liabilities is generally retained in accounting records because
this information has the qualitative characteristics of
a. Neutrality, decision usefulness and representational faithfulness
b. Reliability and relevance
c. Decision usefulness. reliability, and neutrality
d. Neutrality, verifiability, and representational faithfulness
----------------------------------------- END OF EXAMINATION ----------------------------------------
“CHEATING IN SCHOOL IS A FORM OF SELF – DECEPTION. WE GO TO SCHOOL TO LEARN. WE CHEAT
OURSELVES WHEN WE COAST ON THE EFFORTS AND SCHOLARSHIP OF SOMEONE ELSE”
– JAMES E. FAUST
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