1. Which statement is correct regarding information needs?
I.
All information needs of users cannot be met by financial statement
II.
An investor is provider of risk capital to the entity the provision of financial statement that
meet their needs will also met most of the needs of other users that financial statement can satisfy . Both I and II
2. Financial reports are based on the following , except:

estimates

judgements

models

exact depictions
3. What is a purpose of having a conceptual framework? Both I and II
I.
II.
To enable the profession to more quickly solve emerging practical problems.
To provide a foundation from which to build more useful standards.
4. Under the Conceptual Framework of Financial Reporting, users of financial information may be classified into?
Primary users (existing and potential investors and creditors) and other users.
5. Identify the following statements as true or false:False, True
Statement 1:
The management of a reporting entity is also interested in financial information about the entity.
Therefore, management relies on general purpose financial reports because it is able to obtain the financial
information it needs internally.
Statement 2:
Other parties, such as regulators and members of the public other than investors, lenders and other
creditors, may also find general purpose financial reports useful. However, those reports are not primarily directed to
these other groups.
6. Which of the following are economic phenomena not relating to financial performance?
1.
Sale of goods or services.
2.
Payments of expenses.
3.
Issuance of equity instruments.
4.
Increase in the market price of an economic resource.
5.
Estimated doubtful accounts.
6.
Amortisation of property, plant and equipment.
7. The provider of risk capital and their adviser Both I and II
I.
II.
Are concerned with the risk inherent in and return provided by their investment.
Need information to help them determined whether they should buy or sell
8. What information do existing and potential investors, lenders and other creditors need information about, except:potential
of the market place and the industry to which the entity operates
9. Identify the following statements relating to the management stewardship functions. Proprietary function, Proprietary function
1.
Information about the variability and components of that return is also important, especially in assessing the
uncertainty of future cash flows.
2.
Information about a reporting entity’s past financial performance and how its management discharged its
stewardship responsibilities is usually helpful in predicting the entity’s future returns on its economic resources.
**Par. 1.16
Information about a reporting entity’s financial performance helps users to understand the return that the entity has produced on
its economic resources. Information about the return the entity has produced can help users to assess management’s stewardship
of the entity’s economic resources. Information about the variability and components of that return is also important, especially in
assessing the uncertainty of future cash flows. Information about a reporting entity’s past financial performance and how its
management discharged its stewardship responsibilities is usually helpful in predicting the entity’s future returns on its economic
resources.
10. How do the nature and amounts of a reporting entity’s economic resources and claims help users in assessing the entity’s
economic status? By measuring the entity’s human resources productivity in a given period of time.
**Par.
1.13
Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the
reporting entity’s financial strengths and weaknesses. That information can help users to assess the reporting entity’s liquidity and
solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. That information can
also help users to assess management’s stewardship of the entity’s economic resources. Information about priorities and payment
requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against
the reporting entity.
11. Identify the following statements as true or false:False, True
Statement 1.
General purpose financial reports are designed to show the value of a reporting entity;
Statement 2.
General-purpose financial reports provide information to help existing and potential investors,
lenders and other creditors to estimate the value of the reporting entity.
**Par. 1.17
General purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help
existing and potential investors, lenders and other creditors to estimate the value of the reporting entity.
12. What is the objective of financial reporting as indicated in the conceptual framework? provide information that is useful to
those making investing and credit decisions
13. A primary objective of financial reporting is to assist?investors in predicting prospective cash flows
14. Which of the following are not true concerning a conceptual framework in accounting? It should be based on fundamental
truths that are derived from the laws of nature.
15. The underlying theme of the conceptual framework is? decision usefulness.
16. What accounting method is used to depict the effects of transactions and other events and circumstances on a reporting
entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period? Accrual method
** Par. 1.17
Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic
resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a
different period.
17. The primary user of the general purpose financial reporting is - existing and potential investors, lenders and other creditors
18. Which of the following is true regarding the comparison of managerial and financial accounting? Managerial accounting need
not follow generally accepted accounting principles while financial accounting must follow them
19. There are two types of changes affecting the entity’s economic resources and claims. Identify the following related
statements. True, False
Statement 1:
Changes resulting from financial performance such as sale of goods and payments of expenses.
Statement 2:
Other events and transactions not resulting from financial position.
**Par. 1.15
Changes in a reporting entity’s economic resources and claims result from that entity’s financial performance (see paragraphs
1.17–1.20) and from other events or transactions such as issuing debt or equity instruments (see paragraph 1.21). To properly
assess both the prospects for future net cash inflows to the reporting entity and management’s stewardship of the entity’s
economic resources, users need to be able to identify those two types of changes.
20. What does the objective of general purpose financial reporting purport to serve? Foundation of the conceptual framework.
21. Describe the following are statements concerning the stewardship functions of management. True, False, False
1.
Management stewardship consists of fiduciary function and proprietary function.
2.
Fiduciary stewardship function relates to the ability of the management to use its economic resources in
creating more economic resources.
3.
Proprietary stewardship function relates to the ability of the management to safe keep the economics
resources entrusted to the reporting entity.
22. The following are other sources of information to upon which investors, lenders and other creditors based their decisions
relating to providing resources to a reporting entity, except: Changes in socio-demographics
**Par. 1.6
However, general purpose financial reports do not and cannot provide all of the information that existing and potential investors,
lenders and other creditors need. Those users need to consider pertinent information from other sources, for example, general
economic conditions and expectations, political events and political climate, and industry and company outlooks.
23. These users are interested in information in order to regulate the activities of an entity , determined taxation policies and
provide a basis for national statistic.Government and their agencies
24. Changes in market prices or interest rates related to the entity’s economic resources and claims affect the entity’s ability to
generate net cash inflows. True
**1.19
Information about a reporting entity’s financial performance during a period may also indicate the extent to which events such as
changes in market prices or interest rates have increased or decreased the entity’s economic resources and claims, thereby
affecting the entity’s ability to generate net cash inflows.
25. According to the Board, information derives from accrual accounting method about a reporting entity’s economic resources
and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s
past and future performance than information solely about cash receipts and payments during that period. True
** Par. 1.17
Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic
resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a
different period. This is important because information about a reporting entity’s economic resources and claims and changes in
its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance
than information solely about cash receipts and payments during that period.
26.What does the general purpose financial reporting provide? financial information
**Par 1.2
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.
27. Which of the following is not a purpose of the IASB’s Conceptual Framework?
Select one: To supersede IFRS requirements when IFRS conflicts with Framework
28. What is the authoritative status of the Conceptual Framework? In the absence of a Standard or an Interpretation that
specifically applies to a transaction, management should consider the applicability of the Conceptual Framework in developing and
applying an accounting policy that results in information that is relevant and reliable.
29. Which of the following is not a benefit associated with the FASB Conceptual Framework Project? Business entities will need
far less assistance from accountants because the financial reporting process will be quite easy to apply.
30. The underlying theme of the conceptual framework is?decision usefulness.
31. Which of the following statements is incorrect? Different types of economic resources affect a user’s assessment of the
reporting entity’s prospects for future cash flows uniformly.
32. The International Accounting Standards Board’s (IASB’s) Conceptual Framework includes all of the following except:
Supplementary information
33. A soundly developed conceptual framework of concepts and objectives should?

increase financial statement users' understanding of and confidence in financial reporting.

enhance comparability among companies' financial statements.

allow new and emerging practical problems to be more quickly solved.

all of these
34. Information about the nature and amounts of a reporting entity’s economic resources and claims - Can help users to predict
how future cash flows will be distributed among those with a claim against the reporting entity and its owners.
35. These users are interested in information in order to regulate the activities of an entity , determined taxation policies and
provide a basis for national statistic. Government and their agencies
36. Which of the following items is(are) included in assessing to predict the returns on the economic resources provided by the
users of the general-purpose financial reports? Included, Included
Item 1: amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity
Item 2: management’s stewardship of the entity’s economic resources
37. The ultimate basis of the decision made by the intended users of the general-purpose financial reports would be the:
Predicted returns on resources to be provided to the reporting entity.
38. The objective of financial reporting in the International Accounting Standards Board’s (IASB’s) Conceptual Framework -Is the
foundation for the Framework
39. Those decisions mentioned in the objective of general purpose financial reporting involve about: Determining the value of the
reporting entity.
40. Information about the nature and amounts of a reporting entity’s economic resources and claims - Can help users to predict
how future cash flows will be distributed among those with a claim against the reporting entity and its owners.
41. Whose information is provided in the general purpose financial reporting? reporting entity
42. Why do the intended users of the general-purpose financial reports aim to accomplish? Make decisions relating to providing
resources to the entity.
**Par 1.2
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.
43. Describe the following statements relating to the reporting entity’s cash flows during a period. All statements are true.
1.
Information about a reporting entity’s cash flows during a period also helps users to assess the entity’s
ability to generate future net cash inflows and to assess management’s stewardship of the entity’s economic resources.
2.
That information indicates how the reporting entity obtains and spends cash, including information about its
borrowing and repayment of debt, cash dividends or other cash distributions to investors, and other factors that may
affect the entity’s liquidity or solvency.
3.
Information about cash flows helps users understand a reporting entity’s operations, evaluate its financing
and investing activities, assess its liquidity or solvency and interpret other information about financial performance.
44. In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting?
Objective of financial reporting
45. The conceptual framework is intended to assist

CPAs in public practice

Users of financial statements

Financial Reporting Standards Council

All of these
46. A reporting entity’s economic resources and claims may also change for reasons other than financial performance, such as
issuing debt or equity instruments. Information about this type of change is necessary.
47. According to the Board, information about a reporting entity’s financial performance during a period can also help users to
assess management’s stewardship of the entity’s economic resources.True
**Par. 1.18
That information indicates the extent to which the reporting entity has increased its available economic resources, and thus its
capacity for generating net cash inflows through its operations rather than by obtaining additional resources directly from
investors and creditors. Information about a reporting entity’s financial performance during a period can also help users to assess
management’s stewardship of the entity’s economic resources.
48. What primary activity do the intended users of the general-purpose financial reports do to predict the reporting entity’s
return on provided economic resources? Assessment
**Par 1.3
The decisions described in paragraph 1.2 depend on the returns that existing and potential investors, lenders and other creditors
expect, for example, dividends, principal and interest payments or market price increases. Investors’, lenders’ and other creditors’
expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net
cash inflows to the entity and on their assessment of management’s stewardship of the entity’s economic resources. Existing and
potential investors, lenders and other creditors need information to help them make those assessments.
49. Which of the following statements is not an objective of financial reporting? Provide information on the liquidation value of an
enterprise.
50. Examples of management’s responsibilities to use the entity’s economic resources include, except: - Ensuring that employee
benefits are paid in accordance with the applicable laws.
**1.23
Examples of management’s responsibilities to use the entity’s economic resources include protecting those resources from
unfavourable effects of economic factors, such as price and technological changes, and ensuring that the entity complies with
applicable laws, regulations and contractual provisions.
51. Which of the following statements is true?The concepts are the goal towards which the Board and preparers of financial
reports strive.
52. Identify the following statements as true or false: TRUE, TRUE
Statement 1.
The Board, in developing Standards, will seek to provide the information set that will meet the
needs of the maximum number of primary users.
Statement 2.
Focusing on common information needs does not prevent the reporting entity from including
additional information that is most useful to a particular subset of primary users.
53. All of the following are examples of decisions to be made by the investors, lenders and other creditors mentioned in the
Conceptual Framework, except: Approving/disapproving big-time ticket contracts affecting the future cash flows of the reporting
entity.
54. What is the quality of the information provided by the general-purpose financial report? Useful
55. Information about how efficiently and effectively the reporting entity’s management has discharged its responsibilities to use
the entity’s economic resources helps users to assess management’s stewardship of those resources. Hence, it can be useful for
assessing the entity’s prospects for future net cash inflows.
** Par. 1.22
Information about how efficiently and effectively the reporting entity’s management has discharged its responsibilities to use the
entity’s economic resources helps users to assess management’s stewardship of those resources. Such information is also useful
for predicting how efficiently and effectively management will use the entity’s economic resources in future periods. Hence, it can
be useful for assessing the entity’s prospects for future net cash inflows.
56. How do the nature and amounts of a reporting entity’s economic resources and claims help users in assessing the entity’s
economic status? By measuring the entity’s human resources productivity in a given period of time.
** Par.
1.13
Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the
reporting entity’s financial strengths and weaknesses. That information can help users to assess the reporting entity’s liquidity and
solvency, its needs for additional financing and how successful it is likely to be in obtaining that financing. That information can
also help users to assess management’s stewardship of the entity’s economic resources. Information about priorities and payment
requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against
the reporting entity.
57. The term management refers to - Management and the governing board of an entity.
Par 1.4, footnote no. 3
Throughout the Conceptual Framework, the term ‘management’ refers to management and the governing board of an entity
unless specifically indicated otherwise
58. Different types of economic resources affect a user’s assessment of the reporting entity’s prospects for future cash flows
differently. Identify the following related statements as true or false. True, False
Statement 1:
resources.
Accounts receivable is an example of future cash flows resulting directly from existing economic
Statement 2:
Production of goods or services is an economic activity that can be identified with individual
economic resources (or claims).
**Par. 1.14
Different types of economic resources affect a user’s assessment of the reporting entity’s prospects for future cash flows
differently. Some future cash flows result directly from existing economic resources, such as accounts receivable. Other cash flows
result from using several resources in combination to produce and market goods or services to customers. Although those cash
flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and
amount of the resources available for use in a reporting entity’s operations.
59. According to the Board, information about a reporting entity’s financial performance during a period, reflected by changes in
its economic resources and claims other than by obtaining additional resources directly from investors and creditors, is useful in
assessing the entity’s past, but not the future ability, to generate net cash inflows. - False
60. The following are the returns that intended users of the general-purpose financial reports refer to, except:Profit
61. Whose information is provided in the general purpose financial reporting - reporting entity
62. According to the Board, information derives from accrual accounting method about a reporting entity’s economic resources
and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s
past and future performance than information solely about cash receipts and payments during that period. - TRUE
63. Information about the nature and amounts of a reporting entity’s economic resources and claims - Can help users to predict
how future cash flows will be distributed among those with a claim against the reporting entity and its owners.
64. The following statements pertain to neutrality as it relates to faithful representation, except Neutral information is by
definition capable of making a difference in users’ decisions.
**Par. 2.15
A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted,
weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be
received favourably or unfavourably by users. Neutral information does not mean information with no purpose or no influence on
behaviour. On the contrary, relevant financial information is, by definition, capable of making a difference in users’ decisions.
65. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a faithful representation.
**Par. 2.30
Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent.
Verifiability means that different knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful representation. Quantified information need not
be a single point estimate to be verifiable. A range of possible amounts and the related probabilities can also be verified.
66. How do predictive value and confirmatory value relate? Interrelated
**Par. 2.10
The predictive value and confirmatory value of financial information are interrelated. Information that has predictive
value often also has confirmatory value. For example, revenue information for the current year, which can be used as
the basis for predicting revenues in future years, can also be compared with revenue predictions for the current year
that were made in past years. The results of those comparisons can help a user to correct and improve the processes
that were used to make those previous predictions
67. Which is not included in the explanatory material in the financial reports? Effects of transactions, events and conditions
68. Understandability means Classifying, characterizing and presenting information clearly and concisely makes it understandable.
69. Describe the following statements with regard to applying the enhancing qualitative characteristics. Two statements are true.
1. Applying the enhancing qualitative characteristics is an iterative process that does follows a prescribed order.
2. Sometimes, one enhancing qualitative characteristic may have to be diminished to maximise another qualitative
characteristic. For example, a temporary reduction in comparability as a result of prospectively applying a new
Standard may be worthwhile to improve relevance or faithful representation in the longer term.
3. Appropriate disclosures may partially compensate for non-comparability.
** Par. 2.38
Applying the enhancing qualitative characteristics is an iterative process that does not follow a prescribed order. Sometimes, one
enhancing qualitative characteristic may have to be diminished to maximise another qualitative characteristic. For example, a
temporary reduction in comparability as a result of prospectively applying a new Standard may be worthwhile to improve relevance
or faithful representation in the longer term. Appropriate disclosures may partially compensate for non-comparability.
70. The following statements relate to the cost constraint on useful financial reporting, except:
1. Because of the inherent objectivity, different individuals’ assessments of the costs and benefits of
reporting particular items of financial information will vary. The Board seeks to consider costs and
benefits in relation to financial reporting generally, and not just in relation to individual reporting
entities.
2. It does not mean that assessments of costs and benefits always justify the same reporting
requirements for all entities.
3. Differences may be appropriate because of different sizes of entities, different ways of raising
capital (publicly or privately), different users’ needs or other factors.
**Par. 2.43
Because of the inherent subjectivity, different individuals’ assessments of the costs and benefits of reporting particular
items of financial information will vary. Therefore, the Board seeks to consider costs and benefits in relation to financial
reporting generally, and not just in relation to individual reporting entities. That does not mean that assessments of
costs and benefits always justify the same reporting requirements for all entities. Differences may be appropriate
because of different sizes of entities, different ways of raising capital (publicly or privately), different users’ needs or
other factors.
71. Cost constraint is justified by the rule of benefit over cost.
**Par. 2.39
Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial
information imposes costs, and it is important that those costs are justified by the benefits of reporting that
information. There are several types of costs and benefits to consider
72. The most relevant information about a phenomenon where the level of measurement uncertainty involved in making that
estimate may be so high that it may be questionable whether the estimate would provide a sufficiently faithful representation of
that phenomenon are the following, except: Disregard the economic phenomenon.
**Par 2.22
In some cases, a trade-off between the fundamental qualitative characteristics may need to be made in order to meet
the objective of financial reporting, which is to provide useful information about economic phenomena. For example, the
most relevant information about a phenomenon may be a highly uncertain estimate. In some cases, the level of
measurement uncertainty involved in making that estimate may be so high that it may be questionable whether the
estimate would provide a sufficiently faithful representation of that phenomenon. In some such cases, the most useful
information may be the highly uncertain estimate, accompanied by a description of the estimate and an explanation of
the uncertainties that affect it. In other such cases, if that information would not provide a sufficiently faithful
representation of that phenomenon, the most useful information may include an estimate of another type that is
slightly less relevant but is subject to lower measurement uncertainty. In limited circumstances, there may be no
estimate that provides useful information. In those limited circumstances, it may be necessary to provide information
that does not rely on an estimate.
73. What comprises financial information?
1. Economic phenomenon
2. Financial statements
3. Explanatory information
4. Notes to financial statements
5. Financial performance
**Par. 2.2
Financial reports provide information about the reporting entity’s economic resources, claims against the reporting
entity and the effects of transactions and other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the economic phenomena.) Some
financial reports also include explanatory material about management’s expectations and strategies for the
reporting entity, and other types of forward-looking information.
74. It may not be possible to verify some explanations and forward-looking financial information until a future period, if at all. To
help users decide whether they want to use that information, it would normally be necessary to disclose the alternative methods
of compiling the information.
**Par. 2.32
It may not be possible to verify some explanations and forward-looking financial information until a future period, if
at all. To help users decide whether they want to use that information, it would normally be necessary to disclose the
underlying assumptions, the methods of compiling the information and other factors and circumstances that support
the information.
75. Comparing similar information from one period to another involving the same entity is referred to as Intra-comparability
76. Which of the following statements is incorrect with regard to prudence? Misstatements in the measurement can lead to the
overstatement or understatement of income or expenses in strictly in the business period presented.
**Par. 2.16
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements
under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and
liabilities and expenses are not understated.6 Equally, the exercise of prudence does not allow for the
understatement of assets or income or the overstatement of liabilities or expenses. Such misstatements can lead to
the overstatement or understatement of income or expenses in future periods.
77. Which statement is incorrect with regard to complete depiction? A complete depiction represents all information what it
purports to represent.
**Par. 2.14
A complete depiction includes all information necessary for a user to understand the phenomenon being depicted,
including all necessary descriptions and explanations. For example, a complete depiction of a group of assets would
include, at a minimum, a description of the nature of the assets in the group, a numerical depiction of all of the assets in
the group, and a description of what the numerical depiction represents (for example, historical cost or fair value). For
some items, a complete depiction may also entail explanations of significant facts about the quality and nature of the
items, factors and circumstances that might affect their quality and nature, and the process used to determine the
numerical depiction.
78. When applying the cost constraint in developing a proposed Standard, the Board seeks information about the expected
nature and quantity of the benefits and costs of that Standard primarily from the following named sources, except:
1.
2.
3.
4.
providers of financial information
users
auditors
academics
5. government regulatory agencies
79. Additional information on top of those provided in the financial reports bear costs to be shouldered by Users of financial
information
**2.40
Providers of financial information expend most of the effort involved in collecting, processing, verifying and
disseminating financial information, but users ultimately bear those costs in the form of reduced returns. Users of
financial information also incur costs of analysing and interpreting the information provided. If needed information is
not provided, users incur additional costs to obtain that information elsewhere or to estimate it.
80. Which statement does not correctly state the concept of faithful representation? Faithful representation speaks of
truthfulness in the measurement accuracy.
**Par. 2.18
Faithful representation does not mean accurate in all respects. Free from error means there are no errors or omissions
in the description of the phenomenon, and the process used to produce the reported information has been selected and
applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all respects.
For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate.
However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an
estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting
and applying an appropriate process for developing the estimate.
81. In what concepts is faithful representation directly related? 1and 2
**Par. 2.12
Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not
only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it
purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the
same. If they are not the same, providing information only about the legal form would not faithfully represent the
economic phenomenon.
82. Comparability relates to this aspect of financial information. Usefulness
**Par. 2.24
Users’ decisions involve choosing between alternatives, for example, selling or holding an investment, or investing in one
reporting entity or another. Consequently, information about a reporting entity is more useful if it can be compared with
similar information about other entities and with similar information about the same entity for another period or
another date.
83. Comparing similar information from one entity to another is called as Inter-comparability
84. The following are correct statements on materiality, except: One billion amount of currency unit is always material.
**Par. 2.11
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that
the primary users of general purpose financial reports (see paragraph 1.5) make on the basis of those reports, which
provide financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an
individual entity’s financial report. Consequently, the Board cannot specify a uniform quantitative threshold for
materiality or predetermine what could be material in a particular situation.
85. Financial statements report economic phenomena in Words and numbers.
**Par. 2.12
Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not
only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it
purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the
same. If they are not the same, providing information only about the legal form would not faithfully represent the
economic
86. Describe the following statements relating to comparability: False, True, True
1.
Consistency and comparability are the same.
2.
Consistency refers to the use of the same methods for the same items, either from period to period within a reporting
entity or in a single period across entities.
3.
Comparability is the goal; consistency helps to achieve that goal
**Par. 2.26
Consistency, although related to comparability, is not the same. Consistency refers to the use of the same methods for the
same items, either from period to period within a reporting entity or in a single period across entities. Comparability is the
goal; consistency helps to achieve that goal.
87. Comparing similar information from one entity to another belonging in different industries is called as Industry
inter-comparability
88. The following are the qualitative characteristics applied to a general-purpose financial information? 3, 4, 5, and 1
1.
Timeliness
2.
Faithful representation
3.
Comparability
4.
Verifiability
5.
Understandability
6.
Relevance
Identify the enhancing qualitative characteristics.
89. Describe the following statements. False, True
1. When monetary amounts can be observed directly, they must be estimated because uncertainty arises.
2. In cases of measurement uncertainty, the use of reasonable estimates is an essential part of the preparation of
financial information and does not undermine the usefulness of the information if the estimates are clearly and
accurately described and explained.
**Par 2.19
When monetary amounts in financial reports cannot be observed directly and must instead be estimated, measurement
uncertainty arises. The use of reasonable estimates is an essential part of the preparation of financial information and
does not undermine the usefulness of the information if the estimates are clearly and accurately described and
explained. Even a high level of measurement uncertainty does not necessarily prevent such an estimate from providing
useful information
90. Which one is the pervasive concept in the determining the application of the qualitative characteristics Cost constraint
91. The enhancing qualitative characteristics of financial information permits alternative accounting methods for the same
economic phenomenon even if it diminishes comparability.
**Par. 2.29
Although a single economic phenomenon can be faithfully represented in multiple ways, permitting alternative
accounting methods for the same economic phenomenon diminishes comparability
92. What are the impacts of a useful financial information? More informed decisions.
** Par. 2.41
Reporting financial information that is relevant and faithfully represents what it purports to represent helps users to
make decisions with more confidence. This results in more efficient functioning of capital markets and a lower cost of
capital for the economy as a whole. An individual investor, lender or other creditor also receives benefits by making
more informed decisions. However, it is not possible for general purpose financial reports to provide all the information
that every user finds relevant.
93. Which of the following is not one of the characteristics of perfectly faithful representation? Verifiable
** Par. 2.13
To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and
free from error. Of course, perfection is seldom, if ever, achievable. The Board’s objective is to maximise those qualities
to the extent possible.
94. An information is considered to have a confirmatory value if it, except: is verifiable.
**Financial information has confirmatory value if it provides feedback about (confirms or changes) previous evaluations.
95. Cost is a(n) pervasive constraint on the information that can be provided by financial reporting.
96. The following are the qualitative characteristics applied to a general-purpose financial information?
1.
2.
3.
4.
5.
6.
Timeliness
Faithful representation
Comparability
Verifiability
Understandability
Relevance
Identify the fundamental qualitative characteristics.
96. For information to be comparable, like things must look alike and different things must look different. Comparability of
financial information is not enhanced by making unlike things look alike any more than it is enhanced by making like things look
different. It may said that Comparability is not uniformity. For information to be comparable, like things must look alike and
different things must look different. Comparability of financial information is not enhanced by making unlike things look alike any
more than it is enhanced by making like things look different.
97. Given below may be characteristics of an information:
1.
Free from error
2.
Prudence
3.
Substance over form
4.
Comparability
5.
Verifiability
6.
Timeliness
7.
Understandability
Identify the enhancing qualitative information of a useful financial report.
** Par. 2.23
Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness
of information that both is relevant and provides a faithful representation of what it purports to represent. The
enhancing qualitative characteristics may also help determine which of two ways should be used to depict a
phenomenon if both are considered to provide equally relevant information and an equally faithful representation of
that phenomenon.
98. Timeliness means having information available to decision-makers in time to be capable of influencing their decisions.
Generally, the older the information is the less useful it is. However, some information may continue to be timely long after the
end of a reporting period because, for example, some users may need to identify and assess trends.
99. To what degree of application do qualitative characteristics and cost constraint apply to a given type of information? Cost
constraint prevails over qualitative characteristics
** Par. 2.3
The qualitative characteristics of useful financial information5 apply to financial information provided in
financial statements, as well as to financial information provided in other ways. Cost, which is a pervasive constraint on
the reporting entity’s ability to provide useful financial information, applies similarly. However, the considerations in
applying the qualitative characteristics and the cost constraint may be different for different types of information.
For example, applying them to forward-looking information maybe different from applying them to information about
existing economic resources and claims and to changes in those resources and claims.
100. What kind of financial information is needed to be published for the general-purpose users? Useful - The qualitative
characteristics of useful financial information discussed in this chapter identify the types of information that are likely to be most
useful to the existing and potential investors, lenders and other creditors for making decisions about the reporting entity on the
basis of information in its financial report (financial information).
101. To what degree of application do qualitative characteristics and cost constraint apply to a given type of information? Cost
constraint prevails over qualitative characteristics
** Par. 2.3
The qualitative characteristics of useful financial information5 apply tofinancial information provided in
financial statements, as well as to financial information provided in other ways. Cost, which is a pervasive constraint on
the reporting entity’s ability to provide useful financial information, applies similarly. However, the considerations
in applying the qualitative characteristics and the cost constraint may be different for different types of
information. For example, applying them to forward-looking information maybe different from applying them to
information about existing economic resources and claims and to changes in those resources and claims.
102. Identify the following statements? False, True
Statement 1: The exercise of prudence implies a need for asymmetry, for example, a systematic need for more
persuasive evidence to support the recognition of assets or income than the recognition of liabilities or expenses.
Statement 2: Particular Standards may contain asymmetric requirements if this is a consequence of decisions intended
to select the most relevant information that faithfully represents what it purports to represent.
** Par. 2.17
The exercise of prudence does not imply a need for asymmetry, for example, a systematic need for more persuasive
evidence to support the recognition of assets or income than the recognition of liabilities or expenses. Such asymmetry is
not a qualitative characteristic of useful financial information. Nevertheless, particular Standards may contain
asymmetric requirements if this is a consequence of decisions intended to select the most relevant information that
faithfully represents what it purports to represent.
103. Applying the fundamental qualitative characteristics would usually be impacted by the following:
1. cost constraint
2. enhancing qualitative characteristics
3. compliance to management policies
only two are correct.
Par. 2.21
The most efficient and effective process for applying the fundamental qualitative characteristics would usually be as
follows (subject to the effects of enhancing characteristics and the cost constraint, which are not considered in this
example).
104. Enhancing qualitative characteristics should be maximised to the extent possible. When this is followed, either individually
or as a group, - It cannot make information useful if that information is irrelevant or does not provide a faithful representation of
what it purports to represent.
** Par. 2.37
Enhancing qualitative characteristics should be maximised to the extent possible. However, the enhancing qualitative
characteristics, either individually or as a group, cannot make information useful if that information is irrelevant or does
not provide a faithful representation of what it purports to represent.
105. Which is one is the best way to describe financial information? Financial reports
** Par. 2.2
Financial reports provide information about the reporting entity’s economic resources, claims against the reporting
entity and the effects of transactions and other events and conditions that change those resources and claims. (This
information is referred to in the Conceptual Framework as information about the economic phenomena.) Some
financial reports also include explanatory material about management’s expectations and strategies for the
reporting entity, and other types of forward-looking information.
106. An information is relevant if It Is capable of making a difference in the decisions made by the users.
** Par. 2.6
Relevant financial information is capable of making a difference in the decisions made by users. Information may be
capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware
of it from other sources.
107. Which of the following statements is incorrect? A parent entity has always the option to provide or not consolidated financial
statements.
** Par. 3.18
Information provided in unconsolidated financial statements is typically not sufficient to meet the information
needs of existing and potential investors, lenders and other creditors of the parent. Accordingly, when
consolidated financial statements are required, unconsolidated financial statements cannot serve as a
substitute for consolidated financial statements. Nevertheless, a parent may be required, or choose, to
prepare unconsolidated financial statements in addition to consolidated financial statements.
108. The Conceptual Framework specifies the number of statement(s) of financial performance to comprising of Not specified
** The Conceptual Framework does not specify whether the statement(s) of financial performance comprise(s) a single
statement or two statements.
109. Which of the following information is not included in the financial statements? Unrecognized income and expenses
** Par 3.4
Financial statements are prepared for a specified period of time (reporting period) and provide information about:
(a) assets and liabilities—including unrecognised assets and liabilities— and equity that existed at the end of the
reporting period, or during the reporting period; and
(b) income and expenses for the reporting period.
110. If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship, the reporting
entity’s financial statements are referred to as combined financial statements
** Par. 3.12
If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary relationship, the
reporting entity’s financial statements are referred to as ‘combined financial statements’.
111. Identify the following statements. Two statements are true.
1. Prior events are those transactions and other events that have occurred after the end of the reporting period.
2. Subsequent events are reportable if its information is necessary to meet the objective of financial statements.
3. Future events are the same as the subsequent events.
** Par. 3.7
Financial statements include information about transactions and other events that have occurred after the end of the
reporting period if providing that information is necessary to meet the objective of financial statements (see paragraph
3.2).
112. The minimum number of period(s) to be presented to the users of financial statements is: Two
** Par. 3.5
To help users of financial statements to identify and assess changes and trends, financial statements also provide
comparative information for at least one preceding reporting period.
113. In cases where determining the boundary of a reporting entity can ba difficult, faithful representation requires that, except:
the subsidiary is not a legal entity.
** Paragraphs. 3.13 and 3.14
Determining the appropriate boundary of a reporting entity can be difficult if the reporting entity:
(a) is not a legal entity; and
(b) does not comprise only legal entities linked by a parent-subsidiary relationship.
In such cases, determining the boundary of the reporting entity is driven by the information needs of the primary users
of the reporting entity’s financial statements. Those users need relevant information that faithfully represents what it
purports to represent. Faithful representation requires that:
(a) the boundary of the reporting entity does not contain an arbitrary or incomplete set of economic
activities;
(b) including that set of economic activities within the boundary of the reporting entity results in neutral
information; and
(c) a description is provided of how the boundary of the reporting entity was determined and of what
constitutes the reporting entity.
114. Which is the following forward-looking information is not typically provided in the financial statements? Management’s
expectations and strategies in the coming period.
** Par. 3.6, 2nd statement
For example, if an asset or liability is measured by estimating future cash flows, information about those estimated
future cash flows may help users of financial statements to understand the reported measures. Financial statements do
not typically provide other types of forward-looking information, for example, explanatory material about
management’s expectations and strategies for the reporting entity.
115. The financial statements are provided according to the perspective of the: company as a whole
** Par. 3.8
Financial statements provide information about transactions and other events viewed from the perspective of the
reporting entity as a whole, not from the perspective of any particular group of the entity’s existing or potential
investors, lenders or other creditors.
116. Which of the following statements is incorrect? A parent entity has always the option to provide or not consolidated financial
statements.
** Par. 3.18
Information provided in unconsolidated financial statements is typically not sufficient to meet the information needs of
existing and potential investors, lenders and other creditors of the parent. Accordingly, when consolidated financial
statements are required, unconsolidated financial statements cannot serve as a substitute for consolidated financial
statements. Nevertheless, a parent may be required, or choose, to prepare unconsolidated financial statements in
addition to consolidated financial statements.
117. Identify the following statements in relation to the reporting entity. One statement is false
1.
A reporting entity is an entity that is required to prepare financial statements.
2.
A reporting entity is an entity that chooses to prepare financial statements.
3.
A reporting entity can be a single entity or a portion of an entity
4.
A reporting entity can comprise more than one entity.
5.
A reporting entity must be a legal entity. False
Par. 3.10
A reporting entity is an entity that is required, or chooses, to prepare financial statements. A reporting entity can be a
single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal
entity.
118. Sometimes one entity (parent) has control over another entity (subsidiary). If a reporting entity comprises both the parent
and its subsidiaries, the reporting entity’s financial statements are referred to as consolidated financial statements
** Par. 3.11
Sometimes one entity (parent) has control over another entity (subsidiary). If a reporting entity comprises both the
parent and its subsidiaries, the reporting entity’s financial statements are referred to as ‘consolidated financial
statements’. If a reporting entity is the parent alone, the reporting entity’s financial statements are referred to as
‘unconsolidated financial statements’.
119. Financial statements provide the following information that meet the definition of measurement about a reporting entity’s.:
None of the given is provided
1.
2.
3.
economic resources
claims against the entity
changes in those resources and claims
** Par 3.1
Chapters 1 and 2 discuss information provided in general purpose financial reports and Chapters 3–8 discuss
information provided in general purpose financial statements, which are a particular form of general purpose financial
reports. Financial statements provide information about economic resources of the reporting entity, claims against the
entity, and changes in those resources and claims, that meet the definitions of the elements of financial statements (see
Table 4.1).
120. Financial statements are prepared for a specified period of time (reporting period) and provide information about assets
and liabilities—including unrecognized assets and liabilities— and equity that existed at the end of the reporting period, or during
the reporting period.
** Par 3.4
Financial statements are prepared for a specified period of time (reporting period) and provide information about:
(a) assets and liabilities—including unrecognized assets and liabilities— and equity that existed at the end of the
reporting period, or during the reporting period; and
(b) income and expenses for the reporting period.
121. The consolidated financial statements are useful to users because net cash inflows to the parent include distributions to the
parent from its subsidiaries, and those distributions depend on net cash inflows to the subsidiaries
** Par. 3.15
Consolidated financial statements provide information about the assets, liabilities, equity, income and expenses of both
the parent and its subsidiaries as a single reporting entity. That information is useful for existing and potential investors,
lenders and other creditors of the parent in their assessment of the prospects for future net cash inflows to the parent.
This is because net cash inflows to the parent include distributions to the parent from its subsidiaries, and those
distributions depend on net cash inflows to the subsidiaries.
122. The major components of the financial information include the following, except: statement of changes in equity
** Par. 3.3
That information is provided:
(a) in the statement of financial position, by recognising assets, liabilities and equity;
(b) in the statement(s) of financial performance,9 by recognising income and expenses; and
(c) in other statements and notes, by presenting and disclosing information about:
(d) recognized assets, liabilities, equity, income and expenses (see paragraph 5.1), including information about their
nature and about the risks arising from those recognized assets and liabilities;
(ii) assets and liabilities that have not been recognised (see paragraph 5.6), including information about their nature and
about the risks arising from them;
(iii) cash flows;
(iv) contributions from holders of equity claims and distributions to them; and
(v) the methods, assumptions and judgements used in estimating the amounts presented or disclosed, and changes in
those methods, assumptions and judgements.
123. Financial statements are normally prepared on the assumption that the reporting entity is a going concern.
** Par. 3.9
Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will
continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the
need to enter liquidation or to cease trading. If such an intention or need exists, the financial statements may have to be
prepared on a different basis. If so, the financial statements describe the basis used.
124. When should an expenditure be recorded as an asset rather than an expense? When future benefit exits
125. An economic resource could produce economic benefits for an entity by entitling or enabling it to do the following One or
more of the given
1.
Receipt of cash or another economic resource arising from contractual rights.
2.
Exchange economic resources with another party on favourable terms
3.
Produce cash inflows or avoid cash outflows
** Par. 4.16
An economic resource could produce economic benefits for an entity by entitling or enabling it to do, for example, one
or more of the following:
(a) receive contractual cash flows or another economic resource;
(b) exchange economic resources with another party on favourable terms;
(c) produce cash inflows or avoid cash outflows by, for example:
(i) using the economic resource either individually or in combination with other economic resources to produce goods or
provide services;
(ii) using the economic resource to enhance the value of other economic resources; or
(iii) leasing the economic resource to another party;
(d) receive cash or other economic resources by selling the economic resource; or
(e) extinguish liabilities by transferring the economic resource.
126. Which of the following is not a basic element of financial statements? Statement of financial position
127. Treating a set of rights and obligations as a single unit of account differs from offsetting assets and liabilities. Yes
** Par. 4.54
Treating a set of rights and obligations as a single unit of account differs from offsetting assets and liabilities (see
paragraph 7.10).
128. To satisfy the second criterion for a liability, the obligation must have the potential to require the entity to transfer an
economic resource to another party (or parties) under the following condition(s): No, No, No
** Par. 4.37
To satisfy this criterion, the obligation must have the potential to require the entity to transfer an economic resource to
another party (or parties). For that potential to exist, it does not need to be certain, or even likely, that the entity will be
required to transfer an economic resource—the transfer may, for example, be required only if a specified uncertain
future event occurs. It is only necessary that the obligation already exists and that, in at least one circumstance, it would
require the entity to transfer an economic resource.
129. An entity has the obligation to transfer an economic resource until it has – Yes, Yes, Yes, No
** Par. 4.41
In the situations described in paragraph 4.40, an entity has the obligation to transfer an economic resource until it has
settled, transferred or replaced that obligation.
130. Which of the following is not an element of an asset? Owned by the entity
** Par. 4.3
An asset is a present economic resource controlled by the entity as a result of past events.
Par. 4.4
An economic resource is a right that has the potential to produce economic benefits.
131. Control can also arise if an entity has other means of ensuring that it, and no other party, has the present ability to direct
the use of the economic resource and obtain the benefits that may flow from it. An entity could control a right to use know-how
that is/ has/can – No, Yes, No
**Par. 4.22
Control of an economic resource usually arises from an ability to enforce legal rights. However, control can also arise if
an entity has other means of ensuring that it, and no other party, has the present ability to direct the use of the
economic resource and obtain the benefits that may flow from it. For example, an entity could control a right to use
know-how that is not in the public domain if the entity has access to the know-how and the present ability to keep the
know-how secret, even if that know-how is not protected by a registered patent.
132. Which of the following practices may not be an acceptable deviation from recognizing revenue at the point of sale? Upon
receipt of order.
133. The International Accounting Standards Board (IASB) defines one of the 5 elements as follows: “the residual interest in the
assets of the entity after deducting all its liabilities” Which element matches this description? Equity.
134. Which of the following are the two components of the revenue recognition principle? It is probable that future economic
benefits will flow to the company and it is possible to reliably measure the amount
135. An executory contract covers - 1, 2, 3, 4

Contract

Performance of obligation
**Par. 4.56
An executory contract is a contract, or a portion of a contract, that is equally unperformed—neither party has fulfilled
any of its obligations, or both parties have partially fulfilled their obligations to an equal extent.
136. A contract to pay an employee a salary in exchange for receiving the employee’s services is not yet a liability because the
obligation exists only after the employee has rendered his services. How is this contract viewed in the perspective of recongising
an obligation? Executory contract
**Par. 4.47
An entity does not yet have a present obligation to transfer an economic resource if it has not yet satisfied the criteria in
paragraph 4.43, that is, if it has not yet obtained economic benefits, or taken an action, that would or could require the
entity to transfer an economic resource that it would not otherwise have had to transfer. For example, if an entity has
entered into a contract to pay an employee a salary in exchange for receiving the employee’s services, the entity does
not have a present obligation to pay the salary until ithas received the employee’s services. Before then the contract is
executory— the entity has a combined right and obligation to exchange future salary for future employee services (see
paragraphs 4.56–4.58).
137. Rights are established by – 1, 2, 3, 4
1.
By contracts.
2.
By legislation.
3.
By acquiring or creating know-how that is not in the public domain.
4.
through an obligation of another party that arises because that other party has no practical ability to act in a
manner inconsistent with its customary practices, published policies or specific statements.
5.
Homestead.
**Paar. 4.7
Many rights are established by contract, legislation or similar means. For example, an entity might obtain rights from
owning or leasing a physical object, from owning a debt instrument or an equity instrument, or from owning a
registered patent. However, an entity might also obtain rights in other ways, for example:
(a) by acquiring or creating know-how that is not in the public domain (see paragraph 4.22); or
(b) through an obligation of another party that arises because that other party has no practical ability to act in a
manner inconsistent with its customary practices, published policies or specific statements (see paragraph 4.31)
138. As generally used , the terms ‘’net asset represents - Total assets less total liabilities
139. What should be given more importance in analysing contractual rights and obligations? – Yes, No
**Par. 4.59
The terms of a contract create rights and obligations for an entity that is a party to that contract. To represent those
rights and obligations faithfully, financial statements report their substance (see paragraph 2.12). In some cases, the
substance of the rights and obligations is clear from the legal form of the contract. In other cases, the terms of the
contract or a group or series of contracts require analysis to identify the substance of the rights and obligations.
140. Which of the following is not a required component of financial statements prepared in accordance with generally accepted
accounting principles? President's letter to shareholders
141. Which of the following basic elements of financial statements is not associated with the statement of financial position?
Income
142. An existing right having low probability to produce potential economic benefit is an asset. The following matters are also
considered: 1, 2, 3, 4
1.what information to provide about the asset
2.how to provide that information
3.whether the asset is recognised
4.how it is measured
5.when to provide that information
**Par. 4.15
A right can meet the definition of an economic resource, and hence can be an asset, even if the probability that it will
produce economic benefits is low. Nevertheless, that low probability might affect decisions about what information to
provide about the asset and how to provide that information, including decisions about whether the asset is recognised
(see paragraphs 5.15–5.17) and how it is measured.
143. An entity could control a right to use know-how that is not in the public domain if the entity has access to the know-how, the
present ability to keep the know-how secret that is – YES, YES
**Par. 4.22
Control of an economic resource usually arises from an ability to enforce legal rights. However, control can also arise if
an entity has other means of ensuring that it, and no other party, has the present ability to direct the use of the
economic resource and obtain the benefits that may flow from it. For example, an entity could control a right to use
know-how that is not in the public domain if the entity has access to the know-how and the present ability to keep the
know-how secret, even if that know-how is not protected by a registered patent.
144. The Allowance for Doubtful Accounts, which appears as a deduction from Accounts Receivable on a statement of financial
position and which is based on an estimate of bad debts, is an application of the - expense recognition principle
145. What is the quality of a right existence to be considered an asset? Yes, No
146. A present obligation exists as a result of past events only if: 1and 2
1.
the entity has already obtained economic benefits or taken an action;
2.
as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise
have had to transfer.
**Par. 4.43
A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits or taken an action; and
(b) as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have
had to transfer.
147. Application of the full disclosure principle - is demonstrated by the use of supplementary information presenting the effects
of changing prices.
148. What terms are generally considered in a contract unless they have no substance? Yes, Yes
**Par. 4.60
All terms in a contract—whether explicit or implicit—are considered unless they have no substance. Implicit terms could
include, for example, obligations imposed by statute, such as statutory warranty obligations imposed on entities that
enter into contracts to sell goods to customers.
149. The right as it relates to an economic resource refers to produce economic benefits
**Par. 4.6
Rights that have the potential to produce economic benefits take many forms, which may include:
(a) rights that correspond to an obligation of another party, for example:
(i) rights to receive cash.
(ii) rights to receive goods or services.
(iii) rights to exchange economic resources with another party on favourable terms. Such rights include, for
example, a forward contract to buy an economic resource on terms that are currently favourable or an option
to buy an economic resource.
(iv) rights to benefit from an obligation of another party to transfer an economic resource if a specified
uncertain future event occurs.
(b) rights that do not correspond to an obligation of another party, for example:
(i) rights over physical objects, such as property, plant and equipment or inventories. Examples of such rights are a
right to use a physical object or a right to benefit from the residual value of a leased object.
(ii) rights to use intellectual property.
150. An entity’s duty or responsibility to transfer an economic resource may be conditional on a particular future action that the
entity itself may take. In such situations, the entity has an obligation - 1
1.
if it has no practical ability to avoid taking that action.
2.
If it the entity concurs to accept the responsibility upon the fulfilment of a condition.
3.
If it has the ability to pay in the future.
Choose the best description.
**Par. 4.32
In some situations, an entity’s duty or responsibility to transfer an economic resource is conditional on a particular
future action that the entity itself may take. Such actions could include operating a particular business or operating in a
particular market on a specified future date, or exercising particular options within a contract. In such situations, the
entity has an obligation if it has no practical ability to avoid taking that action.
151. An economic resource should have a present Right – Yes; Economic Benefit – No
**Par. 4.17
Although an economic resource derives its value from its present potential to produce future economic benefits, the
economic resource is the present right that contains that potential, not the future economic benefits that the right may
produce. For example, a purchased option derives its value from its potential to produce economic benefits through
exercise of the option at a future date. However, the economic resource is the present right—the right to exercise the
option at a future date. The economic resource is not the future economic benefits that the holder will receive if the
option is exercised.
152. How are the below examples classified as economic benefits?
1.
2.
3.
4.
goods
services
operating a particular business
operating in a particular market
**Par. 4.44
The economic benefits obtained could include, for example, goods or services. The action taken could include, for
example, operating a particular business or operating in a particular market. If economic benefits are obtained, or an
action is taken, over time, the resulting present obligation may accumulate over that time
153. The following are possible examples of obligations to transfer an economic resource: All of the given.
1. obligations to pay cash.
2. obligations to deliver goods or provide services.
3. obligations to exchange economic resources with another party on unfavourable terms. Such obligations include, for
example, a forward contract to sell an economic resource on terms that are currently unfavourable or an option that
entitles another party to buy an economic resource from the entity.
4. obligations to transfer an economic resource if a specified uncertain future event occurs.
5. obligations to issue a financial instrument if that financial instrument will oblige the entity to transfer an economic
resource.
Which of the following is not an example of an obligation?
154. A unit of account is selected when considering - Recognition criteria (Yes) Measurement basis (Yes)
**Par. 4.49
A unit of account is selected for an asset or liability when considering how recognition criteria and measurement
concepts will apply to that asset or liability and to the related income and expenses. In some circumstances, it may be
appropriate to select one unit of account for recognition and a different unit of account for measurement. For example,
contracts may sometimes be recognised individually but measured as part of a portfolio of contracts. For presentation
and disclosure, assets, liabilities, income and expenses may need to be aggregated or separated into components.
155. Revenue generally should be recognized - when a sale occurs.
156. Obligations are established by
1.
A contract
2.
A legislation
3.
The entity’s customary practices, published policies or specific statement if the entity has no practical ability
to act in a manner inconsistent with those practices, policies or statements.
4.
An error or a wrongdoing still lodged in the pertinent court for resolution.
Which of the above is referred to as a “constructive obligation”? 3
**Par. 4.31
Many obligations are established by contract, legislation or similar means and are legally enforceable by the party (or
parties) to whom they are owed. Obligations can also arise, however, from an entity’s customary practices, published
policies or specific statements if the entity has no practical ability to act in a manner inconsistent with those practices,
policies or statements. The obligation that arises in such situations is sometimes referred to as a ‘constructive
obligation’.
158. Examples of rights that correspond to an obligation of another party - 1, 2, 3, 4
1.
rights to receive cash.
2.
rights to receive goods or services.
3.
rights to exchange economic resources with another party on favourable terms. Such rights include,
for example, a forward contract to buy an economic resource on terms that are currently favourable or an option to
buy an economic resource.
4.
rights to benefit from an obligation of another party to transfer an economic resource if a specified
uncertain future event occurs.
4.
Right of way.
159. The following criteria for a liability are arranged in what order? – 2,3,1
A.
The obligation exists as a result of past events
B.
There is an obligation
C.
There is a duty to transfer an economic resource.
**Par. 4.28
The first criterion for a liability is that the entity has an obligation.
Par. 4.36
The second criterion for a liability is that the obligation is to transfer an economic resource.
Par. 4.42
The third criterion for a liability is that the obligation is a present obligation that exists as a result of past events.
160. A unit of account is selected to provide information that is
**Par. 4.51
A unit of account is selected to provide useful information, which implies that:
(a)
the information provided about the asset or liability and about any related income and expenses must
be relevant. xxx
(b)
the information provided about the asset or liability and about any related income and expenses must
faithfully represent the substance of the transaction or other event from which they have arisen. xxx
161. The reclassification of a unit of account as to its transferred component and retained component happens when the entity
transfers its asset or liability in – Asset (Part), Liability (Part)
**Par. 4.50
If an entity transfers part of an asset or part of a liability, the unit of account may change at that time, so that the
transferred component and the retained component become separate units of account.
162. Issuance of common stock for cash affects which basic element of financial statements? Revenues
163. Which control is referred to in the Conceptual Framework?
**Par. 4.19
Control links an economic resource to an entity. Assessing whether control exists helps to identify the economic resource
for which the entity accounts. For example, an entity may control a proportionate share in a property without
controlling the rights arising from ownership of the entire property. In such cases, the entity’s asset is the share in the
property, which it controls, not the rights arising from ownership of the entire property, which it does not control.
164. If an agent has custody of an economic resource controlled by the principal, that economic resource mat be recognized as
an asset of the agent. - False
if the agent has an obligation to transfer to a third party an economic resource controlled by the principal, that obligation is a
liability of the agent, because the economic resource that would be transferred is the principal’s economic resource, not the
agent’s. – False
**Par. 4.25
Sometimes one party (a principal) engages another party (an agent) to act on behalf of, and for the benefit of, the
principal. For example, a principal may engage an agent to arrange sales of goods controlled by the principal. If an
agent has custody of an economic resource controlled by the principal, that economic resource is not an asset of the
agent. Furthermore, if the agent has an obligation to transfer to a third party an economic resource controlled by the
principal, that obligation is not a liability of the agent, because the economic resource that would be transferred is the
principal’s economic resource, not the agent’s.
165. The following are considered in recognising a liability:
1.
what information to provide about the liability
2.
how to provide that information
3.
whether the liability is recognised
4.
how it is measured
What are those considered in recognising a liability under the following condition of future
economic benefit?
(a)
1, 2, 3, 4
(b)
1, 2, 3
(c)
1, 2
(d)
2, 3, 4
166. The unit of account is covered by the following:
**Par. 4.48
The unit of account is the right or the group of rights, the obligation or the group of obligations, or the group
of rights and obligations, to which recognition criteria and measurement concepts are applied.
167. Describe the following statements regarding future economic benefits: False, True
1.The entity ensures that the resource will produce economic benefits.
2.The entity is the party that will obtain the future benefit, either directly or indirectly.
**Par. 4.23
For an entity to control an economic resource, the future economic benefits from that resource must flow to the entity
either directly or indirectly rather than to another party. This aspect of control does not imply that the entity can ensure
that the resource will produce economic benefits in all circumstances. Instead, it means that if the resource produces
economic benefits, the entity is the party that will obtain them either directly or indirectly.
168. Describe the following statements relating to obligation: True, False
1. If one party has an obligation to transfer an economic resource, it follows that another party (or parties) has a right
to receive that economic resource.
2. A requirement for one party to recognise a liability and measure it at a specified amount implies that the other party
(or parties) must recognise an asset or measure it at the same amount.
**Par. 4.30
If one party has an obligation to transfer an economic resource, it follows that another party (or parties) has a right to
receive that economic resource. However, a requirement for one party to recognise a liability and measure it at a
specified amount does not imply that the other party (or parties) must recognise an asset or measure it at the same
amount. For example, particular Standards may contain different recognition criteria or measurement requirements for
the liability of one party and the corresponding asset of the other party (or parties) if those different criteria or
requirements are a consequence of decisions intended to select the most relevant information that faithfully represents
what it purports to represent.
169. There is a close association between incurring expenditure and acquiring assets. False, False
1.
When the entity incurs an expenditure, as asset is recognized.
2.
When the entity does not incur an expenditure, there should be no asset to be recognized.
**Par. 4.18
There is a close association between incurring expenditure and acquiring assets, but the two do not necessarily coincide.
Hence, when an entity incurs expenditure, this may provide evidence that the entity has sought future economic
benefits, but does not provide conclusive proof that the entity has obtained an asset. Similarly, the absence of related
expenditure does not preclude an item from meeting the definition of an asset. Assets can include, for example, rights
that a government has granted to the entity free of charge or that another party has donated to the entity.
170. Obligations are established by - 1, 2, 3
1.
A contract
2.
A legislation
3.
The entity’s customary practices, published policies or specific statement if the entity has no practical ability
to act in a manner inconsistent with those practices, policies or statements.
5.
An error or a wrongdoing still lodged in the pertinent court for resolution.
**Par. 4.31
Many obligations are established by contract, legislation or similar means and are legally enforceable by the party (or
parties) to whom they are owed. Obligations can also arise, however, from an entity’s customary practices, published
policies or specific statements if the entity has no practical ability to act in a manner inconsistent with those practices,
policies or statements. The obligation that arises in such situations is sometimes referred to as a ‘constructive
obligation’.
171. A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
172. The accounting principle of expense recognition is best demonstrated by associating effort (expense) with accomplishment
(revenue).
173. Control can also arise if an entity has other means of ensuring that it, and no other party, has the present ability to – Yes, Yes
174. Describe the following statements relating to a unit of account: - True, True, True
1.
A unit of account may be included in a different group for recognition and another for measurement.
2.
Contracts may sometimes be recognised individually but measured as part of a portfolio of contracts.
3.
For presentation and disclosure, assets, liabilities, income and expenses may need to be aggregated or
separated into components.
** Par. 4.49
A unit of account is selected for an asset or liability when considering how recognition criteria and measurement
concepts will apply to that asset or liability and to the related income and expenses. In some circumstances, it may be
appropriate to select one unit of account for recognition and a different unit of account for measurement. For example,
contracts may sometimes be recognised individually but measured as part of a portfolio of contracts. For presentation
and disclosure, assets, liabilities, income and expenses may need to be aggregated or separated into components.
175. Rights that do not correspond to an obligation of another party, include the following 1, 2, 3
1. Rights over physical objects, such as property, plant and equipment or inventories.
2. Right to use a physical object or a right to benefit from the residual value of a leased object.
3. Rights to use intellectual property.
4. Right to remain silent.
** Par. 4.6, excerpted
Rights that do not correspond to an obligation of another party, for example:
(i) rights over physical objects, such as property, plant and equipment or inventories. Examples of such rights are a right
to use a physical object or a right to benefit from the residual value of a leased object.
(ii) rights to use intellectual property.
176. How may an entity fulfil its duty to transfer an economic resource to the party that has a right to receive that resource?
Select from the following modes:. All except 6
1. settle the obligation by negotiating a release from the obligation.
2. transfer the obligation to a third party.
3. replace that obligation to transfer an economic resource with another obligation by entering into a new transaction.
4. Pay in cash or other economic resource.
5. Seek for passage of a new legislation.
6.
File for the declaration of bankruptcy.
** Par.4.40
Instead of fulfilling an obligation to transfer an economic resource to the party that has a right to receive that resource,
entities sometimes decide to, for example:
(a)
settle the obligation by negotiating a release from the obligation;
(b)
transfer the obligation to a third party; or
(c)
transaction.
replace that obligation to transfer an economic resource with another obligation by entering into a new
Par. Par. 4.45
If new legislation is enacted, a present obligation arises only when, as a consequence of obtaining economic benefits or
taking an action to which that legislation applies, an entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer. The enactment of legislation is not in itself sufficient to give an entity a
present obligation. Similarly, an entity’s customary practice, published policy or specific statement of the type
mentioned in paragraph 4.31 gives rise to a present obligation only when, as a consequence of obtaining economic
benefits, or taking an action, to which that practice, policy or statement applies, the entity will or may have to transfer
an economic resource that it would not otherwise have had to transfer.
177. Treating a group of rights and obligations as a single unit of account may provide more relevant information than treating
each right or obligation as a separate unit of account if those rights and obligations - 1, 2, 4
1. cannot be or are unlikely to be the subject of separate transactions.
2. cannot or are unlikely to expire in different patterns.
3. have similar economic characteristics and risks and hence are likely to have similar implications for the prospects for
future economic returns or net cash flows to the entity.
4. are used together in the business activities conducted by an entity to produce cash flows and are measured by
reference to estimates of their interdependent future cash flows.
** Par. 4.51
A unit of account is selected to provide useful information, which implies that:
(a) the information provided about the asset or liability and about any related income and expenses must be relevant.
Treating a group of rights and obligations as a single unit of account may provide more relevant information than
treating each right or obligation as a separate unit of account if, for example, those rights and obligations:
(i) cannot be or are unlikely to be the subject of separate transactions;
(ii) cannot or are unlikely to expire in different patterns;
(iii) have similar economic characteristics and risks and hence are likely to have similar implications for the prospects for
future net cash inflows to the entity or net cash outflows from the entity; or
(iv) are used together in the business activities conducted by an entity to produce cash flows and are measured by
reference to estimates of their interdependent future cash flows.
178. When does a new legislation, entity’s customary practice, published policy or specific statement give rise to a liability? - 1
1.
2.
An entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.
An entity has settled the obligation in advance.
3.
When such new legislation, entity’s customary practice, published policy or specific statement is favourable to the
entity
** Par. Par. 4.45
If new legislation is enacted, a present obligation arises only when, as a consequence of obtaining economic benefits or
taking an action to which that legislation applies, an entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer. The enactment of legislation is not in itself sufficient to give an entity a
present obligation. Similarly, an entity’s customary practice, published policy or specific statement of the type
mentioned in paragraph 4.31 gives rise to a present obligation only when, as a consequence of obtaining economic
benefits, or taking an action, to which that practice, policy or statement applies, the entity will or may have to transfer
an economic resource that it would not otherwise have had to transfer.
179. Describe the following statements: - True, True
1. Each right is an asset.
2. For accounting purposes, related rights are often treated as a single unit of account that is a single asset
** Par. 4.11
In principle, each of an entity’s rights is a separate asset. However, for accounting purposes, related rights are often
treated as a single unit of account that is a single asset (see paragraphs 4.48–4.55). For example, legal ownership of a
physical object may give rise to several rights, including:
(a) the right to use the object;
(b) the right to sell rights over the object;
(c) the right to pledge rights over the object; and
(d) other rights not listed in (a)–(c).
180. In general, rights or obligations arising from the same source are separated only if the resulting information is – Useful (No)
and Benefits outweigh the costs (Yes)
** Par. 4.52
Just as cost constrains other financial reporting decisions, it also constrains the selection of a unit of account. Hence, in
selecting a unit of account, it is important to consider whether the benefits of the information provided to users of
financial statements by selecting that unit of account are likely to justify the costs of providing and using that
information. In general, the costs associated with recognising and measuring assets, liabilities, income and expenses
increase as the size of the unit of account decreases. Hence, in general, rights or obligations arising from the same
source are separated only if the resulting information is more useful and the benefits outweigh the costs.
181. Generally, revenue from sales should be recognized at a point when - none of these
182. Not adjusting the amounts reported in the financial statements for inflation is an example of which basic principle of
accounting? – Historical Cost
183. The information provided about the asset or liability and about any related income and expenses must faithfully represent
the substance of the transaction or other event from which they have arisen. Therefore, it may be necessary to: 1,2, 3
1.
treat rights or obligations arising from different sources as a single unit of account.
2.
separate the rights or obligations arising from a single source.
3.
recognise and measure unrelated rights and obligations separately.
184. This refers to any assets or liabilities that have been retained after the derecognition processed is made. - Retained
component
** Par. 5.28, excerpted
The aims described in paragraph 5.27 are normally achieved by:
xxx
(b ) continuing to recognise the assets or liabilities retained, referred to as the ‘retained component’, if any. That
retained component becomes a unit of account separate from the transferred component. Accordingly, no income or
expenses are recognised on the retained component as a result of the derecognition of the transferred component,
unless the derecognition results in a change in the measurement requirements applicable to the retained component;
and
185. What level of measurement uncertainty is considered in providing an estimate for a useful information? Level of
Measurement Uncertainty; High or Low (Yes, Yes)
** Par. 5.19
For an asset or liability to be recognised, it must be measured. In many cases, such measures must be estimated and are
therefore subject to measurement uncertainty. As noted in paragraph 2.19, the use of reasonable estimates is an
essential part of the preparation of financial information and does not undermine the usefulness of the information if
the estimates are clearly and accurately described and explained. Even a high level of measurement uncertainty does
not necessarily prevent such an estimate from providing useful information.
186. Not all items that meet the definition of accounting elements are recognized. Only those having the following characteristics
would be recognized: Relevant and faithful representation
** Par. 5.7
Not recognising an item that meets the definition of one of the elements makes the statement of financial position and
the statement(s) of financial performance less complete and can exclude useful information from financial statements.
On the other hand, in some circumstances, recognising some items that meet the definition of one of the elements
would not provide useful information. An asset or liability is recognised only if recognition of that asset or liability and of
any resulting income, expenses or changes in equity provides users of financial statements with information that is
useful, ie with:
(a) relevant information about the asset or liability and about any resulting income, expenses or changes in equity; and,
(c) a faithful representation of the asset or liability and of any resulting income, expenses or changes in equity (see
paragraphs.
187. One case in which questions about derecognition arise is when a contract is modified in a way that reduces or eliminates
existing rights or obligations. In deciding how to account for contract modifications, it is necessary to consider which unit of
account provides users of financial statements with the most useful information about the assets and liabilities retained after the
modification, and about how the modification changed the entity’s assets and liabilities: If a contract is executory.
** Par. 5.33
One case in which questions about derecognition arise is when a contract is modified in a way that reduces or eliminates
existing rights or obligations. In deciding how to account for contract modifications, it is necessary to consider which
unit of account provides users of financial statements with the most useful information about the assets and liabilities
retained after the modification, and about how the modification changed the entity’s assets and liabilities:
(a) if a contract modification only eliminates existing rights or obligations, the discussion in paragraphs 5.26–5.32 is
considered in deciding whether to derecognise those rights or obligations;
(b) if a contract modification only adds new rights or obligations, it is necessary to decide whether to treat the added
rights or obligations as a separate asset or liability, or as part of the same unit of account as the existing rights and
obligations (see paragraphs 4.48–4.55); and
(c) if a contract modification both eliminates existing rights or obligations and adds new rights or obligations, it is
necessary to consider both the separate and the combined effect of those modifications. In some such cases, the
contract has been modified to such an extent that, in substance, the modification replaces the old asset or liability with
a new asset or liability. In cases of such extensive modification, the entity may need to derecognise the original asset or
liability and recognise the new asset or liability.
188. Describe the following statements: True, True, False
1. Only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial
position.
2. Similarly, only items that meet the definition of income or expenses are recognised in the statement(s) of financial
performance.
3. All items that meet the definition of one of those elements are recognised.
** Par. 5.6
Only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial position.
Similarly, only items that meet the definition of income or expenses are recognised in the statement(s) of financial
performance. However, not all items that meet the definition of one of those elements are recognised.
189. The following measurement techniques are considered in determining the highly uncertain estimate. Yes, Yes
** Par.5.21
In some of the cases described in paragraph 5.20, the most useful information may be the measure that relies on the
highly uncertain estimate, accompanied by a description of the estimate and an explanation of the uncertainties that
affect it. This is especially likely to be the case if that measure is the most relevant measure of the asset or liability. In
other cases, if that information would not provide a sufficiently faithful representation of the asset or liability and of any
resulting income, expenses or changes in equity, the most useful information may be a different measure (accompanied
by any necessary descriptions and explanations) that is slightly less relevant but is subject to lower measurement
uncertainty.
190. Expense is recognized at the, except,: Increase in the carrying amount of an asset.
** Par. 5.4
The statements are linked because the recognition of one item (or a change in its carrying amount) requires the
recognition or derecognition of one or more other items (or changes in the carrying amount of one or more other items).
For example:
(a) the recognition of expenses occurs at the same time as:
(i) the initial recognition of a liability, or an increase in the carrying amount of a liability; or
the derecognition of an asset, or a decrease in the carrying amount of an asset.
191. Income is recognized at the, except,: Increase in the carrying amount of an asset or a liability.
** Par.5.4
The statements are linked because the recognition of one item (or a change in its carrying amount) requires the
recognition or derecognition of one or more other items (or changes in the carrying amount of one or more other items).
For example:
(a) the recognition of income occurs at the same time as:
(i) the initial recognition of an asset, or an increase in the carrying amount of an asset; or
(ii) the derecognition of a liability, or a decrease in the carrying amount of a liability.
192. The following measurement uncertainty(ies) techniques is(are) considered in determining the highly uncertain estimate.
High – Yes; Low – Yes
** Par.5.21
In some of the cases described in paragraph 5.20, the most useful information may be the measure that relies on the
highly uncertain estimate, accompanied by a description of the estimate and an explanation of the uncertainties that
affect it. This is especially likely to be the case if that measure is the most relevant measure of the asset or liability. In
other cases, if that information would not provide a sufficiently faithful representation of the asset or liability and of any
resulting income, expenses or changes in equity, the most useful information may be a different measure (accompanied
by any necessary descriptions and explanations) that is slightly less relevant but is subject to lower measurement
uncertainty.
193. Do the uncertainty of existence of asset or liability or the low probability of cash flows serve as a basis to conclude that the
information lacks relevance to users? – No
** Par. 5.13
The presence of one or both of the factors described in paragraph 5.12 does not lead automatically to a conclusion that
the information provided by recognition lacks relevance. Moreover, factors other than those described in paragraph
5.12 may also affect the conclusion. It may be a combination of factors and not any single factor that determines
whether recognition provides relevant information.
194. Describe the following statements: True, False
1.
If an asset is not recognized, expense is recognized.
2.
Asset or liability not recognized in the structured summaries should be presented in the explanatory
information .
** Pars. 5. 10 and 5.11
It is important when making decisions about recognition to consider the information that would be given if an asset or
liability were not recognised. For example, if no asset is recognised when expenditure is incurred, an expense is
recognised. Over time, recognising the expense may, in some cases, provide useful information, for example,
information that enables users of financial statements to identify trends
Even if an item meeting the definition of an asset or liability is not recognised, an entity may need to provide
information about that item in the notes. It is important to consider how to make such information sufficiently visible to
compensate for the item’s absence from the structured summary provided by the statement of financial position and, if
applicable, the statement(s) of financial performance.
195. This refers to derecognized assets or liabilities that have expired or have been consumed, collected, fulfilled or transferred,
and recognising any resulting income and expenses. - Transferred component
** Par. 5.28, excerpted
The aims described in paragraph 5.27 are normally achieved by:
derecognising any assets or liabilities that have expired or have been consumed, collected, fulfilled or transferred, and
recognising any resulting income and expenses. In the rest of this chapter, the term ‘transferred component’ refers to all
those assets and liabilities;
196. All of the following statements are correct, except: Recognition of a particular asset or liability and any resulting income,
expenses or changes in equity must always provide relevant information
197. How are the recognized elements of financial statements depicted? Structured summaries
** Par. 5.2
The statement of financial position and statement(s) of financial performance depict an entity’s recognised assets,
liabilities, equity, income and expenses in structured summaries that are designed to make financial information
comparable and understandable. An important feature of the structures of those summaries is that the amounts
recognised in a statement are included in the totals and, if applicable, subtotals that link the items recognised in the
statement.
198. They are structured financial representation of the financial position of and the transactions undertaken by an enterprise
financial statements
199. The assumption that an enterprise will continue in operation for the foreseeable future is based on going concern
200. Which of the following information is not specifically a required disclosure of PAS 1? Names of major/significant shareholders
of the entity
201. Little Inc. decided to extend its reporting period from a year (12-month period) to a 15-month period. Which of the
following is not required under PAS 1 in case of change in reporting period? XYZ Inc. should change the reporting period only if
other similar entities in the geographical area in which it generally operates have done so in the current year; otherwise its financial
statements would not be comparable to others.
202. An entity is required to disclose 3 statements of financial position as comparative information when (choose the exception)
It decides, for the first time, to disclose comparative information
203. Under the accrual basis of accounting, the effects of transactions and other events are recorded in the accounting records
and reported in the financial statement when they occur
204. A complete set of financial statements includes the following components: I, II, III, IV and V
I.
Statement of Financial Position
II.
Statement of Comprehensive Income
III. Statement of Changes in Equity
IV. Statement of Cash Flows
V.
Summary of Accounting policies and explanatory notes
205. In presenting a statement of financial position, an entity must make the current/non-current presentation distinction except
when a presentation based on liquidity provides information that is reliable and more relevant
206. Which statement is incorrect concerning materiality? Materiality provides a threshold or cutoff point for useful information
and therefore a primary qualitative characteristic.
207. Which of the following is not among the overall principles of financial statement presentation? Financial statements need
not present comparative information
208. Financial statements achieved fair presentation when the PFRS issued by FRSC are appropriately applied, with additional
disclosures when necessary
209. The following relates to materiality and aggregation, except Each financial statement item should be presented separately in
the financial statements.
210. The reporting period of an enterprise is generally equal to one year
211. The financial statement that presents an entity’s assets, liabilities and equity at a point in time could be titled the statement
of financial position, the balance sheet or any other title that is not misleading
212. An entity must present additional line items in a statement of financial position when such presentation is relevant to an
understanding of the entity’s financial position
213. Per PAS 1, on frequency of reporting, an entity shall present a complete set of financial statements (including comparative
information) At least annually
214. A consideration in the presentation of financial statements where items are presented and classified on a uniform basis
from one period to another. Consistency
215. XYZ Inc. decided to extend its reporting period from a year (12-month period) to a 15-month period. Which of the following
is not required under PAS in case of change in reporting period? XYZ Inc. should disclose that comparative amounts used in the
financial statements are not entirely comparable.
216. Which of the following statements is incorrect? When preparing financial statements, management should assume a
liquidation of an enterprise.
217. Items of income and expense should be offset when, and only when Either I or II
I.
A PFRS requires or permits it
II.
II.Gains and losses and related expenses arising from the same or similar transactions and events are
not material.
218. They are financial statements intended to meet the needs of users who are not in a position to demand reports tailored to
meet their information needs general-purpose financial statements
219. Describe the following statements in relation to IAS 1: True, True
1. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the
Conceptual Framework.
2. An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such
compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply
with all the requirements of IFRSs.
General Feedback
Par. 15
Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation
requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with
additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.
Par. 16
An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the
notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of
IFRSs.
Par. 17
In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs. A fair presentation also
requires an entity:
(a)
to select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. IAS 8 sets out a hierarchy of authoritative guidance that management considers in the absence of an
IFRS that specifically applies to an item.
(b)
to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information.
(c)
to provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable
users to understand the impact of particular transactions, other events and conditions on the entity’s financial position
and financial performance.
Par.18
An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or
explanatory material.
Par. 19
In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so
misleading that it would conflict with the objective of financial statements set out in the Framework, the entity shall depart from
that requirement in the manner set out in paragraph 20 if the relevant regulatory framework requires, or otherwise does not
prohibit, such a departure.
Par. 20
When an entity departs from a requirement of an IFRS in accordance with paragraph 19, it shall disclose:
(a)
that management has concluded that the financial statements present fairly the entity’s financial position,
financial performance and cash flows;
(b)
that it has complied with applicable IFRSs, except that it has departed from a particular requirement to achieve a
fair presentation;
(c)
the title of the IFRS from which the entity has departed, the nature of the departure, including the treatment that
the IFRS would require, the reason why that treatment would be so misleading in the circumstances that it would conflict
with the objective of financial statements set out in the Framework, and the treatment adopted; and
(d)
for each period presented, the financial effect of the departure on each item in the financial statements that would
have been reported in complying with the requirement.
Par. 21
When an entity has departed from a requirement of an IFRS in a prior period, and that departure affects the amounts recognised
in the financial statements for the current period, it shall make the disclosures set out in paragraph 20(c) and (d).
Par. 22
Paragraph 21 applies, for example, when an entity departed in a prior period from a requirement in an IFRS for the measurement
of assets or liabilities and that departure affects the measurement of changes in assets and liabilities recognized in the current
period’s financial statements.
Par. 23
In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so
misleading that it would conflict with the objective of financial statements set out in the Framework, but the relevant regulatory
framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived
misleading aspects of compliance by disclosing:
(a) the title of the IFRS in question, the nature of the requirement, and the reason why management has concluded that complying
with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in
the Framework; and
(b) for each period presented, the adjustments to each item in the financial
statements that management has concluded would be necessary to achieve a fair presentation.
Par. 24
For the purpose of paragraphs 19–23, an item of information would conflict with the objective of financial statements when it
does not represent faithfully the transactions, other events and conditions that it either purports to represent or could reasonably
be expected to represent and, consequently, it would be likely to influence economic decisions made by users of financial
statements. When assessing whether complying with a specific requirement in an IFRS would be so misleading that it would
conflict with the objective of financial statements set
out in the Framework, management considers:
(a)
why the objective of financial statements is not achieved in the particular circumstances; and
(b)
how the entity’s circumstances differ from those of other entities that comply with the requirement. If other entities
in similar circumstances comply with the requirement, there is a rebuttable presumption that the entity’s compliance with
the requirement would not be so misleading that it would conflict with the objective of financial statements set out in
the Framework
220. S1. An entity whose financial statements comply with PFRSs shall make an explicit and unreserved statement of such
compliance in the notes to the financial statements.
S2. An entity shall not describe financial statements as complying with PFRSs unless they comply with substantially all of
the requirements of PFRSs.
S3. An entity can rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes
or explanatory material. - True False False
221. These are specific principles, conventions, rules and practices adopted by an enterprise in preparing and presenting the
financial statement Accounting policies
222. Which of the basic financial statements is not prepared using the accrual basis of accounting? Statement of Cash Flows
223. They show the results of management’s stewardship of the resources entrusted to it financial statements
224. In principle, income and expenses included in other comprehensive income in one period are reclassified from other
comprehensive income into the statement of profit or loss in a future period when doing so results in the statement of profit or
loss providing (Column 1) of the entity’s financial performance for that future period, unless the (Column 2) may, in developing
Standards, decide that income and expenses included in other comprehensive income are not to be subsequently reclassified
Par. 7.19
In principle, income and expenses included in other comprehensive income in one period are reclassified from other
comprehensive income into the statement of profit or loss in a future period when doing so results in the statement of profit or
loss providing more relevant information, or providing a more faithful representation of the entity’s financial performance for that
future period. However, if, for example, there is no clear basis for identifying the period in which reclassification would have that
result, or the amount that should be reclassified, the Board may, in developing Standards, decide that income and expenses
included in other comprehensive income are not to be subsequently reclassified.
225. Describe the following statements: True, True
1.
Income and expenses that arise on a historical cost measurement basis (see Table 6.1) are included in the
statement of profit or loss.
2.
If a financial asset is measured at current value and if interest income is identified separately from other changes
in value, that interest income is included in the statement of profit or loss.
Par. 7.18
Income and expenses that arise on a historical cost measurement basis (see Table 6.1) are included in the statement of profit or
loss. That is also the case when income and expenses of that type are separately identified as a component of a change in the
current value of an asset or liability. For example, if a financial asset is measured at current value and if interest income is
identified separately from other changes in value, that interest income is included in the statement of profit or loss.
226. How do you consider offsetting?
Par. 7.10
Offsetting occurs when an entity recognises and measures both an asset and liability as separate units of account, but groups
them into a single net amount in the statement of financial position. Offsetting classifies dissimilar items together and therefore is
generally not appropriate.
327. Which of the following statements is correct? Aggregation is the adding together of assets, liabilities, equity, income or
expenses that have shared characteristics and are included in the same classification.
Par. 7.20
Aggregation is the adding together of assets, liabilities, equity, income or expenses that have shared characteristics and are
included in the same classification.
328. Effective communication of information in financial statements requires focusing on presentation and disclosure
Par. 7.2
Effective communication of information in financial statements makes that information more relevant and contributes to a
faithful representation of an entity’s assets, liabilities, equity, income and expenses. It also enhances the understandability and
comparability of information in financial statements. Effective communication of information in financial statements requires:
(a)
focusing on presentation and disclosure objectives and principles rather than focusing on rules;
(b)
classifying information in a manner that groups similar items and separates dissimilar items; and
(c)
aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation.
329. What should be balanced in developing Standards for presentation and disclosure requirements? 1 and 2
1.
Giving entities the flexibility to provide relevant information that faithfully represents the entity’s assets, liabilities, equity,
income and expenses.
2.
Requiring information that is comparable, both from period to period for a reporting entity and in a single reporting period
across entities.
3.
Requiring information that is verifiable using techniques in an independent measurement and evaluation of existence.
Par. 7.4
To facilitate effective communication of information in financial statements, when developing presentation and disclosure
requirements in Standards a balance is needed between:
(a) giving entities the flexibility to provide relevant information that faithfully represents the entity’s assets, liabilities, equity,
income and expenses; and
(b) requiring information that is comparable, both from period to period for a reporting entity and in a single reporting period
across entities.
330. Different levels of aggregation may be needed in different parts of the financial statements.
Par. 7.22
Different levels of aggregation may be needed in different parts of the financial statements. For example, typically, the statement
of financial position and the statement(s) of financial performance provide summarised information and more detailed
information is provided in the notes.
331. Which of the following information is incorrect? 1
1.
Aggregation makes information more useful by summarising all the details.
2.
A balance needs to be found so that relevant information is not obscured either by a large amount of insignificant detail or
by excessive aggregation.
3.
Aggregation conceals some of the details.
Par. 7.21
Aggregation makes information more useful by summarising a large volume of detail. However, aggregation conceals some of
that detail. Hence, a balance needs to be found so that relevant information is not obscured either by a large amount of
insignificant detail or by excessive aggregation.
332. Which of the following statements is incorrect? Effective communication in financial statements is also supported by
considering the following principles entity-specific information is more useful than standardised descriptions, sometimes referred
to as ‘boilerplate’; and duplication of information in different parts of the financial statements is usually necessary and can make
financial statements less understandable.
333. Effective communication of information in financial statements requires the following, except: it does not required
constrains decisions about presentation and disclosure.
334.The chance in the current value of an asset or liability, in exceptional circumstances, may be included in the
Par. 7.17
Because the statement of profit or loss is the primary source of information about an entity’s financial performance for the period,
all income and expenses are, in principle, included in that statement. However, in developing Standards, the Board may decide in
exceptional circumstances that income or expenses arising from a change in the current value of an asset or liability are to be
included in other comprehensive income when doing so would result in the statement of profit or loss providing more relevant
information, or providing a more faithful representation of the entity’s financial performance for that period.
335. Cost constrains the following aspect of providing useful information:
Par. 7.3
Just as cost constrains other financial reporting decisions, it also constrains decisions about presentation and disclosure. Hence, in
making decisions about presentation and disclosure, it is important to consider whether the benefits provided to users of financial
statements by presenting or disclosing particular information are likely to justify the costs of providing and using that information.
336. A reporting entity communicates information about its assets, liabilities, equity, income and expenses by presenting and
disclosing information in its financial statements
337. Which of the following statements is incorrect? Different levels of aggregation may be needed in different parts of the
financial statements. For example, typically, the statement of financial position and the statement(s) of financial performance
provide summarised information and more detailed information is provided on the face of the financial reports.
338. How may income and expenses classified and included: Yes, Yes, No
1.
2.
3.
In the statement of profit or loss
outside the statement of profit or loss, in other comprehensive income.
outside the statement of profit or loss, in the statement of comprehensive income.
Par. 7.15
Income and expenses are classified and included either:
(a) in the statement of profit or loss;11 or
(b) outside the statement of profit or loss, in other comprehensive income.
339. Which of the following statements is incorrect? Classification is not applied to the unit of account selected for an accounting
element.
340. Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for
presentation and disclosure purposes. Such characteristics include—but are not limited to: 1, 2, 3
1.
2.
3.
4.
the nature of the item
its role (or function) within the business activities conducted by the entity
how it is measured
the amount of each component and their total
Par. 7.7
Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for presentation
and disclosure purposes. Such characteristics include—but are not limited to—the nature of the item, its role (or function) within
the business activities conducted by the entity, and how it is measured.
341. Describe the following statements: False, False, True
1.
Equity claim is a component of equity.
2.
To provide useful information, it may be necessary to classify equity claims separately if those equity claims have
different characteristics
3.
To provide useful information, it may be necessary to classify components of equity separately if some of those
components are subject to particular legal, regulatory or other requirements.
Par. 7.12
To provide useful information, it may be necessary to classify equity claims separately if those equity claims have
different characteristics (see paragraph 4.65).
Par. 7.13
Similarly, to provide useful information, it may be necessary to classify components of equity separately if some of those
components are subject to particular legal, regulatory or other requirements. For example, in some jurisdictions, an
entity is permitted to make distributions to holders of equity claims only if the entity has sufficient reserves specified as
distributable (see paragraph 4.66). Separate presentation or disclosure of those reserves may provide useful
information.
342. Which of the following statements is incorrect? Income and expenses that arise on a historical cost measurement basis are
excluded in the statement of profit or loss.
343. Which of the following statements is incorrect? Classification is applied to components of such income and expenses if those
components have similar characteristics and are identified separately.
344. Which of the following statements is incorrect? Offsetting classifies dissimilar items together and therefore is generally
appropriate.
345. Classifying dissimilar assets, liabilities, equity, income or expenses together has an adverse effect on the following: 1, 2, 3, 5
1.
2.
3.
4.
5.
6.
Relevant information
Understandability
Comparability
Verifiability
Faithful representation
Timeliness
Par. 7.8
Classifying dissimilar assets, liabilities, equity, income or expenses together can obscure relevant information, reduce
understandability and comparability and may not provide a faithful representation of what it purports to represent.
346. Describe the following information: False, True, True
1.
Including presentation and disclosure objectives in Standards supports effective communication in financial
statements because such objectives help entities to identify useful techniques and to decide how to communicate
that information in the most effective manner.
2.
Entity-specific information is more useful than standardised descriptions, sometimes referred to as ‘boilerplate’.
3.
Duplication of information in different parts of the financial statements is usually unnecessary and can make
financial statements less understandable.
Par. 7.5
Including presentation and disclosure objectives in Standards supports effective communication in financial statements
because such objectives help entities to identify useful information and to decide how to communicate that information
in the most effective manner.
Par. 7.6
Effective communication in financial statements is also supported by considering the following principles:
(a) entity-specific information is more useful than standardised descriptions, sometimes referred to as ‘boilerplate’; and
(b) duplication of information in different parts of the financial statements is usually unnecessary and can make
financial statements less understandable.
347. The term “total for profit or loss” refers to Yes, Yes
1.
a total for a separate statement
2.
a subtotal for a section within a single statement of financial performance.
The Conceptual Framework does not specify whether the statement(s) of financial performance comprise(s) a single
statement or two statements. The Conceptual Framework uses the term ‘statement of profit or loss’ to refer to a
separate statement and to a separate section within a single statement of financial performance. Likewise, it uses the
term ‘total for profit or loss’ to refer both to a total for a separate statement and to a subtotal for a section within a
single statement of financial performance.
348. Describe the following statements regarding effective communication of information in financial statements. Statement 4 is
false.
1.
Focusing on presentation and disclosure objectives and principles rather than focusing on rules.
2.
Classifying information in a manner that groups similar items and separates dissimilar items.
3.
Aggregating information in such a way that it is not obscured either by unnecessary detail or by excessive aggregation.
4.
Keeping the presentation and disclosure
Par. 7.2
Effective communication of information in financial statements makes that information more relevant and contributes
to a faithful representation of an entity’s assets, liabilities, equity, income and expenses. It also enhances the
understandability and comparability of information in financial statements. Effective communication of information in
financial statements requires:
(a)
focusing on presentation and disclosure objectives and principles rather than focusing on
(b)
classifying information in a manner that groups similar items and separates dissimilar items;
rules;
and
(c)
aggregating information in such a way that it is not obscured either by unnecessary detail or
by excessive aggregation.
349. The statement of profit or loss is the primary source of information about an entity’s
Par. 7.16
The statement of profit or loss is the primary source of information about an entity’s financial performance for
the reporting period. That statement contains a total for profit or loss that provides a highly summarised depiction of
the entity’s financial performance for the period. Many users of financial statements incorporate that total in their
analysis either as a starting point for that analysis or as the main indicator of the entity’s financial performance for the
period. Nevertheless, understanding an entity’s financial performance for the period requires an analysis of all
recognised income and expenses— including income and expenses included in other comprehensive income—as well as
an analysis of other information included in the financial statements.
350. Which of the following are considered as major components of equity? 1, 2, 3, 4
1.
Share capital
2.
Share premium
3.
Retained earnings
4.
Other comprehensive income
5.
Profit
351. Classification is applied to True, False
1.
income and expenses resulting from the unit of account selected for an asset or liability.
2.
components of such income and expenses if those components have different characteristics and are cannot be identified
separately.
7.14
Classification is applied to:
(a)
income and expenses resulting from the unit of account selected for an asset or liability; or
(b)
components of such income and expenses if those components have different characteristics and are identified
separately. For example, a change in the current value of an asset can include the effects of value changes and the accrual
of interest (see Table 6.1). It would be appropriate to classify those components separately if doing so would enhance the
usefulness of the resulting financial information.
352. Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit of account Absolutely, Yes
Par. 7.11
Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit of account (see paragraphs
4.48–4.55).
353. A change in unearned revenue would be classified into which of the following categories for purposes of disclosure in the
statement of cash flow? As an item reconciling earnings and operating cash flows
354. The direct method Shows each major class of gross cash receipts and gross cash payments.
355. Which of the following cash flows does not appear in a cash flow statement using indirect method? Cash received from
customers
356. Star Company provided the following data for the preparation of statement of cash flows for the current year using the
direct method:
Cash balance, beginning
Cash paid to purchase inventory
Cash received from sale of building
Cash paid for interest
Cash paid to repay a loan
Cash collected from customers
1,500,000
7,800,000
5,600,000
450,000
1,000,000
10,000,000
Cash received from issuance of ordinary shares
1,200,000
Cash paid for dividend
Cash paid for income taxes
Cash paid to purchase machinery
780,000
1,320,000
1,950,000
How much was the cash flow for operating activities? 430,000
357. How should a gain from the sale of used equipment for cash be reported in a cash flow statement using the indirect
method? In operating activities as a deduction from income
358. Sales, P102,000; Cost of goods sold, P40,000; Wages, P31,800; Purchase of land, P8,000; Increase in accounts receivable,
P3,600; Depreciation expense, P4,000; Gain on sale of equipment, P1,400; Issuance of bonds, P16,000 at face value; Increase in
accounts payable, P5,200; Patent amortization expense, P2,600; Decrease in inventory, P2,000; Loss on sale of land P1,000;
Decrease in wages payable, P600; Declaration and payment of dividend, P6,800.
Net cash flows from operating activities is? P33,200
359. How should gain on sale of an office building owned by the entity be presented in a cash flow statement? As an adjustment
to the net income in the "operating activities" section of the cash flow statement prepared under the indirect method
360. Amortization of premium on bonds payable is subtracted from net income in the reconciliation of net income to cash flows
from operation because Interest expense understates the cash paid for interest by the amount of the premium amortization
361. The following was taken from the comparative financial statements of Champaca Company for the current year:
Net income for the current year
Sales revenue
Cost of goods sold (except depreciation)
Depreciation expenses
Amortization of intangible assets
Interest expense on short-term debt
Dividend declared and paid during year
Accounts receivable
Inventory
Accounts payable
Interest payable
750,000
4,500,000
2,750,000
500,000
200,000
300,000
350,000
January 1
220,000
350,000
475,000
100,000
December 31
150,000
400,000
520,000
85,000
Under the indirect method, how much should be reported as net cash flow from operating activities? 1,500,000
Solution 54-13 Answer a
Net income
750,000
Depreciation
500,000
Amortization
200,000
Decrease in accounts receivable
70,000
Increase in inventory
(50,000)
Increase in accounts payable
45,000
Decrease in interest payable
(15,000)
Net cash flow from operating activities
1,500,000
362. During the financial year, Cresswell Limited had a Cost of Sales amounting to $260 000. Beginning and ending balances
were:
Inventory
Accounts Payable
Beginning balance
Ending balance
$46 000
$18 000
$55 000
$26 000
A discount of $2 000 for prompt payment was received. The amount of cash paid for goods purchased during the year was:
$259 000;
363. In preparing a statement of cash flows under the indirect method , cash flows from operating activities Can be calculated by
appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
364. Which of the following cannot be classified as Cash flows from operating activities? Cash receipts from short term
borrowings.
365. During the financial year Marina Limited had sales of $720 000. The beginning balance of Accounts receivable was $103 000,
and the ending balance was $139 000. Bad debts amounting to $34 000 were written off during the period. The cash receipts
from customers during the year amounted to: $650 000;
366. Black town Company had the following account balances for the current year:
Accounts payable
Inventory
Accounts receivable
Prepaid expenses
·
·
·
December 31
500,000
300,000
800,000
400,000
January 1
650,000
250,000
900,000
600,000
All purchases of inventory were on account.
Depreciation expense of P900,000 was recognized during the year.
Equipment was sold during the year and gain of P300,000 was recognized.
Black town provided following cash flow information for the current year:
Cash collected from customers
Cash paid for inventory
Cash paid for other expenses
9,500,000
(4,100,000)
(1,400,000)
Cash flows from operations
4,000,000
What was black town Company’s net income for the current year? 3,300,000
Solution 54-16 Answer a
Net income (SQUEEZE)
3,300,000
Decrease in accounts payable
(150,000)
Increase in inventory
(50,000)
Decrease in accounts receivables
100,000
Decrease in prepaid expenses
200,000
Depreciation
900,000
Gain on sale of equipment
(300,000)
Cash flow from operations
4,000,000
The net income is “squeezed” by working back from the cash flow from operations.
367. Under the direct method, which of the following would represent cash paid? Interest expense , adjusted for changes in
interest payable and amortization of bond premium or discount
368. Sinulog Company has provided the following 2009 current account balances:
Jan. 1
Dec. 31
P1,500,000
P2,800,000
Allowance for doubtful accounts
200,000
400,000
Prepaid insurance
600,000
450,000
Accounts payable
900,000
1,200,000
Accounts receivable
Sinulog’s net income for 2009 was P8,000,000. Net cash provided by operating activities should be P7,350,000
369. Brook Company provided the following information for the preparation of the statement of cash flows for the current year:
Decrease in inventory
300,000
Increase in wages payable
Restructuring charge
Depreciation
100,000
2,300,000
1,000,000
Net income
500,000
The restructuring charge consists of two elements, namely P1,500,000 for the write down in value of certain assets and P800,000
for recognition of an obligation to relocate employees. None of the relocation has yet taken place.
Under the indirect method, how much should be reported as cash flow from operating activities? 4,200,000
370. Aklan Company reported net income of P10,000,000 for 2009. Changes occurred in several balance sheet accounts during
2009 as follows:
Investment in shares, carried at equity
Premium on bonds payable
P2,500,000 increase
500,000 decrease
Accumulated depreciation, caused by major repair
1,000,000 decrease
Deferred tax liability
400,000 increase
In the 2009 cash flow statement, the cash provided by operating activities should be P7,400,000
371. Supplemental disclosures required only when the statement of cash flows is prepared using the indirect method include
Amounts paid for interest and taxes
372. How should gain on sale of an office building owned by the entity be presented in a statement of cash flows? As a deduction
from the net income in the operating activities section prepaid under the indirect method
373. Which of the following will be classified as cash flows from operating activities? Cash receipts from royalties, fees,
commissions and other revenue.
374. Katsis Limited had the following cash flows during the reporting period:
·
·
·
·
·
·
Purchase of intangibles - P30,000
Proceeds from sale of plant - P28,000
Receipts from customers - P832,000a
Payments to suppliers - P593,000
Interest received - P17,600
Income taxes paid - P45,500
The net cash connected to operating activities was: P211,100
375. Kersley Company has provided the following account balances for the preparation of the statement of cash flows for the
current year:
Accounts receivable
Allowance for uncollectible accounts
Prepaid rent expense
Accounts payable
January 1
1,150,000
40,000
620,000
970,000
December 31
1,450,000
50,000
410,000
1,120,000
Kersley’s net income for the year is P7,500,000. Net cash provided by operating activities should be 7,570,000
Solution 54-9 Answer d
Net income
7,500,000
Increase in net accounts receivable (1,400,000- 1,110,000)
(290,000)
Decrease in prepaid rent expense
210,000
Increase in accounts payable
150,000
Net cash provided by operating activities
7,570,000
Observe that the allowance account is “netted” against the accounts receivable for purposes of determining the net change in
accounts receivable.
376. The following information pertains to Lax Company during the current year.
Dividend received
500,000
Dividend paid
Cash received from customers
Proceeds from issuing share capital
Interest received
Proceeds from sale of long term investments
Cash paid to suppliers and employees
Interest paid on long term debt
Income taxes paid
Cash balance, January 1
1,000,000
9,000,000
1,500,000
200,000
2,000,000
6,000,000
400,000
300,000
1,800,000
What is the net cash provided by operating activities for the current year using direct method? 3,000,000
377. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a cash flow from investing activities
equals the carrying amount of the equipment Plus the gain
378. The following information is available from the financial statement of Arlyn Company for the current year:
Net income
Depreciation expense
Amortization
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Payments of dividends
Purchases of available for sale securities
Decrease in income tax payable
Increase on long-term note payable
3,960,000
1,020,000
200,000
1,260,000
900,000
240,000
540,000
220,000
160,000
2,000,000
What is Arlyn Company’s net cash flow from operating activities? 5,620,000
379. Brett Limited had a net profit after tax of $850 000 for the financial year. Included in this profit was:
·
Depreciation expense of $120 000
·
Gain on sale of Investments of $28 000
Also, Accounts Receivable increased by $39 000 and Inventories decreased by $12 000.
during the year was: $915 000;
The cash flow from operating activities
380. Sales, P102,000; Cost of goods sold, P40,000; Wages, P31,800; Purchase of land, P8,000; Increase in accounts receivable,
P3,600; Depreciation expense, P4,000; Gain on sale of equipment, P1,400; Issuance of bonds, P16,000 at face value; Increase in
accounts payable, P5,200; Patent amortization expense, P2,600; Decrease in inventory, P2,000; Loss on sale of land P1,000;
Decrease in wages payable, P600; Declaration and payment of dividend, P6,800.
Net cash flows from operating activities is? P33,200
381. Using the indirect method, cash flows from operating activities would be increased by which of the following? Decrease in
accounts receivable
382. In preparing a cash flow statement, cash flows from operating activities Can be calculated by appropriately adding to or
deducting from net income those items in the income statement that do not affect cash
383. In preparing a statement of cash flows , the reconciliation of net income to cash from operating activities does not include
Adjustment to record debt or equity securities classified as available for sale securities
384. Colon Company uses the direct method to prepare its statement of cash flows. The company had the following cash flows
during 2009:
Cash receipts from the issuance of ordinary shares
Cash receipts from customers
Cash receipts from dividends on long-term investments
Cash receipts from repayment of loan made to another company
Cash payments for wages and other operating expenses
Cash payments for insurance
Cash payments for dividends
Cash payments for taxes
Cash payment to purchase land
P400,000
200,000
30,000
220,000
120,000
10,000
20,000
40,000
80,000
The net cash provided by (used in) operating activities is? P60,000
385. Bumper Company’s statement of cash flows for the current year shows cash flow from operations of P1,840,000. The
following items also appear on the statement of financial position and income statement.
Depreciation expense
Accounts receivable increase
Inventory decrease
Accounts payable decrease
400,000
120,000
280,000
80,000
What is the net income for the current year? 1,360,000
Solution 54-15 Answer a
Net income (SQEEZE)
1,360,000
Depreciation
400,000
Accounts receivable increase
(120,000)
Inventory decrease
280,000
Accounts payable decrease
(80,000)
Cash flow from operations
1,840,000
The net income is simply “squeezed’ by working back from cash flow from operations.
386. When preparing a reconciliation of net income to cash from operations , an increase in the ending inventory will result in an
adjustment to reported net income because The net increase in inventory is part of the difference between cost of goods sold and
cash paid to suppliers
387. Box Company provided the following information during the current year.
Dividend received
500,000
Proceeds from sale of long-term
investments
Dividend paid
1,000,000
Cash paid to suppliers and
employees
Cash
received
from 9,000,000
Interest paid on long term debt
customers
Proceeds from issuing share 1,500,000
Income taxes paid
capital
Interest received
200,000
Cash balance, Jan 1
What is the net cash provided by operating activities for the current year? 3,000,000
2,000,000
6,000,000
400,000
300,000
1,800,000
388. Fragile Company uses the direct method to prepare it statement of cash flows. The entity had the following cash flows
during the current year:
Cash receipts from issuance of ordinary shares
Cash receipts from customers
Cash receipts from dividends on long- term investments
Cash receipts from repayment of loan made to another entity
Cash payments for wages and other operating expenses
Cash payments for insurance
Cash payments for dividends
Cash payments for taxes
Cash payments to purchase land
4,000,000
2,000,000
300,000
2,200,000
1,200,000
100,000
200,000
400,000
800,000
The net cash provided by operating activities is? 600,000
389. In a cash flow statement using the indirect approach for operating activities, an increase in inventory should be presented as
Deduction from net income
390. Word Corporation is preparing its statement of cash flows and has provided this information:
Net income before taxes
Depreciation on property, plant and equipment
P400,000
200,000
Loss on sale of building
100,000
Interest expense
150,000
Interest payable, beginning of the year
100,000
Interest payable, end of the year
50,000
Income taxes paid
100,000
Accounts receivable, beginning of the year
500,000
Accounts receivable, end of the year
850,000
Inventory, beginning of the year
500,000
Inventory, end of the year
400,000
Accounts payable, beginning of the year
200,000
Accounts payable, end of the year
500,000
The net cash provided by operating activities is P600,000
391. The net income for the current year for Roger Company was P3,520,000. Additional data are as follows:
Purchase of plant assets
Depreciation of plants assets
Dividends declared
Net decrease in noncash current assets
Loss on sale of equipment
2,800,000
1,480,000
970,000
290,000
130,000
What should be the net cash provided by operating activities in the statement of cash flows for the current year using the
indirect method? 5,420,000
Solution 54-8 Answer a
Net income
3,520,000
Depreciation
1,480,000
Net decrease in noncash current assets
290,000
Loss on sale of equipment
130,000
Net cash provided by operating activities
The indirect method of presenting the cash flow from operations begins with the accrual basis net income and applies a
series of adjustments to convert the income to cash basis. The following general guidelines are offered for the adjustment of
the net income to cash basis:
1.
All increases in noncash trade current assets are deducted from net income.
2.
All decrease in noncash trade current assets are added to net income.
3.
All increase in trade current liabilities are added to net income.
4.
All decrease in trade current liabilities are deducted from net income.
5.
Depreciation, amortization and other noncash expenses are added to net income to eliminate the effect they
had on net income.
6.
Gain on disposal of property is included in net income but it is a non operating item. Thus is deducted from
the net income.
Loss on disposal of property is deducted from net income but this is a non operating item. Thus, this is added back to net income.
392. In a statement of cash flows, the cash flows from investing activities section should report a major repair to machinery
charged to accumulated depreciation.
393. During 2018, equipment was sold for $468,000. The equipment cost $786,000 and had a book value of $432,000.
Accumulated Depreciation—Equipment was $2,061,000 at 12/31/17 and $2,205,000 at 12/31/18. Depreciation expense for 2018
was $498,000.
394. In 2013, a fire completely destroyed a building belonging to Jiffrey Company. The cost of the building was P8,000,000 and
had accumulated depreciation of P5,000,000 at the time of fire. Jiffrey received a cash settlement from an insurance company
and reported a casualty loss of P500,000. In its 2013 statement of cash flows, the net change reported in the cash flows from
investing activities should be P2,500,000 increase
395. The following information on selected cash transactions for 2018 has been provided by Mancuso Company:
Proceeds from sale of land
$315,000
Proceeds from long-term borrowings
600,000
Purchases of plant assets
216,000
Purchases of inventories
1,020,000
Proceeds from sale of Mancuso common stock
360,000
What is the cash provided (used) by investing activities for the year ended December 31, 2018, as a result of the above
information? $99,000
396.
Smiley Corp.'s transactions for the year ended December 31, 2018 included the following:
·
·
·
·
·
·
·
·
Purchased real estate for $1,250,000 cash which was borrowed from a bank.
Sold available-for-sale securities for $1,000,000.
Paid dividends of $1,200,000.
Issued 500 shares of common stock for $500,000.
Purchased machinery and equipment for $250,000 cash.
Paid $900,000 toward a bank loan.
Reduced accounts receivable by $200,000.
Increased accounts payable $400,000.
Smiley's net cash used in investing activities for 2018 was $500,000.
397. Hager Company sold some of its plant assets during 2018. The original cost of the plant assets was $900,000 and the
accumulated depreciation at date of sale was $840,000. The proceeds from the sale of the plant assets were $90,000. The
information concerning the sale of the plant assets should be shown on Hager's statement of cash flows (indirect method) for the
year ended December 31, 2018, as a(n) addition to net income of $30,000 and a $90,000 increase in cash flows from investing
activities.
398. In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified as cash inflows from
investing activities.
399. The following cash flow activities are regarded as investing cash flows: acquisition of subsidiary net of cash acquired;
400. Napier Co. provided the following information on selected transactions during 2018:
Purchase of land by issuing bonds
$1,000,000
Proceeds from issuing bonds
3,000,000
Purchases of inventory
3,800,000
Purchases of treasury stock
600,000
Loans made to affiliated corporations
1,400,000
Dividends paid to preferred stockholders
400,000
Proceeds from issuing preferred stock
1,600,000
Proceeds from sale of equipment
300,000
The net cash provided (used) by investing activities during 2018 is $(1,100,000).
401. Marcum Corp.'s transactions for the year ended December 31, 2009 included the following:
·
Purchased real estate for P220,000 cash which was borrowed from a bank.
·
Sold available-for-sale securities for P200,000.
·
Paid dividends of P240,000.
·
Issued 500 shares of common stock for P100,000.
·
Purchased machinery and equipment for P50,000 cash.
·
Paid P180,000 toward a bank loan.
·
Reduced accounts receivable by P40,000.
·
Increased accounts payable P80,000.
Marcum's net cash used in investing activities for 2009 was P70,000
402. Equipment which cost $426,000 and had accumulated depreciation of $228,000 was sold for $222,000. This transaction
should be shown on the statement of cash flows (indirect method) as a(n) deduction from net income of $24,000 and a $222,000
cash inflow from investing activities.
403. In preparing Titan Inc.’s statement of cash flows for the year ended December 31, 2018, the following amounts were
available:
Collect note receivable
$615,000
Issue bonds payable
639,000
Purchase treasury stock
300,000
What amount should be reported on Titan, Inc.’s statement of cash flows for investing activities? $615,000
404. Equipment that cost $875,000 and had a book value of $390,000 was sold for $450,000. Data from the comparative balance
sheets are:
Equipment
Accumulated Depreciation
12/31/18
$5,400,000
1,650,000
12/31/17
$4,875,000
1,425,000
Equipment purchased during 2018 was $1,400,000.
405. In 2009, a fire completely destroyed a building belonging to Negros Company. The cost of the building was P8,000,000 and
had accumulated depreciation of P5,000,000 at the time of fire. Negros received a cash settlement from an insurance company
and reported a casualty loss of P500,000. In its 2009 statement of cash flows, the net change reported in the cash flows from
investing activities should be? P2,500,000 increase
406. Fleming Company provided the following information on selected transactions during 2018:
Dividends paid to preferred stockholders
$ 500,000
Loans made to affiliated corporations
1,400,000
Proceeds from issuing bonds
1,600,000
Proceeds from issuing preferred stock
2,100,000
Proceeds from sale of equipment
800,000
Purchases of inventories
,400,000
Purchase of land by issuing bonds
600,000
Purchases of treasury stock
1,200,000
The net cash provided (used) by investing activities during 2018 is? $(600,000).
407. Cash inflows from investing result from decreases in noncash assets.
408. Capiz Company had the following activities during 2009:
·
·
Acquired ordinary shares of Iloilo Company for P3,000,000.
Sold an investment in Guimaras Company for P4,500,000 when the carrying amount was P3,800,000.
·
Acquired a P5,000,000 one-year certificate of deposit from a bank. During the year, interest of P400,000 was
received from the bank.
·
Collected dividends of P800,000 on investments in equity securities.
In the 2009 statement of cash flows, net cash used in investing activities should be? P3,500,000
409. The following information on selected cash transactions for 2018 has been provided by Mancuso Company:
Proceeds from sale of land
$315,000
Proceeds from long-term borrowings
600,000
Purchases of plant assets
216,000
Purchases of inventories
1,020,000
Proceeds from sale of Mancuso common stock
360,000
What is the cash provided (used) by investing activities for the year ended December 31, 2018, as a result of the above
information? $99,000
410. Antique Corp. reported net income of P420,000 for 2009. Changes occurred in several balance sheet accounts as follows:
Equipment
Accumulated depreciation
Note payable
P35,000 increase
56,000 increase
42,000 increase
Additional information:
·
During 2009, Antique sold equipment costing P35,000, with accumulated depreciation of P16,800, for a gain of
P7,000.
·
In December 2009, Antique purchased equipment costing P70,000 with P28,000 cash and a 12% note payable of
P42,000.
·
Depreciation expense for the year was P72,800.
In Antique's 2009 statement of cash flows, net cash used in investing activities should be P
2,800
411. Xanthe Corporation had the following transactions occur in the current year:
·
·
·
·
·
·
Cash sale of merchandise inventory.
Sale of delivery truck at book value.
Sale of Xanthe common stock for cash.
Issuance of a note payable to a bank for cash.
Sale of a security held as an available-for-sale investment.
Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current
year? Three items
412. Howell, Inc. reported net income of $88,000 for the year ended December 31, 2018. Included in net income were
depreciation expense of $16,800 and a gain on sale of equipment of $3,400. The equipment had an historical cost of $80,000 and
accumulated depreciation of $48,000. Each of the following accounts increased during 2018:
Land
Prepaid rent
FVTOCI securities
Bonds payable
$11,000
$13,600
$2,000
$10,000
What is the amount of cash provided by or used by investing activities for Jarvis, Inc. for the year ended December 31, 2018?
$22,400
413. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? Sale of
a business segment
414. Selected information from Dinkel Company's 2018 accounting records is as follows:
Proceeds from issuance of common stock
Proceeds from issuance of bonds
Cash dividends on common stock paid
Cash dividends on preferred stock paid
Purchases of treasury stock
Sale of stock to officers and employees not included above
$ 800,000
2,400,000
290,000
120,000
240,000
200,000
Dinkel's statement of cash flows for the year ended December 31, 2018, would show net cash provided (used) by financing
activities of? $2,750,000
415. During 2018, Stout Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Stout, converted into common shares of Stout
Payment in 2018 of cash dividend declared in 2017 to preferred shareholders
Payment for the early retirement of long-term bonds payable (carrying amount $3,930,000)
Proceeds from the sale of treasury stock (on books at cost of $387,000)
540,000
279,000
,975,000
450,000
The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2018 should be? $3,804,000.
416. During 2009, Siquijor has the following activities related to its financial operations:
Payment for the early retirement of long-term bonds payable (carrying amount of bonds
payable P5,000,000)
Distribution in 2009 of cash dividend declared in 2008
Carrying amount of convertible preference shares converted into ordinary shares
Proceeds from sale of treasury shares (cost, P2,000,000)
P5,500,000
3,000,000
2,000,000
2,500,000
In the 2009 statement of cash flows, net cash used in financing activities should be P6,000,000
417. Lange Co. provided the following information on selected transactions during 2009:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury shares
Loans made to affiliated corporations
Dividends paid to preference shareholders
Proceeds from issuing preference shares
Proceeds from sale of equipment
The net cash provided by financing activities during 2009 is? P370,000
P200,000
300,000
650,000
90,000
250,000
80,000
240,000
50,000
The balance in retained earnings at December 31, 2017 was $1,440,000 and at December 31, 2018 was $1,164,000. Net income
for 2018 was $1,000,000. A stock dividend was declared and 418. distributed which increased common stock $500,000 and
paid-in capital $220,000. A cash dividend was declared and paid. The amount of the cash dividend was? $556,000.
419. Financing activities are the? Activities that result in changes in the size and composition of equity capital and borrowings of
the enterprise.
420. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect
method), this event would be reflected as a(n) cash inflow from financing activities.
421. Dividends paid to stockholders are reported on the cash flow statement as Financing activity
422. Smiley Corp.'s transactions for the year ended December 31, 2018 included the following:
Purchased real estate for $1,250,000 cash which was borrowed from a bank.
·
Sold available-for-sale securities for $1,000,000.
·
Paid dividends of $1,200,000.
·
Issued 500 shares of common stock for $500,000.
·
Purchased machinery and equipment for $250,000 cash.
·
Paid $900,000 toward a bank loan.
·
Reduced accounts receivable by $200,000.
·
Increased accounts payable $400,000.
Smiley's net cash used in financing activities for 2018 was? $350,000.
423. In a statement of cash flows, which of the following items is reported as a cash flow from financing activities? I, II, and III
I.
Payments to retire mortgage notes
II.
Interest payments on mortgage notes
III. Dividends payments
424. Warner Limited had the following cash flows during a reporting period:
·
Acquisition of subsidiary, net of cash flows P250,000
·
Dividends paid P65,000
·
Repayment of borrowings P90,000
·
Interest paid on borrowings P57,000
·
Proceeds from sale of plant P215,000
What is the amount of the cash flows in relation to financing activities of Warner Limited for the reporting period? Net cash
outflow P155,000
425. Which of the following would be classified as a financing activity on a statement of cash flows? Payment of a bond payable
426. In preparing Titan Inc.’s statement of cash flows for the year ended December 31, 2018, the following amounts were
available:
Collect note receivable
Issue bonds payable
Purchase treasury stock
$615,000
639,000
300,000
What amount should be reported on Titan, Inc’s statement of cash flows for financing activities? $339,000
427. The following information was taken from the 2018 financial statements of Dunlop Corporation:
Bonds payable, January 1, 2018
Bonds payable, December 31, 2018
$ 800,000
4,800,000
During 2018
·
A $720,000 payment was made to retire bonds payable with a face amount of $800,000.
·
Bonds payable with a face amount of $320,000 were issued in exchange for equipment.
In its statement of cash flows for the year ended December 31, 2018, what amount should Dunlop report as proceeds from
issuance of bonds payable? $4,480,000
428. Cash outflows for financing activities include all, except Interest payment on loans
429. During 2013, Jerwin has the following activities related to its financial operations:
Payment for the early retirement of long-term bonds payable (carrying amount of bonds payable
P5,000,000)
Distribution in 2009 of cash dividend declared in 2008
Carrying amount of convertible preference shares converted into ordinary shares
Proceeds from sale of treasury shares (cost, P2,000,000)
In the 2013 statement of cash flows, net cash used in financing activities should be P6,000,000
P5,500,000
3,000,000
2,000,000
2,500,000
430. Howell, Inc. reported net income of $88,000 for the year ended December 31, 2018. Included in net income was a gain on
early extinguishment of debt of $120,000 related to bonds payable with a book value of $2,400,000. Each of the following
accounts increased during 2018:
Notes receivable
Deferred tax liability
Treasury stock
$90,000
$20,000
$240,000
What is the amount of cash used by financing activities for Jarvis, Inc. for the year ended December 31, 2018? $2,520,000
431. The balance in retained earnings at December 31, 2017 was $1,440,000 and at December 31, 2018 was $1,164,000. Net
income for 2018 was $1,000,000. A stock dividend was declared and distributed which increased common stock $500,000 and
paid-in capital $220,000. A cash dividend was declared and paid. The amount of the cash dividend was? $556,000.
In a cash flow statement, which of the following items is reported as a cash flow from financing activities? I and III
II.
III.
I. Payment to retire mortgage notes
Interest payments on mortgage notes
Dividend payments
432. In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
financing activity
433. The transactions of Tsape Company for the year 2009 included the following:
Cash borrowed from bank for purchase of land
P6,000,000
Purchase of land for cash
Sale of securities for cash
Dividend declared (of which P2,000,000 was paid during the year)
Issuance of ordinary shares for cash
Payment of bank loan including interest of P500,000
Increase in customers’ deposits
6,000,000
1,000,000
3,000,000
7,000,000
3,500,000
500,000
The 2009 statement of cash flows should report net cash provided by financing activities at P8,000,000
434. How does Conceptual Framework contribute to transparency? By enhancing the international comparability and quality of
financial information, enabling investors and other market participants to make informed economic decisions.
Par. SP 1.5
The Conceptual Framework provides the foundation for Standards that:
(a)
contribute to transparency by enhancing the international comparability and quality of financial information,
enabling investors and other market participants to make informed economic decisions.
(b)
strengthen accountability by reducing the information gap between the providers of capital and the people to
whom they have entrusted their money. Standards based on the Conceptual Framework provide information needed to
hold management to account. As a source of globally comparable information, those Standards are also of vital
importance to regulators around the world.
(c)
contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus
improving capital allocation. For businesses, the use of a single, trusted accounting language derived from Standards
based on the Conceptual Framework lowers the cost of capital and reduces international reporting costs.
435. To meet the objective of general purpose financial reporting, the Board may sometimes specify requirements that depart
from aspects of the Conceptual Framework. If the Board does so, it will explain the departure in the Basis for Conclusions on that
Standard.
Par. SP 1.3
To meet the objective of general purpose financial reporting, the Board may sometimes specify requirements that depart from
aspects of the ConceptualFramework. If the Board does so, it will explain the departure in the Basis forConclusions on that
Standard.
436. What is the status of the conceptual framework? Nothing in the conceptual framework overrides any Standard or any
requirement in a Standard.
Par. SP 1.2
The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework overrides any Standard or any
requirement in a Standard.
437. How does Conceptual Framework contribute to economic efficiency? By helping investors to identify opportunities and risks
across the world, thus improving capital allocation. For businesses, the use of a single, trusted accounting language derived from
Standards based on the Conceptual Framework lowers the cost of capital and reduces international reporting costs.
Par. SP 1.5
The Conceptual Framework provides the foundation for Standards that:
(a)
contribute to transparency by enhancing the international comparability and quality of financial information,
enabling investors and other market participants to make informed economic decisions.
(b)
strengthen accountability by reducing the information gap between the providers of capital and the people to
whom they have entrusted their money. Standards based on the Conceptual Framework provide information needed to hold
management to account. As a source of globally comparable information, those Standards are also of vital importance to
regulators around the world.
(c)
contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus
improving capital allocation. For businesses, the use of a single, trusted accounting language derived from Standards based on the
Conceptual Framework lowers the cost of capital and reduces international reporting costs.
438. The Conceptual Framework may be revised from time to time on the basis of the Board’s experience of working with it.
Identify the following statements. False, True
Statement 1.
Revisions of the Conceptual Framework will automatically lead to changes to the specific Standards.
Statement 2.
Any decision to amend a Standard would require the Board to go through its due process for adding a
project to its agenda and developing an amendment to that Standard.
Par. SP 1.4
The Conceptual Framework may be revised from time to time on the basis of the Board’s experience of working with it. Revisions
of the ConceptualFramework will not automatically lead to changes to the Standards. Anydecision to amend a Standard would
require the Board to go through its due process for adding a project to its agenda and developing an amendment to that
Standard.
439. Which of the following is not included in those tht would describe the Conceptual Framework for Financial Reporting?
Specific standards
440. The Conceptual Framework contributes to the stated mission of the following entities, except: Global financial markets and
exchanges
441. How does Conceptual Framework strengthen accountability? By reducing the information gap between the providers of
capital and the people to whom they have entrusted their money. Standards based on the Conceptual Framework provide
information needed to hold management to account. As a source of globally comparable information, those Standards are also of
vital importance to regulators around the world.
Par. SP 1.5
The Conceptual Framework provides the foundation for Standards that:
(a)
contribute to transparency by enhancing the international comparability and quality of financial information,
enabling investors and other market participants to make informed economic decisions.
(b)
strengthen accountability by reducing the information gap between the providers of capital and the people to
whom they have entrusted their money. Standards based on the Conceptual Framework provide information needed to
hold management to account. As a source of globally comparable information, those Standards are also of vital
importance to regulators around the world.
(c)
contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus
improving capital allocation. For businesses, the use of a single, trusted accounting language derived from Standards
based on the Conceptual Framework lowers the cost of capital and reduces international reporting costs.
442. The Board’s work serves the public interest by fostering all of the following in relation to the global economy, except:
Prosperity
Par. SP 1.5
The Conceptual Framework contributes to the stated mission of the IFRS Foundation and of the Board, which is part of the IFRS
Foundation. That mission is to develop Standards that bring transparency, accountability and efficiency to financial markets
around the world. The Board’s work serves the public interest by fostering trust, growth and long-term financial stability in the
global economy.
443. All of the following are purposes of Conceptual Framework, except: Assist in analyzing he valuation of an enterprise.
Par. SP 1.1
The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of, and the
concepts for, general purpose financial reporting. The purpose of the Conceptual Framework is to:
(a)
assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards)
that are based on consistent concepts;
(b)
assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy; and
(c)
assist all parties to understand and interpret the Standards.
444. All of the following are purposes of Conceptual Framework, except: Assist in analyzing he valuation of an enterprise.
Par. SP 1.1
The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of, and the
concepts for, general purpose financial reporting. The purpose of the Conceptual Framework is to:
(a)
assist the International Accounting Standards Board (Board) to develop IFRS Standards (Standards)
that are based on consistent concepts;
(b)
assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy; and
(c)
assist all parties to understand and interpret the Standards.
445. All of the following is part of the mission to develop Standards that bring general-purpose financial reports to the financial
markets around the world, except: Effectiveness
Par. SP 1.5
SP1.5 The Conceptual Framework contributes to the stated mission of the IFRS Foundation and of the Board, which is part of the
IFRS Foundation. That mission is to develop Standards that bring transparency, accountability and efficiency to financial markets
around the world.
446. The following are important in selecting a measurement basis: 1, 2
1.
2.
3.
Par. 6.43
Nature of the information
Facts and circumstances of each factor affecting the selection of a measurement basis.
Materiality
In selecting a measurement basis for an asset or liability and for the related income and expenses, it is necessary to consider the
nature of the information that the measurement basis will produce in both the statement of financial position and the
statement(s) of financial performance (see paragraphs 6.23–6.42 and Table 6.1), as well as other factors (see paragraphs
6.44–6.86).
Par. 6.44
In most cases, no single factor will determine which measurement basis should be selected. The relative importance of each factor
will depend on facts and circumstances.
447. Are the following items considered in the determination of fulfilment value?
Par. 6.17, excerpted
xxx Fulfilment value is the present value of the cash, or other economic resources, that an entity expects to be obliged to transfer
as it fulfils a liability. Those amounts of cash or other economic resources include not only the amounts to be transferred to the
liability counterparty, but also the amounts that the entity expects to be obliged to transfer to other parties to enable it to fulfil
the liability.
448. Describe the following statements: True, False
1. The presence of outcome uncertainty or existence uncertainty may sometimes contribute to
measurement uncertainty.
2. The outcome uncertainty or existence uncertainty results in measurement uncertainty.
Par. 6.62
The presence of outcome uncertainty or existence uncertainty may sometimes contribute to measurement uncertainty. However,
outcome uncertainty or existence uncertainty does not necessarily result in measurement uncertainty. For example, if the fair
value of an asset can be determined directly by observing prices in an active market, no measurement uncertainty is associated
with the measurement of that fair value, even if it is uncertain how much cash the asset will ultimately produce and hence there is
outcome uncertainty.
449. Value in and use and fulfilment value are applied to the following:
Par. 6.17
Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive from the
use of an asset and from its ultimate disposal. Fulfilment value is the present value of the cash, or other economic
resources, that an entity expects to be obliged to transfer as it fulfils a liability. Those amounts of cash or other economic
resources include not only the amounts to be transferred to the liability counterparty, but also the amounts that the
entity expects to be obliged to transfer to other parties to enable it to fulfil the liability.
450. Unlike historical cost, current cost provides information about the cost of an asset consumed or about income from the
fulfilment of liabilities which can be used to derive (1) and can be used as an input in predicting the (2).
Par. 6.41, excerpted
Unlike historical cost, current cost reflects prices prevailing at the time of consumption or fulfilment. When price changes are
significant, margins based on current cost may be more useful for predicting future margins than margins based on historical cost.
451. The relevance of information provided by a measurement basis for an asset or liability and for the related income and
expenses is affected by: 1 and 2
1.
2.
3.
the characteristics of the asset or liability.
how that asset or liability contributes to future cash flows.
how that asset or liability affects other assets or liabilities.
452. Historical cost may be applied to asset or liability as follows:
453. What is the term used to depict a way to apply a historical cost measurement basis to financial assets and financial liabilities
is to measure them at amortised cost. Amortised cost.
Par. 6.9
One way to apply a historical cost measurement basis to financial assets and financial liabilities is to measure them at amortised
cost. The amortised cost of a financial asset or financial liability reflects estimates of future cash flows, discounted at a rate
determined at initial recognition. For variable rate instruments, the discount rate is updated to reflect changes in the variable rate.
The amortised cost of a financial asset or financial liability is updated over time to depict subsequent changes, such as the accrual
of interest, the impairment of a financial asset and receipts or payments.
454. The total carrying amount of equity (total equity) is not measured
Par. 6.87
The total carrying amount of equity (total equity) is not measured directly. It equals the total of the carrying amounts of all
recognised assets less the total of the carrying amounts of all recognised liabilities.
455. Describe the following statements: False, True
1. Value in use provides information about the present value of the estimated cash flows from the use of an asset
and from its ultimate disposal have predictive value because it can be used in assessing the prospects for future
returns on economic resources.
2. Updated estimates of value in use or fulfilment value, combined with information about estimates of the
amount, timing and uncertainty of future cash flows, may also have confirmatory value because they provide
feedback about previous estimates of value in use or fulfilment value.
Par. 6.37
Value in use provides information about the present value of the estimated cash flows from the use of an asset and from its
ultimate disposal. This information may have predictive value because it can be used in assessing the prospects for future net cash
inflows.
Par. 6.39
Updated estimates of value in use or fulfilment value, combined with information about estimates of the amount, timing and
uncertainty of future cash flows, may also have confirmatory value because they provide feedback about previous estimates of
value in use or fulfilment value.
456. Current cost is determined as follows:
Par. 6.22
In some cases, current cost cannot be determined directly by observing prices in an active market and must be determined
indirectly by other means. For example, if prices are available only for new assets, the current cost of a used asset might need to
be estimated by adjusting the current price of a new asset to reflect the current age and condition of the asset held by the entity.
457. The choice of a measurement basis should follow the following order of importance: 3, 1, 2
1.
2.
3.
Fundamental qualitative characteristics
Enhancing qualitative characteristics
Usefulness of the financial information
Par. 6.45
The information provided by a measurement basis must be useful to users of financial statements. To achieve this, the information
must be relevant and it must faithfully represent what it purports to represent. In addition, the information provided should be, as
far as possible, comparable, verifiable, timely and understandable.
458. How do value in use and fulfilment value reflect?
Par. 6.19
Value in use and fulfilment value reflect entity-specific assumptions rather than assumptions by market participants. In practice,
there may sometimes be little difference between the assumptions that market participants would use and those that an entity
itself uses.
459. Cash-flow-based measurement technique is an example of what valuation technique?
Par. 6.74
Valuation techniques, sometimes including the use of cash-flow-based measurement techniques, may be needed to estimate fair
value when it cannot be observed directly in an active market and are generally needed when determining value in use and
fulfilment value. Depending on the techniques used:
(a)
estimating inputs to the valuation and applying the valuation technique may be costly and complex.
(b)
the inputs into the process may be subjective and it may be difficult to verify both the inputs and the validity of the
process itself. Consequently, the measures of identical assets or liabilities may differ. That would reduce comparability.
460. The following are examples of transactions not on market terms. Only 4 examples are correct.
1.
the transaction price may be affected by relationships between the parties, or by financial distress or
other duress of one of the parties;
2.
an asset may be granted to the entity free of charge by a government or donated to the entity by
another party;
3.
a liability may be imposed by legislation or regulation; or
4.
a liability to pay compensation or a penalty may arise from an act of wrongdoing.
5.
A liability that is executory in nature.
Par. 6.80
Assets may be acquired, or liabilities may be incurred, as a result of an event that is not a transaction on market terms. For
example:
(a)
the transaction price may be affected by relationships between the parties, or by financial distress or other duress
of one of the parties;
(b)
an asset may be granted to the entity free of charge by a government or donated to the entity by another party;
(c)
a liability may be imposed by legislation or regulation; or
(d)
a liability to pay compensation or a penalty may arise from an act of wrongdoing.
461. How are these variables considered in the perspective of market participants?
Par. 6.13
Fair value reflects the perspective of market participants—participants in a market to which the entity has access. The asset or
liability is measured using the same assumptions that market participants would use when pricing the asset or liability if those
market participants act in their economic best interest.
462. When income or expense is recognized at the exit or terminal point of he asset or liability, the following measurement bases
are:
Par. 6.51
If the value of an asset or liability is sensitive to market factors or other risks, its historical cost might differ significantly from its
current value. Consequently, historical cost may not provide relevant information if information about changes in value is
important to users of financial statements. For example, amortised cost cannot provide relevant information about a financial
asset or financial liability that is a derivative.
Par. 6.52
Furthermore, if historical cost is used, changes in value are reported not when that value changes, but when an event such as
disposal, impairment or fulfilment occurs. This could be incorrectly interpreted as implying that all the income and expenses
recognised at the time of that event arose then, rather than over the periods during which the asset or liability was held.
Moreover, because measurement at historical cost does not provide timely information about changes in value, income and
expenses reported on that basis may lack predictive value and confirmatory value by not depicting the full effect of the entity’s
exposure to risk arising from holding the asset or liability during the reporting period.
463. When measurement uncertainty arises, measurement of recognized asset or liability is to be performed under the following
conditions:
Par. 6.60
When a measure cannot be determined directly by observing prices in an active market and must instead be estimated,
measurement uncertainty arises. The level of measurement uncertainty associated with a particular measurement basis may
affect whether information provided by that measurement basis provides a faithful representation of an entity’s financial position
and financial performance. A high level of measurement uncertainty does not necessarily prevent the use of a measurement basis
that provides relevant information. However, in some cases the level of measurement uncertainty is so high that information
provided by a measurement basis might not provide a sufficiently faithful representation (see paragraph 2.22). In such cases, it is
appropriate to consider selecting a different measurement basis that would also result in relevant information.
464. Sale of an asset or transfer of a liability would normally be for consideration of an amount similar to its fair value, if the
transaction were to occur in the market that was the source for the prices used when measuring that fair value. In those cases, if
the asset or liability is measured at fair value, the net income or net expenses arising at the time of the sale or transfer would
usually be Small, unless the effect of transaction costs is significant.
6.36
Sale of an asset or transfer of a liability would normally be for consideration of an amount similar to its fair value, if the
transaction were to occur in the market that was the source for the prices used when measuring that fair value. In those cases, if
the asset or liability is measured at fair value, the net income or net expenses arising at the time of the sale or transfer would
usually be small, unless the effect of transaction costs is significant.
465. The characteristics of the asset or liability affecting the relevance of information provided by a measurement basis the
following in particular:
Par. 6.50
The relevance of information provided by a measurement basis depends partly on the characteristics of the asset or liability, in
particular, on the variability of cash flows and on whether the value of the asset or liability is sensitive to market factors or other
risks.
466. Elements recognized in financial statements are quantified in Monetary terms
Par 6.1
Elements recognised in financial statements are quantified in monetary terms. This requires the selection of a measurement basis.
A measurement basis is an identified feature—for example, historical cost, fair value or fulfilment value —of an item being
measured. Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related
income and expenses.
467. Using a historical cost measurement basis, identical assets acquired, or liabilities incurred, at different times can be reported
in the financial statements at different amounts. This reduces what enhancing qualitative characteristics, both from period to
period for a reporting entity and in a single period across entities. Comparability
Par. 6.71
Using a historical cost measurement basis, identical assets acquired, or liabilities incurred, at different times can be reported in
the financial statements at different amounts. This can reduce comparability, both from period to period for a reporting entity and
in a single period across entities.
468. The historical cost of a liability is updated over time to depict, if applicable: Only 3 items are considered.
1. fulfilment of part or all of the liability, for example, by making payments that extinguish part or all of the
liability or by satisfying an obligation to deliver goods.
2. the effect of events that increase the value of the obligation to transfer the economic resources needed to
fulfil the liability to such an extent that the liability becomes onerous. A liability is onerous if the historical cost
is no longer sufficient to depict the obligation to fulfil the liability.
3. accrual of interest to reflect any financing component of the liability.
4. payments received that extinguish part or all of the asset.
469. Verifiability is enhanced by using measurement bases that result in measures that can be independently corroborated either
directly or indirectly. An example of direct verification is by observing prices,
Par. 6.68
Verifiability is enhanced by using measurement bases that result in measures that can be independently corroborated either
directly, for example, by observing prices, or indirectly, for example, by checking inputs to a model. If a measure cannot be
verified, users of financial statements may need explanatory information to enable them to understand how the measure was
determined. In some such cases, it may be necessary to specify the use of a different measurement basis.
470. Describe the following statements: True, False
1. The presence of outcome uncertainty or existence uncertainty may sometimes contribute to measurement
uncertainty.
2. The outcome uncertainty or existence uncertainty results in measurement uncertainty.
Par. 6.62
The presence of outcome uncertainty or existence uncertainty may sometimes contribute to measurement uncertainty. However,
outcome uncertainty or existence uncertainty does not necessarily result in measurement uncertainty. For example, if the fair
value of an asset can be determined directly by observing prices in an active market, no measurement uncertainty is associated
with the measurement of that fair value, even if it is uncertain how much cash the asset will ultimately produce and hence there is
outcome uncertainty.
471. Depending on the techniques used, applying the cash-flow-based measurement techniques may be costly, complex,
subjective and difficult to verify. To these, what qualitative characteristics are not enhanced: Timeliness
Par. 6.74
Valuation techniques, sometimes including the use of cash-flow-based measurement techniques, may be needed to estimate fair
value when it cannot be observed directly in an active market and are generally needed when determining value in use and
fulfilment value. Depending on the techniques used:
(a)
estimating inputs to the valuation and applying the valuation technique may be costly and complex.
(b)
the inputs into the process may be subjective and it may be difficult to verify both the inputs and the validity of the
process itself. Consequently, the measures of identical assets or liabilities may differ. That would reduce comparability.
472. The historical cost of an asset is updated over time to depict, if applicable: Only 4 items are considered.
1.
the consumption of part or all of the economic resource that constitutes the asset (depreciation or
amortisation).
2.
payments received that extinguish part or all of the asset.
3.
the effect of events that cause part or all of the historical cost of the asset to be no longer recoverable
(impairment).
4.
accrual of interest to reflect any financing component of the asset.
5.
Changes in the value of similar asset.
473. The current cost measurement basis enhances comparability. Its inherent complexity, subjectivity and cost make this
measurement basis lacking in terms of 2, 3
1.
2.
Comparability
Understandability
3.
4.
Verifiability
Timeliness
Par. 6.76
Using a current cost measurement basis, identical assets acquired or liabilities incurred at different times are reported in the
financial statements at the same amount. This can enhance comparability, both from period to period for a reporting entity and in
a single period across entities. However, determining current cost can be complex, subjective and costly. For example, as noted in
paragraph 6.22, it may be necessary to estimate the current cost of an asset by adjusting the current price of a new asset to
reflect the current age and condition of the asset held by the entity. In addition, because of changes in technology and changes in
business practices, many assets would not be replaced with identical assets. Thus, a further subjective adjustment to the current
price of a new asset would be required in order to estimate the current cost of an asset equivalent to the existing asset. Also,
splitting changes in current cost carrying amounts between the current cost of consumption and the effect of changes in prices
(see paragraph 6.42) may be complex and require arbitrary assumptions. Because of these difficulties, current cost measures may
lack verifiability and understandability.
474. Measurement date covers the following, except: Date of audit report
Par. 6.12
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date.
475. Amortised cost is may provide relevant information for financial assets and financial liabilities with the objective of collecting
contractual cash flows on
Par. 6.57
When a business activity of an entity involves managing financial assets and financial liabilities with the objective of collecting
contractual cash flows, amortised cost may provide relevant information that can be used to derive the margin between the
interest earned on the assets and the interest incurred on the liabilities. However, in assessing whether amortised cost will provide
useful information, it is also necessary to consider the characteristics of the financial asset or financial liability. Amortised cost is
unlikely to provide relevant information about cash flows that depend on factors other than principal and interest.
476. Under the current cost measurement basis, the change in the carrying amount consists of: Both 1 and 2
1. the change in the carrying amount in the reporting period into the current cost of consumption (or current
income from fulfilment).
the effect of changes in prices.
477. The phrase “orderly transactions between market participants” in paragraph 6.12 covers:
478. Under the historical cost measurement basis, and the transaction is made on market terms,, how is transaction cost
considered?
Par 6.5
The historical cost of an asset when it is acquired or created is the value of the costs incurred in acquiring or creating the asset,
comprising the consideration paid to acquire or create the asset plus transaction costs. The historical cost of a liability when it is
incurred or taken on is the value of the consideration received to incur or take on the liability minus transaction costs.
479. The historical cost of an asset is updated over time to depict, if applicable: Only 4 items are considered.
1.
the consumption of part or all of the economic resource that constitutes the asset (depreciation or
amortisation).
2.
payments received that extinguish part or all of the asset.
3.
the effect of events that cause part or all of the historical cost of the asset to be no longer recoverable
(impairment).
4.
accrual of interest to reflect any financing component of the asset.
5.
Changes in the value of similar asset.
480. For assets and liabilities that produce cash flows directly, the measurement basis that provides the most relevant
information is likely to be – Historical Cost: No Current Value:Yes
Par. 6.56
For assets and liabilities that produce cash flows directly, such as assets that can be sold independently and without a significant
economic penalty (for example, without significant business disruption), the measurement basis that provides the most relevant
information is likely to be a current value that incorporates current estimates of the amount, timing and uncertainty of the future
cash flows.
481. When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction on market terms, all relevant
aspects of the transaction or other event need to be identified and considered. These include, except: Distribution to creditors.
Par. 6.82
When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction on market terms, all relevant
aspects of the transaction or other event need to be identified and considered. For example, it may be necessary to recognise
other assets, other liabilities, contributions from holders of equity claims or distributions to holders of equity claims to faithfully
represent the substance of the effect of the transaction or other event on the entity’s financial position (see paragraphs
4.59–4.62) and any related effect on the entity’s financial performance.
482. Measurement uncertainty is different from both outcome uncertainty and existence uncertainty: False, True
1.
outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow or
outflow of economic benefits that will result from an asset or liability. It covers the existence uncertainty.
2.
existence uncertainty arises when it is uncertain whether an asset or a liability exists.
Describe the statements above.
Par. 6.61
Measurement uncertainty is different from both outcome uncertainty and existence uncertainty:
(a)
outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow or outflow of
economic benefits that will result from an asset or liability.
(b)
existence uncertainty arises when it is uncertain whether an asset or a liability exists. Paragraphs 5.12–5.14
discuss how existence uncertainty may affect decisions about whether an entity recognises an asset or liability when it is uncertain
whether that asset or liability exists.
483. The nature of the business activities conducted by the entity defines on whether the economic resoucrces produce cash
flows
As noted in paragraph 1.14, some economic resources produce cash flows directly; in other cases, economic resources are
used in combination to produce cash flows indirectly. How economic resources are used, and hence how assets and liabilities
produce cash flows, depends in part on the nature of the business activities conducted by the entity.
484. Which of the following statements relating to a Standard may need to describe how to implement the measurement basis
selected in that Standard. 1, 2, 3,
1. specifying techniques that may or must be used to estimate a measure applying a particular
measurement basis;
2. specifying a simplified measurement approach that is likely to provide information similar to that
provided by a preferred measurement basis; or
3. explaining how to modify a measurement basis, for example, by excluding from the fulfilment value of
a liability the effect of the possibility that the entity may fail to fulfil that liability (own credit risk).
485. Fair value reflects the amount, timing and uncertainty of future cash flows in relation to the perspective of the
Par. 6.32
Information provided by measuring assets and liabilities at fair value may have predictive value because fair value reflects market
participants’ current expectations about the amount, timing and uncertainty of future cash flows. These expectations are priced in
a manner that reflects the current risk preferences of market participants. That information may also have confirmatory value by
providing feedback about previous expectations.
486. If an entity acquired an asset in one market and determines fair value using prices in a different market (the market in which
the entity would sell the asset), any difference between the prices in those two markets is recognised as income when that fair
value is
Par. 6.35
If an entity acquired an asset in one market and determines fair value using prices in a different market (the market in which the
entity would sell the asset), any difference between the prices in those two markets is recognised as income when that fair value is
first determined.
487. How is transaction cost considered in the fair value measurement of a liability? Ignored
Par. 6.16
Because fair value is not derived, even in part, from the price of the transaction or other event that gave rise to the asset or
liability, fair value is not increased by the transaction costs incurred when acquiring the asset and is not decreased by the
transaction costs incurred when the liability is incurred or taken on. In addition, fair value does not reflect the transaction costs
that would be incurred on the ultimate disposal of the asset or on transferring or settling the liability.
488. The following affect(s) the historical cost measurement basis of an asset.
Par. 6.26
Because historical cost is reduced to reflect consumption of an asset and its impairment, the amount expected to be recovered
from an asset measured at historical cost is at least as great as its carrying amount. Similarly, because the historical cost of a
liability is increased when it becomes onerous, the value of the obligation to transfer the economic resources needed to fulfil the
liability is no more than the carrying amount of the liability.
489. Examples of typical assets measured at historical cost are the following:
Par. 6.55
When a business activity of an entity involves the use of several economic resources that produce cash flows indirectly, by being
used in combination to produce and market goods or services to customers, historical cost or current cost is likely to provide
relevant information about that activity. For example, property, plant and equipment is typically used in combination with an
entity’s other economic resources. Similarly, inventory typically cannot be sold to a customer, except by making extensive use of
the entity’s other economic resources (for example, in production and marketing activities). Paragraphs 6.24–6.31 and 6.40–6.42
explain how measuring such assets at historical cost or current cost can provide relevant information that can be used to derive
margins achieved during the period.
490. Which measurement basis enhances comparability particularly if the assets or liabilities contribute to cash flows in a similar
manner?
Par. 6.72
Because fair value is determined from the perspective of market participants, not from an entity-specific perspective, and is
independent of when the asset was acquired or the liability was incurred, identical assets or liabilities measured at fair value will,
in principle, be measured at the same amount by entities that have access to the same markets. This can enhance comparability
both from period to period for a reporting entity and in a single period across entities. In contrast, because value in use and
fulfilment value reflect an entity-specific perspective, those measures could differ for identical assets or liabilities in different
entities. Those differences may reduce comparability, particularly if the assets or liabilities contribute to cash flows in a similar
manner.
491. Which constrains the selection of a measurement basis? Cost
Par. 6.64
Just as cost constrains other financial reporting decisions, it also constrains the selection of a measurement basis. Hence, in
selecting a measurement basis, it is important to consider whether the benefits of the information provided to users of financial
statements by that measurement basis are likely to justify the costs of providing and using that information.
492. Fulfilment value provides information about what value of the estimated cash flows needed to fulfil a liability. Hence,
Par. 6.38
Fulfilment value provides information about the present value of the estimated cash flows needed to fulfil a liability. Hence,
fulfilment value may have predictive value, particularly if the liability will be fulfilled, rather than transferred or settled by
negotiation.
493. Fair value relates to what act in relation to an asset?
Par. 6.12
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date.
494. Describe the following statements: True, False
1. Consistently using the same measurement bases for the same items, either from period to period within a
reporting entity or in a single period across entities, can help make financial statements more comparable.
2. Consistency in the use of the same measurement basis for the same items prevents the preparer of the
financial reports to select another measurement basis for an asset or liability.
Par. 6.65
Consistently using the same measurement bases for the same items, either from period to period within a reporting entity or in a
single period across entities, can help make financial statements more comparable.
Par. 6.66
A change in measurement basis can make financial statements less understandable. However, a change may be justified if other
factors outweigh the reduction in understandability, for example, if the change results in more relevant information. If a change is
made, users of financial statements may need explanatory information to enable them to understand the effect of that change.
495. What enhancing qualitative characteristics support the use of historical cost as a measurement basis?
Par. 6.69
In many situations, it is simpler, and hence less costly, to measure historical cost than it is to measure a current value. In addition,
measures determined applying a historical cost measurement basis are generally well understood and, in many cases, verifiable.
496. The “accumulated other comprehensive income” is the difference between the: 1 minus 2
1. carrying amount of the asset or liability in the statement of financial position
2. carrying amount that would have been determined applying the measurement basis selected for the statement
of profit or loss
3. amortised amount of the asset or liability in the statement of financial position
4. amortised amount that would have been determined applying the measurement basis selected for the
statement of profit or loss
Par. 6.86
In such cases, the total income or total expenses arising in the period from the change in the current value of the asset or liability
is separated and classified so that:
(a)
the statement of profit or loss includes the income or expenses measured applying the measurement basis
selected for that statement; and
(b)
other comprehensive income includes all the remaining income or expenses. As a result, the accumulated other
comprehensive income related to that asset or liability equals the difference between:
(i)
the carrying amount of the asset or liability in the statement of financial position; and
(ii)
the carrying amount that would have been determined applying the measurement basis selected for the statement
of profit or loss.
497. Describe the following statements: All statements are correct,
1. Historical cost related to the price of the transaction or other event that gave rise to the asset or liability.
2. Historical cost related to the price of the transaction or other event that gave rise to the liability.
3. At the historical cost measurement, the entity expects that the asset will provide sufficient economic benefits
that the entity will at least recover the cost of the asset.
4. At historical cost, since a liability is increased when it becomes onerous, the value of the obligation to transfer
the economic resources needed to fulfil the liability is no more than the carrying amount of the liability.
Par. 6.24
Information provided by measuring an asset or liability at historical cost may be relevant to users of financial statements, because
historical cost uses information derived, at least in part, from the price of the transaction or other event that gave rise to the asset
or liability.
Par. 6.25
Normally, if an entity acquired an asset in a recent transaction on market terms, the entity expects that the asset will provide
sufficient economic benefits that the entity will at least recover the cost of the asset. Similarly, if a liability was incurred or taken
on as a result of a recent transaction on market terms, the entity expects that the value of the obligation to transfer economic
resources to fulfil the liability will normally be no more than the value of the consideration received minus transaction costs.
Hence, measuring an asset or liability at historical cost in such cases provides relevant information about both the asset or liability
and the price of the transaction that gave rise to that asset or liability.
498. Recognition involves the following process(es):
1. Capturing for inclusion in the financial statements those that meet the definition of accounting
elements.
2. Depicting the item in one of those statements—either alone or in aggregation with other items— in
words and by a monetary amount, and including that amount in one total in that statement.
Describe the phrases above. True, False
Par. 5.1, excerpted
Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial
performance an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income
or expenses. Recognition involves depicting the item in one of those statements—either alone or in aggregation with other
items— in words and by a monetary amount, and including that amount in one or more totals in that statement. The amount at
which an asset, a liability or equity is recognised in the statement of financial position is referred to as its ‘carrying amount’.
499. Describe the following statements:
The cost constrains principle does not impact the recognition decision.
Judgment is required when deciding whether to recognise an item, and thus recognition requirements may need to vary
between and within Standards. False, True
Pars. 5.8 and 5.9
Just as cost constrains other financial reporting decisions, it also constrains recognition decisions. There is a cost to recognising an
asset or liability. Preparers of financial statements incur costs in obtaining a relevant measure of an asset or liability. Users of
financial statements also incur costs in analysing and interpreting the information provided. An asset or liability is recognised if
the benefits of the information provided to users of financial statements by recognition are likely to justify the costs of providing
and using that information. In some cases, the costs of recognition may outweigh its benefits.
It is not possible to define precisely when recognition of an asset or liability will provide useful information to users of financial
statements, at a cost that does not outweigh its benefits. What is useful to users depends on the item and the facts and
circumstances. Consequently, judgement is required when deciding whether to recognise an item, and thus recognition
requirements may need to vary between and within Standards.
500. What are the factors considered in using the cash-flow-based measurement technique, except: The market where the
business operates is inactive.
Par. 5.20
In some cases, the level of uncertainty involved in estimating a measure of an asset or liability may be so high that it may be
questionable whether the estimate would provide a sufficiently faithful representation of that asset or liability and of any resulting
income, expenses or changes in equity. The level of measurement uncertainty may be so high if, for example, the only way of
estimating that measure of the asset or liability is by using cash-flow-based measurement techniques and, in addition, one or
more of the following circumstances exists:
(a)
to estimate.
the range of possible outcomes is exceptionally wide and the probability of each outcome is exceptionally difficult
(b)
the measure is exceptionally sensitive to small changes in estimates of the probability of different outcomes—for
example, if the probability of future cash inflows or outflows occurring is exceptionally low, but the magnitude of those cash
inflows or outflows will be exceptionally high if they occur.
(c)
measuring the asset or liability requires exceptionally difficult or exceptionally subjective allocations of cash flows
that do not relate solely to the asset or liability being measured.
501. All of the following statements are correct, except: Compliance to the derecognition procedures is strict and without
reservations.
502. The IASB’s Conceptual framework for financial reporting defines recognition as the process of incorporating in the financial
statements an item which meets the definition of an element and satisfies certain criteria. Which of the following elements
should be recognised in the financial statements of an entity in the manner described?
Select one: In equity: irredeemable preference shares
503. Which of the following affect the determination of faithful representation? 1, 2, 3
1.
2.
3.
Substance over Form
Outcome uncertainty
Measurement uncertainty
Par. 5.18
Recognition of a particular asset or liability is appropriate if it provides not only relevant information, but also a faithful
representation of that asset or liability and of any resulting income, expenses or changes in equity. Whether a faithful
representation can be provided may be affected by the level of measurement uncertainty associated with the asset or liability or
by other factors.
504. The following measurement techniques are are considered in determining the highly uncertain estimate.
Par.5.21
In some of the cases described in paragraph 5.20, the most useful information may be the measure that relies on the highly
uncertain estimate, accompanied by a description of the estimate and an explanation of the uncertainties that affect it. This is
especially likely to be the case if that measure is the most relevant measure of the asset or liability. In other cases, if that
information would not provide a sufficiently faithful representation of the asset or liability and of any resulting income, expenses
or changes in equity, the most useful information may be a different measure (accompanied by any necessary descriptions and
explanations) that is slightly less relevant but is subject to lower measurement uncertainty.
505. Recognition links the elements, the statement of financial position and the statement(s) of financial performance as follows,
except: in the statement of financial position at the beginning and end of the reporting period, net change in total assets minus net
change total liabilities equal total equity.
506. Recognition is the process of including within the financial statements items which meet the definition of an element
according to the IASB’s Conceptual Framework for Financial Reporting. Which of the following items should be recognised as an
asset in the statement of financial position of a company?
Select one: A receivable from a customer which has been sold (factored) to a finance company. The finance company has full
recourse to the company for any losses
507. The following are considered in determining the highly uncertain estimate:
Par.5.21
In some of the cases described in paragraph 5.20, the most useful information may be the measure that relies on the highly
uncertain estimate, accompanied by a description of the estimate and an explanation of the uncertainties that affect it. This is
especially likely to be the case if that measure is the most relevant measure of the asset or liability. In other cases, if that
information would not provide a sufficiently faithful representation of the asset or liability and of any resulting income, expenses
or changes in equity, the most useful information may be a different measure (accompanied by any necessary descriptions and
explanations) that is slightly less relevant but is subject to lower measurement uncertainty.
508. Describe the following statements with regard to the derecognition process. False, True, True, True
a. Derecognition is the removal of all, not in part, of a recognised asset or liability from an entity’s statement of financial position.
b. Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability.
c. For an asset, derecognition normally occurs when the entity loses control of all or part of the recognised asset.
d. For a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the
recognised liability.
Part 5.26
Derecognition is the removal of all or part of a recognised asset or liability from an entity’s statement of financial position.
Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability:
(a)
for an asset, derecognition normally occurs when the entity loses control of all or part of the recognised asset; and
for a liability, derecognition normally occurs when the entity no longer has a present obligation for all or part of the recognised
liability.
509. Generally, iIs income or expense recognized from transactions arising from the derecognition process?
Par. 5.28, excerpted
The aims described in paragraph 5.27 are normally achieved by:
(a)
continuing to recognise the assets or liabilities retained, referred to as the ‘retained component’, if any.
That retained component becomes a unit of account separate from the transferred component. Accordingly, no income or
expenses are recognised on the retained component as a result of the derecognition of the transferred component, unless the
derecognition results in a change in the measurement requirements applicable to the retained component; and
510. Faithful representation of a recognised asset, liability, equity, income or expenses involves the following: Only 3 are covered
1.
2.
3.
4.
Definition
Recognition/Derecognition
Measurement
Presentation and Disclosure
Par. 5.24
Faithful representation of a recognised asset, liability, equity, income or expenses involves not only recognition of that item, but
also its measurement as well as presentation and disclosure of information about it.
511. Whether or not an asset or liability is recognised, a faithful representation of the asset or liability may need to include: False,
True
1. explanatory information about the certainties associated with the asset or liability’s existence or
measurement,
2. or with its outcome—the amount or timing of any inflow or outflow of economic benefits that will
ultimately result from it.
Par. 5.23
Whether or not an asset or liability is recognised, a faithful representation of the asset or liability may need to include explanatory
information about the uncertainties associated with the asset or liability’s existence or measurement, or with its outcome—the
amount or timing of any inflow or outflow of economic benefits that will ultimately result from it (see paragraphs 6.60–6.62).
512. All of the following statements are correct, except: Even if an item meeting the definition of an asset or liability is not
recognised, an entity may need not to provide information about that item in the notes.
512. In the derecognition process, the following components are considered as: Transferred Components, Retained Components
(Derecognize, Recognize)
513. When income or expense is recognized in the retained component, the following procedures should be applied: One or
more
(i)
presenting any retained component separately in the statement of financial position;
(ii)
presenting separately in the statement(s) of financial performance any income and expenses recognised as a result of the
derecognition of the transferred component; or
(iii)
providing explanatory information.
514. In some cases, derecognition may not faithfully represent how much a transaction or other event changed the entity’s
assets or liabilities, even when supported by one or more of the procedures described in paragraph 5.28(c). In those cases,
derecognition of the transferred component might imply that the entity’s financial position has changed more significantly than it
has. This might occur, for example, if an entity has transferred an asset and, at the same time, entered into another transaction
that results in a present right or present obligation to reacquire the asset. Such present rights or present obligations may arise
from, such as, except, a: Lease.
Par. 5.31
When an entity no longer has a transferred component, derecognition of the transferred component faithfully represents that
fact. However, in some of those cases, derecognition may not faithfully represent how much a transaction or other event changed
the entity’s assets or liabilities, even when supported by one or more of the procedures described in paragraph 5.28(c). In those
cases, derecognition of the transferred component might imply that the entity’s financial position has changed more significantly
than it has. This might occur, for example:
(a)
if an entity has transferred an asset and, at the same time, entered into another transaction that results in a
present right or present obligation to reacquire the asset. Such present rights or present obligations may arise from, for example,
a forward contract, a written put option, or a purchased call option.
515. Which of the following affect the determination of faithful representation? 1, 2, 3
1.
2.
3.
Substance over Form
Outcome uncertainty
Measurement uncertainty
Par. 5.18
Recognition of a particular asset or liability is appropriate if it provides not only relevant information, but also a faithful
representation of that asset or liability and of any resulting income, expenses or changes in equity. Whether a faithful
representation can be provided may be affected by the level of measurement uncertainty associated with the asset or liability or
by other factors.
516. When is income or expense recognized in relation to retained components? the derecognition results in a change in the
measurement requirements applicable to the retained component.
Par. 5.28, excerpted
The aims described in paragraph 5.27 are normally achieved by:
(b )
continuing to recognise the assets or liabilities retained, referred to as the ‘retained component’, if any. That retained
component becomes a unit of account separate from the transferred component. Accordingly, no income or expenses are
recognised on the retained component as a result of the derecognition of the transferred component, unless the derecognition
results in a change in the measurement requirements applicable to the retained component;
517. In some cases, derecognition may not faithfully represent how much a transaction or other event changed the entity’s
assets or liabilities, even when supported by one or more of the procedures described in paragraph 5.28(c). In those cases,
derecognition of the transferred component might imply that the entity’s financial position has changed more significantly than it
has. This might occur, for example, True, True
1. if an entity has transferred an asset and, at the same time, entered into another transaction that results
in a present right or present obligation to reacquire the asset. Such present rights or present obligations.
2. if an entity has retained exposure to significant positive or negative variations in the amount of
economic benefits that may be produced by a transferred component that the entity no longer controls.
518. All of the following statements are correct, except: In some cases, an entity might appear to transfer an asset or liability, but
that asset or liability might nevertheless remain an asset or liability of the entity, but nevertheless should be recognized.
519. All of the following statements are correct, except: The initial recognition of assets or liabilities arising from transactions or
other events may result in the simultaneous derecognition of both income and related expenses.
220. In limited circumstances, asset or liability is not recognized, despite all relevant measures of an asset or liability are available
(or can be obtained) and even if the measure were accompanied by a description of the estimates made in producing it and an
explanation of the uncertainties that affect those estimates, after further considering the following:
Par. 5.22
In limited circumstances, all relevant measures of an asset or liability that are available (or can be obtained) may be subject to
such high measurement uncertainty that none would provide useful information about the asset or liability (and any resulting
income, expenses or changes in equity), even if the measure were accompanied by a description of the estimates made in
producing it and an explanation of the uncertainties that affect those estimates. In those limited circumstances, the asset or
liability would not be recognised.
221. Sale of goods on cash is an example of Matching of costs with income
Par. 5.5
The initial recognition of assets or liabilities arising from transactions or otherevents may result in the simultaneous recognition of
both income and relatedexpenses. For example, the sale of goods for cashresults in the recognition ofboth income (from the
recognition of one asset—the cash) and an expense(from the derecognition of another asset—the goods sold). The simultaneous
recognition of income and related expenses is sometimes referred to as the matching of costs with income. Application of the
concepts in the ConceptualFramework leads to such matching when it arises from the recognition ofchanges in assets and
liabilities. However, matching of costs with income is not an objective of the Conceptual Framework. The Conceptual Framework
does not allow the recognition in the statement of financial position of items that do not meet the definition of an asset, a liability
or equity.
222.When is explanatory information about the uncertainty of existence of asset or liability may need to be provided in the
financial statements? All cases
Cases
1.
2.
3.
4.
Probability of cash flows
High
High
Low
Low
Range of outcomes
Wide
Narrow
Wide
Narrow
Par. 5.14
Paragraphs 4.13 and 4.35 discuss cases in which it is uncertain whether an asset or liability exists. In some cases, that uncertainty,
possibly combined with a low probability of inflows or outflows of economic benefits and an exceptionally wide range of possible
outcomes, may mean that the recognition of an asset or liability, necessarily measured at a single amount, would not provide
relevant information. Whether or not the asset or liability is recognised, explanatory information about the uncertainties
associated with it may need to be provided in the financial statements.
223. Accounting requirements for derecognition aim to faithfully represent: 1, 2, 3
1.
any assets and liabilities retained after the transaction or other event that led to the derecognition.
2.
any asset or liability acquired, incurred or created as part of the transaction or other event.
3.
the change in the entity’s assets and liabilities as a result of that transaction or other event.
224. The accounts and balances were taken from Disneyland Company’s adjusted trial balance on December 31, 2019.
Inventory
Investment in subsidiary
Cash and cash equivalents
Patents
Prepaid rent
Sinking fund asset
FVTPL Securities
Machineries and Equipment
Allowance for doubtful accounts
Goodwill
Available for sale securities
Land held for future business site
Land “held for sale”
Deferred tax asset
Trade and other receivables (assigned accounts 170,000)
Cash surrender value of life insurance
Accumulated Depreciation – M & E
170,000
220,000
100,000
110,000
120,000
130,000
140,000
890,000
40,000
200,000
150,000
300,000
250,000
280,000
450,000
90,000
390,000
The amount reported as non-current assets in the December 31, 2019 Statement of Financial Position is 1,980,000
225. In presenting a statement of financial position, an entity must make the current/non-current presentation distinction except
when a presentation based on liquidity provides information that is reliable and more relevant
226. In a consolidated balance sheet, the non-controlling (minority) interest under the entity concept is shown: separately within
the equity section
227. Violago Company’s trial balance reflected the following account balances at December 31, 2009:
Accounts receivable
1,600,000
FVTPL securities
500,000
FVTOCI securities
1,300,000
Cash
1,100,000
Inventory
3,000,000
Equipment and furniture
2,500,000
Accumulate depreciation
1,500,000
Patent
400,000
Prepaid expenses
100,000
Land held for future business site
1,800,000
In Violago Company’s December 31, 2009 statement of financial position, the current assets should be 6,300,000
Accounts receivable
1,600,000
Trading securities
500,000
Cash
1,100,000
Inventory
3,000,000
Prepaid expenses
100,000
Total current assets
6,300,000
Again if the problem is the silent, FVTOCI securities shall be classified as noncurrent.
228. An entity provided the following trial balance on June 30, 2015:
Cash overdraft
Accounts receivable, net
Inventory
Prepaid expenses
Land held for resale
( 200,000)
700,000
1,200,000
200,000
2,000,000
Property, plant and equipment, net
Accounts payable and accrued expenses
Share capital
1,900,000
640,000
3,000,000
Share premium
500,000
Retained earnings
1,660,000
Checks amounting to P600,000 were written to vendors and recorded on June 30 resulting in cash overdraft of P200,000. The
checks were mailed on July 9. Land held for resale was sold for cash on July 15. The financial statements were issued on July 31.
On June 30, 2015, what total amount should be reported as current assets? 4,500,000
Cash (600,000 -200,000 overdraft)
400,000
Accounts receivable
700,000
Inventory
1,200,000
Prepaid expenses
200,000
Land held for resale
2,000,000
Total current assets
4,500,000
229. Wacko Company provided the following data on December 31, 2013:
Cash in bank, net of bank overdraft of P500,000
Petty cash (unreplenished petty cash expenses, P10,000)
Trade notes receivable, including discounted note of P1,000,000 accounted for
as a conditional sale
5,000,000
50,000
Accounts receivable, net of accounts with credit balances of P1,500,000
Inventory
Bond sinking fund
Deferred charges
6,000,000
3,000,000
2,000,000
250,000
Accounts payable, net of accounts with debit balances of P1,000,000
Trade notes payable
Bonds payable due on June 30, 2014
Accrued expenses
7,000,000
4,000,000
2,000,000
500,000
4,000,000
What amount should be reported as total current assets on December 31, 2013? 22,040,000
230. The following trial balance of Robertson Co. at December 31, 2009 has been adjusted except for income tax expense.
Debit
Cash
P 825,000
Accounts receivable
2,475,000
Prepaid taxes
525,000
Credit
Accounts payable
P180,000
Share capital
750,000
Share premium
450,000
Retained earnings
945,000
Revenues
5,400,000
Expenses
3,900,000
_________
P7,725,000
P7,725,000
During 2009, estimated tax payments of P525,000 were charged to prepaid taxes. Robertson had not yet recorded income
tax expense. There were no differences between financial statement and income tax income, and Robertson’s tax rate is
35%. Included in accounts receivable is P750,000 due from a customer. Special terms granted to this customer require
payment in equal semi-annual installments of P187,500 every April 1, and October 1.
In Robertson’s December 31, 2009 balance sheet, what amount should be reported as total current assets? P2,925,000
231. Which of the following should not be considered as a current asset in the balance sheet? The cash surrender value of a life
insurance policy carried by a corporation, the beneficiary, on its president
232. An asset shall be classified as current asset when it satisfies any of the following criteria, except It is cash or cash equivalent
that is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date
233. At a minimum, the face of the Statement of Financial Position shall include all of the following line items, except Patents
234.
True, true
Statement I: Provisions should be recognized in the statement of financial position.
Statement II: A change in revaluation surplus during the year should be reported in the Statement of Comprehensive Income.
235. The following totals are taken from the December 31, 2009, balance sheet of Streamer Company:
Current assets
Long-term assets
Current liabilities
Long-term liabilities
P350,000
800,000
240,000
270,000
Additional information:
·
Cash of P38,000 has been placed in a fund for the retirement of long-term debt. The cash and long-term debt have
been offset and are not reflected in the financial statements.
·
Long-term assets include P50,000 in treasury shares.
·
Cash of P14,000 has been set aside to pay taxes due. The cash and taxes payable have been offset and do not appear
in the financial statements.
·
Advances on salespersons' commissions in the amount of P21,000 have been made. Also, sales commissions payable
total P24,000. The net liability of P3,000 is included in Current Liabilities.
After making any necessary changes, compute for the totals of Streamer's current assets P385,000
236. Which statement is correct concerning presentation of information on the face of the Statement of Financial Position? Both
I and II
I.
Additional line items, headings and subtotals shall be presented on the face of the Statement of Financial
Position when such presentation is relevant to an understanding of the entity’s financial position.
II.
The standard does not prescribe the order or format in which items are to be presented
237. Per PAS 1, they shall not be classified as current. Deferred tax assets and liabilities
238. An asset shall be classified as current asset when it satisfies any of the following criteria, except It is cash or cash equivalent
that is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date
239. Under current PFRSs, which of the following statements is (are) correct? S1 and S2
S1. Deferred tax asset is always a non-current asset.
S2. Financial assets classified as held-for-trading are always current assets.
240. On December 31, 2017, an entity showed the following current assets:
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
500,000
2,500,000
2,000,000
100,000
5,100,000
Cash on hand including customer postdated check of P20,000 and employee
IOU of P10,000
130,000
Cash in bank per bank statement (outstanding checks on December 31,
2017, P70,000)
Total cash
Customers’ debit balances, net of customer deposit of P50,000
Allowance for doubtful accounts
Sale price of goods invoiced to customers at 150% of cost on December 29,
January 5, 2018 and excluded from reported
inventory
370,000
500,000
1,900,000
( 150,000)
2017 but delivered on
Total accounts receivable
750,000
2,500,000
What total amount of current assets should be reported? 4,830,000
241. The accounts and balances were taken from Disneyland Company’s adjusted trial balance on December 31, 2019.
Inventory
170,000
Investment in subsidiary
220,000
Cash and cash equivalents
100,000
Patents
110,000
Prepaid rent
120,000
Sinking fund asset
130,000
FVTPL Securities
140,000
Machineries and Equipment
890,000
Allowance for doubtful accounts
40,000
Goodwill
200,000
Available for sale securities
150,000
Land held for future business site
300,000
Land “held for sale”
250,000
Deferred tax asset
280,000
Trade and other receivables (assigned accounts 170,000)
450,000
Cash surrender value of life insurance
90,000
Accumulated Depreciation – M & E
390,000
The amount reported as current assets in the December 31, 2019 Statement of Financial Position is 1,190,000
242. Troy Co. began operations on January 1, 2009, with P1,500,000 from the issuance of share capital and borrowed funds of
P300,000. Net income for 2009 was P100,000 and Troy paid a P50,000 cash dividend on December 15. No additional activities
affected owners' equity in 2009. At December 31, 2009, Troy's liabilities had increased to P550,000. In Troy's December 31,
2009, balance sheet, total assets should be reported at P2,100,000
243. An entity was incorporated on January 1, 2015 with proceeds from the issuance of P7,500,000 in shares and borrowed
funds of P1,100,000. During the first year of operations, revenue from sales and consulting amounted to P820,000, and operating
costs and expenses totaled P640,000. On December 15, the entity declared a P30,000 cash dividend, payable to shareholders on
January 15, 2016. No additional activities affected owners’ equity in 2015. The liabilities increased to P1,200,000 by December
31, 2015. What amount should be reported as total assets on December 31, 2015? 8,850,000
Liabilities
1,200,000
Share capital
7,500,000
Retained earnings
150,000
Total liabilities and equity
8,850,000
Revenue from sales and consulting
820,000
Operating costs and expenses
( 640,000)
Net income
180,000
Dividend declared
( 30,000)
Retained earnings
150,000
244. The general ledger trial balance of Darwin Company includes the following accounts on December 31, 2009:
Inventory, including inventory expected in the ordinary course of operations to be sold beyond 12
months amounting to 700, 000
Trade receivables
Prepaid insurance
Listed investments held for trading purpose at fair value
FVTOCI investments
Cash
Deferred tax asset
Bank overdraft
1,000,000
1,200,000
80,000
200,000
800,000
300,000
150,000
250,000
What amount should be shown as total current asset on December 31, 2009? 2,780,000
Inventory
1,000,000
Trade receivables
1,200,000
Prepaid insurance
80, 000
Investment held for trading
200, 000
Cash
300,000
Total current assets
2,780,000
In the absence of statements to the contrary, FVTOCI investments shall be classified as noncurrent. PAS 1 and PAS 12 provide
that deferred tax asset is a noncurrent asset. The bank overdraft is classified as current liability.
245. What financial statements do not involved a distinct period of time? Statement of financial position.
246. The operating cycle of an entity Is the time between the acquisition of assets for processing and their realization in cash or
cash equivalents
247. PAS 1 precludes an entity to present or classify this account as current in the statement of financial position. Deferred tax
assets
248. The current sections of the unadjusted statement of financial position of Baguio Company on December 31, 2019 were as
follows:
Cash
Accounts receivable
Inventory
Prepaid expenses
Trade accounts payable, net of debit balance of P50,000
Interest payable
Income tax payable
Money claims of the union, pending final decision
Mortgage payable, due in 4 annual installments
2,000,000
3,000,000
1,900,000
100,000
2,450,000
150,000
300,000
500,000
2,000,000
A review showed that the cash balance of P2,000,000 included a customer’s check amounting to P100,000 returned by the
bank marked NSF, an employee IOU of P50,000, and P200,000 deposited with the court for a case under litigation. The cash
in bank portion of P1,650,000 is the balance per bank statement. On December 31, 2019, outstanding checks amounted to
P250,000. The accounts receivable included the following:
Customer’s debit balance
Advance to subsidiary
Advances to suppliers
Receivable from officers
Allowance for doubtful accounts
Selling price of merchandise invoiced at 120% of cost,
not yet delivered and excluded from ending inventory
1,600,000
400,000
200,000
300,000
(100,000)
600,000
What amount should be reported as total current assets on December 31, 2019? 6,100,000
249. For the purpose of stating the working capital of Mukherjee Corporation on December 31,2013, the following data are
submitted:
Cash on hand and in bank, net of bank of overdraft of P5,000s
P136,000
Petty cash(unreplenished petty cash expense, P400)
1,000
Accounts receivable, including discounted accounts with credit balance of P10,000
110,000
Merchandise inventory, including goods held on consignment of P18,000
148,000
Prepaid expenses
9,000
Total current assets
P399,000
Accounts payable, including accounts with debit balance o f P5,000
Notes payable in annual instalment at P100,000 payable every May 31
Accrued expenses
Total current liabilities
250. How much is the total current asset of Mukherjee Corp. or December 31, 2013? P375,600
P60,000
200,000
8,000
P268,000
251. Which of the following must be included as a line item in an entity’s statement of financial position? Investment property
252. Which one of the following is an essential characteristic of an asset? The inflow of future economic benefits is controlled by
the enterprise
253. Which one of the following is not required to be presented as minimum information on the face of the statement of
financial position? Goodwill
254. Berton Company reported assets totaling P870,000 as of December 31, 2009. The following information relates to those
assets:
a.
Breakstone Labs, a rival company, recently offered to give a P100,000 signing bonus to the head of Berton's fabrication
department if she would leave Berton and join Breakstone. She declined. Berton has consequently recorded a
long-term asset, "Employees Under Contract," for P100,000.
b.
Berton purchased a patent from a small research firm for P75,000. Subsequent research has shown that the patented
technology doesn't work as well as originally thought and the technology actually has no economic use. Berton reports
the patent at its amortized cost of P60,000.
c.
An independent appraiser recently set Berton's market value at P500,000. This exceeded the book value of equity by
P120,000. Accordingly, Berton recorded Goodwill totaling P120,000.
d.
Near the end of the year, Berton paid P30,000 for the exclusive right to market electronic equipment to be imported
from abroad. Berton reported this as a P30,000 "Intangible Asset."
e.
When Berton started business three years ago, it was required to deposit P5,000 with the local electric utility. The
deposit is refundable if Berton cancels its electric service. Berton earns no interest on the deposit. The deposit is
recorded as an "Other Long-Term Asset."
After considering the items above, what should be the total of Berton's reported assets? P590,000
255. In which section of the statement of financial position should cash that is restricted for the settlement of a liability due 18
months after the reporting period be presented? Non-current assets
256. The current cost of an asset is the cost of what asset at the measurement date? Equivalent
Par. 6.21
The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the consideration that would
be paid at the measurement date plus the transaction costs that would be incurred at that date.
257. Interest earned on assets, and interest incurred on liabilities, measured at amortised cost may have
Par. 6.31
For similar reasons, information about interest earned on assets, and interest incurred on liabilities, measured at amortised cost
may have predictive and confirmatory value.
258. If the value of an asset or liability is sensitive to market factors or other risks, how do users consider the following
measurement bases?
Par. 6.51
If the value of an asset or liability is sensitive to market factors or other risks, its historical cost might differ significantly from its
current value. Consequently, historical cost may not provide relevant information if information about changes in value is
important to users of financial statements. For example, amortised cost cannot provide relevant information about a financial
asset or financial liability that is a derivative.
259. When a business activity of an entity involves the use of several economic resources that produce cash flows indirectly, by
being used in combination to produce and market goods or services to customers, which measurement bases likely to provide
relevant information about the entity?
Par. 6.55
When a business activity of an entity involves the use of several economic resources that produce cash flows indirectly, by being
used in combination to produce and market goods or services to customers, historical cost or current cost is likely to provide
relevant information about that activity. For example, property, plant and equipment is typically used in combination with an
entity’s other economic resources. Similarly, inventory typically cannot be sold to a customer, except by making extensive use of
the entity’s other economic resources (for example, in production and marketing activities). Paragraphs 6.24–6.31 and 6.40–6.42
explain how measuring such assets at historical cost or current cost can provide relevant information that can be used to derive
margins achieved during the period.
260. Information about the cost of assets sold or consumed, including goods and services consumed immediately (see paragraph
4.8), and about the consideration received, may have the following:
Par. 6.30
Information about the cost of assets sold or consumed, including goods and services consumed immediately (see paragraph 4.8),
and about the consideration received, may have predictive value. That information can be used as an input in predicting future
margins from the future sale of goods (including goods not currently held by the entity) and services and hence to assess the
entity’s prospects for future net cash inflows. To assess an entity’s prospects for future cash flows, users of financial statements
often focus on the entity’s prospects for generating future margins over many periods, not just on its prospects for generating
margins from goods already held. Income and expenses measured at historical cost may also have confirmatory value because
they may provide feedback to users of financial statements about their previous predictions of cash flows or of margins.
Information about the cost of assets sold or consumed may also help in an assessment of how efficiently and effectively the
entity’s management has discharged its responsibilities to use the entity’s economic resources.
261. Although total equity is not measured directly, it may be appropriate to measure directly
Par. 6.89
Although total equity is not measured directly, it may be appropriate to measure directly the carrying amount of some individual
classes of equity (see paragraph 4.65) and some components of equity (see paragraph 4.66). Nevertheless, because total equity is
measured as a residual, at least one class of equity cannot be measured directly. Similarly, at least one component of equity
cannot be measured directly.
262. When income or expense is recognized over the periods during which the asset or liability was held, the following
measurement bases are:
Par. 6.51
If the value of an asset or liability is sensitive to market factors or other risks, its historical cost might differ significantly from its
current value. Consequently, historical cost may not provide relevant information if information about changes in value is
important to users of financial statements. For example, amortised cost cannot provide relevant information about a financial
asset or financial liability that is a derivative.
263. The estimates of timing and amount of future cash flows and variations thereof, the time value of money, the risk premium
or risk discount and liquidity may have impact on the fair value of an asset. How should income or expenses be measured in
relation to these factors?
When those factors have: Separately, Aggregately
Par. 6.34
A change in the fair value of an asset or liability can result from various factors identified in paragraph 6.14. When those factors
have different characteristics, identifying separately income and expenses that result from those factors can provide useful
information to users of financial statements (see paragraph 7.14(b)).
264. Historical cost does not reflect changes in values, except to the extent that those changes relate to
Par 6.4
Historical cost measures provide monetary information about assets, liabilities and related income and expenses, using
information derived, at least in part, from the price of the transaction or other event that gave rise to them. Unlike current value,
historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of an asset or a
liability becoming onerous (see paragraphs 6.7(c) and 6.8(b)).
265. Describe the following statemens: True, True
1. Selection of a measurement basis at initial recognition is important to avoid recognising income or expenses at the time of
the first subsequent measurement solely because of a change in measurement basis
2. The initial measure of the asset acquired, or the liability incurred, determines whether any income or expenses arise from
the transaction.
Par. 6.78
At initial recognition, the cost of an asset acquired, or of a liability incurred, as a result of an event that is a transaction on market
terms is normally similar to its fair value at that date, unless transaction costs are significant. Nevertheless, even if those two
amounts are similar, it is necessary to describe what measurement basis is used at initial recognition. If historical cost will be used
subsequently, that measurement basis is also normally appropriate at initial recognition. Similarly, if a current value will be used
subsequently, it is also normally appropriate at initial recognition. Using the same measurement basis for initial recognition and
subsequent measurement avoids recognising income or expenses at the time of the first subsequent measurement solely because
of a change in measurement basis (see paragraph 6.48).
Par. 6.79
When an entity acquires an asset, or incurs a liability, in exchange for transferring another asset or liability as a result of a
transaction on market terms, the initial measure of the asset acquired, or the liability incurred, determines whether any income or
expenses arise from the transaction. When an asset or liability is measured at cost, no income or expenses arise at initial
recognition, unless income or expenses arise from the derecognition of the transferred asset or liability, or unless the asset is
impaired or the liability is onerous.
266. Historical cost may be applied to asset or liability as follows:
267. Fair value may have the following relevant qualitative characteristics:
Pars. 6.32 and 6.33
Information provided by measuring assets and liabilities at fair value may have predictive value because fair value reflects market
participants’ current expectations about the amount, timing and uncertainty of future cash flows. These expectations are priced in
a manner that reflects the current risk preferences of market participants. That information may also have confirmatory value by
providing feedback about previous expectations.
Income and expenses reflecting market participants’ current expectations may have some predictive value, because such income
and expenses can be used as an input in predicting future income and expenses. Such income and expenses may also help in an
assessment of how efficiently and effectively the entity’s management has discharged its responsibilities to use the entity’s
economic resources.
268. The following are considered using the fair value measurement basis.
Par. 6.12
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date.
269. Fair value relates to what act in relation to an asset?
Par. 6.12
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date.
270. Income or expense is recognized at initial recognition using the following:
Par. 6.81
In such cases, measuring the asset acquired, or the liability incurred, at its historical cost may not provide a faithful representation
of the entity’s assets and liabilities and of any income or expenses arising from the transaction or other event. Hence, it may be
appropriate to measure the asset acquired, or the liability incurred, at deemed cost, as described in paragraph 6.6. Any difference
between that deemed cost and any consideration given or received would be recognised as income or expenses at initial
recognition.
271. The characteristics of the asset or liability affecting the relevance of information provided by a measurement basis the
following in particular:
Par. 6.50
The relevance of information provided by a measurement basis depends partly on the characteristics of the asset or liability, in
particular, on the variability of cash flows and on whether the value of the asset or liability is sensitive to market factors or other
risks.
272. Why does the historical cost of an asset or liability can sometimes be as difficult to measure or verify as a current value?
Subjectivity in making estimates.
Par. 6.70
However, estimating consumption and identifying and measuring impairment losses or onerous liabilities can be subjective.
Hence, the historical cost of an asset or liability can sometimes be as difficult to measure or verify as a current value.
273. Expense is recognized in the consumption or sale of an asset, either
Par. 6.27
If an asset other than a financial asset is measured at historical cost, consumption or sale of the asset, or of part of the asset,
gives rise to an expense measured at the historical cost of the asset, or of part of the asset, consumed or sold.
274. Value in use provides information about the present value of the estimated cash flows from the/its
Par. 6.37
Value in use provides information about the present value of the estimated cash flows from the use of an asset and from its
ultimate disposal. This information may have predictive value because it can be used in assessing the prospects for future net cash
inflows.
275. When do changes in expectations of market participants and changes in their risk preferences become unimportant?
Par. 6.53
Changes in the fair value of an asset or liability reflect changes in expectations of market participants and changes in their risk
preferences. Depending on the characteristics of the asset or liability being measured and on the nature of the entity’s business
activities, information reflecting those changes may not always provide predictive value or confirmatory value to users of financial
statements. This may be the case when the entity’s business activities do not involve selling the asset or transferring the liability,
for example, if the entity holds assets solely for use or solely for collecting contractual cash flows or if the entity is to fulfil liabilities
itself.
276. How would you describe the following possibilities of not fulfilling a liability?
Par. 6.15
The factors mentioned in paragraphs 6.14(b) and 6.14(d) include the possibility that a counterparty may fail to fulfil its liability to
the entity (credit risk), or that the entity may fail to fulfil its liability (own credit risk).
277. In case of using two or more measurements bases, the following income or expenses are recognized in the period from the
change in the current value of the asset or liability is
separated
and
classified, which may include
Par. 6.86
In such cases, the total income or total expenses arising in the period from the change in the current value of the asset or liability
is separated and classified so that:
(a)
the statement of profit or loss includes the income or expenses measured applying the measurement basis
selected for that statement; and
(b)
other comprehensive income includes all the remaining income or expenses. As a result, the accumulated other
comprehensive income related to that asset or liability equals the difference between:
(i)
the carrying amount of the asset or liability in the statement of financial position; and
(ii)
the carrying amount that would have been determined applying the measurement basis selected for the statement
of profit or loss.
278. Expense is recognized in the consumption or sale of an asset, either
Par. 6.27
If an asset other than a financial asset is measured at historical cost, consumption or sale of the asset, or of part of the asset,
gives rise to an expense measured at the historical cost of the asset, or of part of the asset, consumed or sold.
279. Fulfilment value relates to this consideration in paying a liability
280. The difference between the income and the expense is the margin resulting from what activity of a corresponding asset?
Par. 6.28
The expense arising from the sale of an asset is recognised at the same time as the consideration for that sale is recognised as
income. The difference between the income and the expense is the margin resulting from the sale. Expenses arising from
consumption of an asset can be compared to related income to provide information about margins.
281. A more relevant or more faithful representation of the use of two or more measurement bases is through the use of:
Par. 6.85
However, in some cases, that information is more relevant, or results in a more faithful representation of both the entity’s
financial position and its financial performance, through the use of:
(a)
a current value measurement basis for the asset or liability in the statement of financial position; and
(b)
a different measurement basis for the related income and expenses in the statement of profit or loss.
282. What are two (2) measurement bases in accounting? Historical cost and current value
Par 6.4
Historical cost measures provide monetary information about assets, liabilities and related income and expenses, using
information derived, at least in part, from the price of the transaction or other event that gave rise to them. Unlike current value,
historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of an asset or a
liability becoming onerous (see paragraphs 6.7(c) and 6.8(b)).
283. The selection of measurement bases is affected by
Par 6.2
Consideration of the qualitative characteristics of useful financial information and of the cost constraint is likely to result in the
selection of different measurement bases for different assets, liabilities, income and expenses.
284. What is not a rationale behind the use of the current value as a measurement basis? Current value is much reflective of the
market prices at a given conditions and is more useful in predicting the returns on economic resources.
Par. 6.10
Current value measures provide monetary information about assets, liabilities and related income and expenses, using
information updated to reflect conditions at the measurement date. Because of the updating, current values of assets and
liabilities reflect changes, since the previous measurement date, in estimates of cash flows and other factors reflected in those
current values (see paragraphs 6.14–6.15 and 6.20). Unlike historical cost, the current value of an asset or liability is not derived,
even in part, from the price of the transaction or other event that gave rise to the asset or liability.
1. A change in accounting policy shall be made when Either I or II
I.
Required by an accounting standard or an interpretation of the standard
II.
The change will result in more relevant or reliable information about the financial position , financial performance and
cash flows of the entity
2. Accounting policies are? Specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and
presenting financial statements.
3. On December 31, 2011 Dean Company changed its method of accounting for inventory from the average cost method to the
FIFO method. This change caused the 2011 beginning inventory to increase by $420,000. The cumulative effect of this accounting
change to be reported for the year ended 12/31/11, assuming a 40% tax rate, is $252,000
4.
During 2015, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method.
Inventory balances under each method were as follows:
January 1, 2015
December 31, 2015
FIFO
P71,000
P79,000
Weighted-average
P77,000
P83,000
Orca’s income tax rate is 30%.
In its 2015 financial statements, what amount should Orca report as the gain or loss on the cumulative effect of this accounting
change? P0
5.
Philippine Accounting Standard 8 requires The reporting of the cumulative effect of a change in accounting policy as a
direct adjustment to beginning retained earnings in the year of the change.
6.
An entity changed from an accounting principles that is not generally accepted to one that is generally accepted. The
effect of the change shall be reported , net of applicable income tax , in the current year Retained earnings statement
as an adjustment of the opening balance
7.
Which of the following statement best describe prospective application Applying a new accounting policy to
transactions occurring after the date at which the policy changed.
8.
Ana Inc. changes its method of valuation of inventories from weighted-average method to first-in, first-out (FIFO)
method. Ana Inc. should account for this change as? A change in accountancy policy and account for it retrospectively.
9.
A change in accounting policy includes all of the following excepts The change in depreciation method from sum of years
digit to straight line.
10. Which statement is correct regarding changes in accounting policies? If a change in accounting policy is required by a
new ASC standard or interpretation, the change is accounted for as required by that new pronouncement.
11. In the absence of an accounting standard that applies specifically to a transaction , what is the most authoritative
source in developing and applying an accounting policy ? The requirement and guidance in the standard or
interpretation dealing with similar and related issue.
12. A change in the measurement basis is? A change in accounting policy.
13. Jacob, Inc., changed from the average cost to the FIFO cost flow assumption in 2012. the increase in the prior year`s
income before taxes is €1,100,000. The tax rate is 35%. Jacob’s 2012 journal entry to record the change in accounting
policy will include. a credit to deferred Tax Liability for €385,000
14. A change of accounting policy includes Neither I nor II
I.
Adoption of an accounting policy for events or transactions that differ in substance from previously occurring
event or transactions.
II. The adoption of a new accounting policy for events or transactions which did not occur previously or that were
immaterial
15. The initial application of a policy to revalue asset is? A change in accounting policy.
16. What is the treatment of a change in accounting policy Retrospectively , meaning any resulting adjustment is reported
as an adjustment to the opening balance of retained earnings.
17. This means “ applying “ a new accounting policy to transaction other events and conditions as if that policy had always
been applied Retrospective application
18. On January 1, 2011, Frost Corp. changed its inventory method to FIFO from average cost for both financial and income
tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2011 inventory. Assume that the
income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Frost in its
2011 retained earnings statement as a $560,000 addition to the beginning balance.
19. Which statement is correct concerning application of a change in accounting policy? Both I and II
I. An entity shall account for a change in accounting policy resulting from the initial application ofa standard or an
interpretation in accordance with the transitional provision , if any
II. When an entity changes an accounting policy upon initial application of a standard or an interpretation that does
not include specific transitional provision applying to that change shallbe applied retrospectively.
20. Which statement is incorrect regarding the selection and application of accounting policies? Management must use the
requirements and guidance in ASC standards and interpretations dealing with similar and related issues in the absence of
a Standard or an Interpretation that specifically applies to a transaction, other event or condition.
21. Which of the following is a characteristic of a change in accounting policy? Shall be reported by retrospectively adjusting
the financial statement for all years reported , and reporting the cumulative effect of the change in income for all
preceding years as an adjustment to the beginning balance of retained earnings for the earliest year reported.
22. During 2011, a construction company changed from the cost-recovery method to the percentage-of-completion
method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three
years appear below:
Cost-Recovery
Percentage-of-Completion
2009
$ 475,000
$ 800,000
2010
625,000
950,000
2011
700,000
1,050,000
$1,800,000
$2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be
reported by a credit of $390,000 on the 2011 retained earnings statement.
23. How should the following changes be treated?
I.
A change is to be made in the method of calculating the provision for uncollectible receivables
II.
Investment properties are now measured at fair value having previously been measured at cost.
24. Change in accounting policy does not include: Change in useful life from 10 years to 7 years.
25. XYZ Inc. changes its method of valuation of inventories from weighted-average method to first-in, first-out (FIFO) method.
XYZ Inc. should account for this change as A change in accounting policy and account for it retrospectively
26. Which of the following statement best describe prospective application Applying a new accounting policy to transactions
occurring after the date at which the policy changed.
27. On December 31, 2011, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from average cost
for financial statement and income tax purposes. The change will result in a $1,500,000 increase in the beginning inventory at
January 1, 2011. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings
is? $1,050,000.
28. When a public shareholding company changes an accounting policy voluntarily, it has to? Account for it retrospectively.
29. Change in accounting policy does not include
Change in useful life from 10 years to 7years.
30. When the public share holder entity change an accounting policy voluntarily , it has to Account for it retrospectively.
31. During 2009, Titus Company decided to change from the FIFO method of inventory valuation to the weighted average
method. Inventory balances under each method were as follows:
FIFO
Weighted Average
January 1
7,100,000
7,700,000
December 31
7,900,000
8,300,000
Ignoring income tax, in its 2009 statement of retained earnings, what amount should Titus report as the cumulative effect of this
accounting change? 200,000 Decrease
32. A change in accounting policy includes all of the following excepts The change in depreciation method from sum of years digit
to straight line.
33. Which of the following is a change in accounting policy? The adoption of a new accounting policy for events or transactions
that occurred previously.
34. During 2015, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method.
Inventory balances under each method were as follows:
January 1, 2015
December 31, 2015
FIFO
P71,000
P79,000
Weighted-average
P77,000
P83,000
Orca’s income tax rate is 30%.
In its 2015 financial statements, what amount should Orca report as the gain or loss on the cumulative effect of this accounting
change? P0
35. An accounting policy: comprises the principles applied in preparing the financial statements;
36. An entity changed its method of inventory valuations from weighted average to FIFO. The entity shall accounts for this
change as A change in accounting policy and account for it retrospectively.
37. Prospective application of a change in accounting policy is required. When the amount of adjustment to the opening balance
of retained earnings cannot be reasonable determined.
38. Which of the following statement is not correct? A change from an in appropriate accounting policy to a proper one shall be
accounted for as an accounted for as a changed in accounting policy.
39. Per PAS 8, it is applying a new accounting policy to transactions, other events and conditions as if that policy had always been
applied. Retrospective application
40. Retrospective application means? Adjusting the opening balance of each affected component of equity for the earliest prior
period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had
always been applied.
41. When an entity makes a voluntary change to its accounting policies that has an effect on the current period, it is required to
disclose: I, II, and III only;
I.
The reasons why the change will provide more relevant information.
II. The amount of the adjustment for each financial statement line item affected.
III. The nature of the change.
IV. The reasons why the previous policy no longer provides reliable information.
42. Which among the following conditions results in a misleading comparison? Changes in the nature on the underlying
transactions are not disclosed.
43. On January 1, 2013, Warren Co. purchased a P600,000 machine, with a five-year useful life and no salvage value. The
machine was depreciated by an accelerated method for book and tax purposes. The machine’s carrying amount was P240,000 on
December 31, 2014. On January 1, 2015, Warren changed to the straight line method for financial reporting purposes. Warren
can justify the change. Warren’s income tax rate is 30%.
In its 2015 income statement, what amount should Warren report as the cumulative effect of this change? P0
44. Prospective recognition of the effect of a change in an accounting estimates means that the change is applied to transaction
from the? Date of issuance of financial statement.
45. An accounting estimate may be revised if changes occur regarding the circumstances on which the estimate was based.
46. How should the effect of a change in accounting estimates be accounted for? In the period of change and future period if the
changed affects both.
47. The effect of a changes in the expected pattern of consumption of economic benefits of a depreciable assets shall be?
Included in the determination of income or loss in the period of change and future period.
48. In 2009, a firm changed from straight-line (SL) method of depreciation to double declining balance (DDB). The firm’s 2008 and
2009 comparative financial statements will reflect method or methods
49. The estimated life of building that has been depreciated 30 years of an originally estimated life of 50 years has been revised
to a remaining life of 10 years . Based o this information the accountant shall Depreciate the remaining book value over the
remaining life of the asset.
50. When an entity changed the expected service life of an asset because additional information has been obtained , which of the
following should be reported? An accounting changed that should be reported in the period of change and future period if the
change affects both.
51. If a change in accounting estimates affects balance sheet items, PAS 8 Accounting Policies, Changes in Accounting Estimates,
and Errors, requires that the following disclosures be made: I, II and III only.
I.
The nature of the change.
II. The amount of the change that has an effect in the current period.
III. The amount of the change that affects future periods.
IV.
The effect of the change on comparative numbers.
52. A change in the estimated useful life of a building Affect the depreciations on the building beginning with the year of the
change.
53. Which of the following is not correct regarding the provision of PAS 8? A change in depreciation method is classified as a
change in accounting policy.
54. On January 1, 2009, Hess Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of
15 years expiring on January 1, 2024. During 2012, Hess determined that the economic benefits of the patent would not last
longer than ten years from the date of acquisition. What amount should be reported in the statement of financial position for the
patent, net of accumulated amortization, at December 31, 2012? $408,000
SOLUTION
$595,000 × 3/15 = $119,000
$595,000 – $119,000 – [($595,000 – $119,000) × 1/7] = $408,000
55. On January 1, 2009, Knapp Corporation acquired machinery at a cost of $250,000. Knapp adopted the double-declining
balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten
years, with no residual value. At the beginning of 2012, a decision was made to change to the straight-line method of
depreciation for the machinery. The depreciation expense for 2012 would be? $18,286
SOLUTION
{$250,000 – [($250,000 × .2) + ($200,000 × .2) + ($160,000 × .2)]} ÷ 7 = $18,286
56. On January 1, 2009, Neal Corporation acquired equipment at a cost of $540,000. Neal adopted the sum-of-the-years’-digits
method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no
residual value. At the beginning of 2012, a decision was made to change to the straight-line method of depreciation for this
equipment. The depreciation expense for 2012 would be? $45,000
SOLUTION
[(8 + 7 + 6) ÷ 36] × $540,000 = $ 315,000 (AD)
($540,000 - $ 315,000) ÷ 5 = $ 45,000.
57. During the current year, an entity increase the estimated quantity of copper recoverable from its mine . The entity uses the
units of production depletion method. As a result of the change, which of the following should be reported in the entity financial
statement? Chance in the accounting estimates.
58. Which statement is incorrect concerning accounting estimates? By its very nature , the revision of an estimates relates to a
prior period and is a correction of an error.
59. On January 1, 2008, Lake Co. purchased a machine for $792,000 and depreciated it by the straight-line method using an
estimated useful life of eight years with no residual value. On January 1, 2011, Lake determined that the machine had a useful life
of six years from the date of acquisition and will have a residual value of $72,000. An accounting change was made in 2011 to
reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2011 of?
$438,000.
SOLUTION
$792,000 × 3/8 = $297,000
$297,000 + [($792,000 – $297,000 – $72,000) × 1/3] = $438,000
60. On January 1, 2009, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted the straight-line method of
depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At
the beginning of 2012, a decision was made to change to the double-declining balance method of depreciation for this machine.
The amount that Nobel should record as depreciation expense for 2012 is? $120,000
SOLUTION
{($600,000 – [($600,000 ÷ 10) × 3]} ÷ 7 × 2 = $120,000.
61. A change in the residual value of an asset arising because additional information has been obtained is? An accounting
change that should be reported in the period of change and future period if the changed affects both.
62. A change in the period benefited by a deferred cost because additional information has been obtained is An accounting
change that should be reported in the period of change and future period if the change affect both.
63. On January 1, 2009, Philemon Company purchased heavy duty equipment for P 4,000,000. On the date of installation, it was
estimated that the equipment has a useful life of 10 years and a residual value of P 400,000.
On January 1, 2009, the entity decided to review the useful life of the equipment and its residual value and technical experts
were consulted. The experts have determined that the useful life of the equipment was 12 years from the date of
acquisition and its residual value was P460,000.
The depreciation of the equipment for 2009 is 262,500
64. On January 1, 2013, Bray Company purchased for P240,000 a machine with a useful life of ten years and no salvage value. The
machine was depreciated by the double declining balance method and the carrying amount of the machine was P153,600 on
December 31, 2014. Bray changed to the straight-line method on January 1, 2015. Bray can justify the change. What should be
the depreciation expense on this machine for the year ended December 31, 2015? P19,200
65. When it is difficult to distinguish between a change in estimate and in accounting policy, then an entity should Treat the
entire change as a change in estimate with appropriate disclosure
66. Prospective recognition of the effect of a change in an accounting estimates means that the change is applied to transaction
from the? End of the current reporting period.
67. On January 1, 2009, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted the straight-line method of
depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At
the beginning of 2012, a decision was made to change to the double-declining balance method of depreciation for this machine.
Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is? $0.
SOLUTION
$0, No cumulative effect; handle prospectively.
68. Which of the following is characteristic of a change in an accounting estimates? It does not effect the financial statement of
prior period.
69. Which of the following is not correct regarding the provision of PAS 8? A change in depreciation method is classified as a
change in accounting policy.
70. It is an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption of an asset that
results from the assessment of the present status and expected future benefit and obligation associated with the asset and
liability. Change in accounting estimates
71. Per PAS 8, it is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of
an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with,
assets and liabilities. Change in accounting estimate
72. Which of the following should be reported as a change in accounting estimates? Increase in the rate applied to net credit sales
from one percent to two percents in determining losses from uncollectible receivables.
73. The effect of a change in accounting estimate shall be recognized currently and prospectively by including it in income or loss
of Both I and II
I.
The period of change if the change effect that period only
II.
The period of hange and future period if the change affect both
74. On January 1, year 1, Flax Co. purchased a machine for $528,000 and depreciated it by the straight-line method using an
estimated useful life of eight years with no salvage value. On January 1, year 4, Flax determined that the machine had a useful life
of six years from the date of acquisition and will have a salvage value of $48,000. An accounting change was made in year 4 to
reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, year 4, of?
$292,000
Solution
From 1/1/01 to 12/31/Y3, depreciation was recorded using an eight-year life. Yearly depreciation was $66,000 ($528,000 ÷ 8),
and accumulated depreciation at 12/31/Y1 was $198,000 (3 × $66,000). In year 4, the esti mated useful life was changed to six
years total with a sal vage value of $48,000. There fore, the 12/31/Y3 book value ($528,000 – $198,000 = $330,000) is
depreciated down to the $48,000 salvage value over a remaining useful life of three years (six years total – three years already
recorded). Depreciation expense for year 4 is $94,000 [($330,000 – $48,000) ÷ 3], increasing accumulated depreciation to
$292,000 ($198,000 + $94,000).
75. When an entity changed from the straight line method of depreciation for previously recorded assets to the double declining
balance method , which of the following should be reported ? Change in accounting estimates.
76. For the prior year , an entity estimated its two year equipment warranty cost based on a certain amount per unit sold in the
prior year. Experience during the current year indicated that the estimates should have been higher than the previous year. The
effect of these increase in the estimates is reported In income from continuing operations of the current year.
77. On January 1, 2009, Piper Co., purchased a machine (its only depreciable asset) for $300,000. The machine has a five-year
life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective
straight-line method for income tax reporting. Effective January 1, 2012, for financial statement reporting, Piper decided to
change to the straight-line method for depreciation of the machine. Assume that Piper can justify the change. Piper's income
before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended
December 31, 2012, is $250,000. The income tax rate for 2012, as well as for the years 2009-2011, is 30%. What amount should
Piper report as net income for the year ended December 31, 2012? $154,000
SOLUTION
[(5/15 + 4/15 + 3/15) × $300,000] = $240,000 (AD)
($300,000 – $240,000) = $60,000 (BV)
[$250,000 – ($60,000 ÷ 2)] × (1 – .3) = $154,000.
78. A change in amortization rate, such as on a copyright should be accounted for? prospectively
79. When an independent valuation expert advises an entity that the salvage value of its plant and machinery had drastically
changed and thus the change is material, the entity should? Change the annual depreciation for the current year and future years.
80. A discontinued operation is defined as Derivative
81. On November 1, 2016, management of Myto Corporation committed to a plan to dispose of Timms Company, a major
subsidiary. The disposal meets the requirements for classification as discontinued operations. The carrying value of Timms
Company was P8,000,000 and management estimated the fair value less costs to sell to be P6,500,000. For 2016, Timms
Company had a loss of P2,000,000. How much should Myto Corporation present as operations before the effect of taxes in its
income statement for 2016? P3,500,000
82. On the Statement of Comprehensive Income, income from discontinued operations is shown As a separate item after income
from continuing operations, net of income tax
83. Which of the following is a requirement for a component of an entity to be classified as a discontinued operation? It must
have been cash generating units while being held for use
84. Enron Company decided on August 1, 2009 to dispose of a component of its business. The component was sold on November
30, 2009. Enron’s income for 2009 included income of P5, 000,000 from operating the discontinued segment from January 1 to
the sale date. Enron incurred a loss on the November 30 sale of P4, 500,000. Ignoring income tax, what amount should be
reported in the 2009 income statement as income or loss under “discontinued operation”? 500,000 income
85. What is the presentation of the results from discontinued operation in the income statements? The entity shall disclose a
single amount on the face of the income statement with analysis in the notes or a sections of the income statement separate from
continuing operations
86. On October 1, 2016 Tom Company approved the disposal of its subsidiary. The sale of which was expected to be completed
by July of 2017.The following information in relation to the subsidiary is as follows:
Jan 1 – Sep 30
Oct 1 – Dec 31
Revenues
17,500,000
7,500,000
Expenses
13,500,000
5,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2016 was P28,000,000 and the fair value less cost to sell
was P30,500,000.
The sale contract requires Tom Company to terminate certain employees and the expected cost is estimated at
P2,000,000. Income tax rate for 2016 is 30%
The amount reported as income (loss) from discontinued operations is 3,150,000
87. A discontinued operations is a component of an entity that either has been disposed of or is classified as held for sale and I, II
and III
I.
Represents a separate major line of business or geographical area of operations.
II.
Is a Part of a single co- ordinate plan to dispose of a separate major line of business or business or geographical area of
operations.
III. Is a subsidiary acquire exclusively with a view to resale.
.
88. Which of the following is a discontinued operation? Both (b) and (c) above
89. On September 30, 2009, when the carrying amount of the net assets of a business segment was P70,
000,000, Young Company signed a legally binding contract to sell the business segment. The sale is expected to be completed by
January 31, 2010 at selling price of P60, 000,000. In addition, prior to January 31, 2010 the sale contract obliges Young Company
to terminate the employment of certain employees of the business segment incurring an expected termination cost of P2,
000,000 to be paid on June 30, 2010. The segment’s revenue and expenses for 2009 were P40, 000,000 and P45, 000,000
respectively. Before income tax, how much will be reported as loss from discontinued operation for 2009? 17,000,000
Solution 3-9 Answer a
Revenue
40,000,000
Expenses
(45,000,000)
Impairment loss
(10,000,000)
Termination cost
(2,000,000)
Loss from discontinued operation
17,000,000
Selling price
60,000,000
Carrying amount of net assets
(70,000,000)
Impairment loss
(10,000,000)
90. Which is incorrect concerning the presentations of the discontinued operations in the statements of financial positions? Asset
of the component held for sale are measured at the higher of fair value less cost to sell and their carrying amount
91. The discontinued operations section of the Statement of Comprehensive Income is comprised of which one of the following?
Post-tax Income from the discontinued operation of the business segment and post-tax gain or loss from the disposal of the
discontinued operations or post-tax gain or loss from measurement to realizable value of net assets.
92. It comprises operations and cash flow that can be clearly distinguished , operationally and for financial reporting purposes
from the rest of the entity Component of an entity
93. An entity manufacture and sell household products . The entity experienced losses associated with its small appliance group.
Operations and cash flow for this group can be clearly distinguished from the rest of the entity operations . The entity plans to
sell the small appliance group with its operations . What is the earliest point at which the entity shall report the small appliance
group as a discontinued operations. When the entity classifies it as held for sale
94. A component of an entity is classified as a continue operations Either I or II
I.
When the entity has actually disposed of the operations
II.
When the operations meets the criteria to be classified as “ held” for sale.”
95. A discontinued operations is a component of an entity that either has been disposed of or is classified as held for sale and I, II
and III
I.
Represents a separate major line of business or geographical area of operations.
II.
Is a Part of a single co- ordinate plan to dispose of a separate major line of business or business or geographical area of
operations.
III. Is a subsidiary acquire exclusively with a view to resale.
96. A component of an entity is classified as a discontinued operation Both I and II
I.
When the entity has actually disposed of the operation
II.
When the operation meets the criteria to be classified as “held for sale”
97. The following statement relate to a discontinue operation .Which statement is true? II only
I.
When the discontinue criteria are met after the date of the reporting period , the operations shall
retrospectively be separately presented as a discontinue operations
II.
The net cash flow attributable to the operating investing , and financing activities of a discontinue
operations shall be separately presented.
98. Which of the following criteria does not have to be met in order for an operations to be classified as discontinued The
operations
must be sold within three months of the year – end
99. Booker Company committed to sell its comic book division (a component of the business) on September 1, 2009. The carrying
amount of the division was P4,000,000 and the fair value was P3,500,000. The disposal date is expected to be June 1,2010. The
division reported an operating loss of P200,000 for the year ended December 31, 2009. Ignoring income tax, what amount
should be reported as loss from discounted operation in 2009? 700,000
1. The financial statements are authorized for issue When the board of director review the financial statements and authorizes
them for issue
2. These are events whether favorable or unfavorable that occurred between the end of the reporting period and the date on
which the financial statements are authorized for issued. Events after reporting period
3. Under PAS 10, which of the following is classified as an adjusting event rather than a non – adjusting event? A mistake was
discovered in the calculation of the allowance for uncollectable trade receivables resulting to an understatement of the trade
receivables.0
4. PAS 10 covers adjusting and non- adjusting events after reporting period up to Date of authorization to issue the financial
statements
5. Events after the balance sheet date are the events, both favorable and unfavorable, that occur between the balance sheet
date and the date When financial statements are authorized for issue.
6.Non-adjusting Type II events that are indicate of conditions that arose after the balance sheet date is given the following
treatment. Note disclosure, in the financial statements
7. Type 1 events that provide evidence of conditions that existed at the balance sheet date are given the following treatment:
Recognition in the financial statements.
8. Non adjusting events after reporting period that generally results in disclosure includes all of the following excepts None of the
choices
9. Under PAS 10, an entity shall disclose all of the following in each material category of non- adjusting events, except A
statement that an entity chooses to classify the event as a non- adjusting event rather than as an adjusting event rather than as an
adjusting event.
10. Adjustments of financial statements are required for those events after events after balance sheet date which Provide
additional information for determining amounts relating to conditions existing on the balance sheet date.
11. Adjusting event is I only
I.
An event after the balance sheet date that provides evidence of conditions that existed at the balance
sheet date.
II.
An event after the balance sheet date that is indicative of a condition that arose after the balance
sheet date.
12. Adjusting events after balance sheet date include all of the following, except Dividends to holders of equity instruments
proposed or declared after balance sheet date
13. The management of an entity completes draft of financial statements for the year ended December 31, 2005 on February 28,
2006. On March 15, 2006, the board of directors reviews the financial statements and authorizes them for issue. The entity
announces its profit and selected other financial information on March 20, 2006. The financial statements are made available to
shareholders and others on April 1, 2006. The shareholders approved the financial statements at their annual meeting on May
10, 2006 and the approved financial statements are then filed with SEC and BIR on May 30, 2006. For purposes of identifying
events after balance sheet date, the financial statements were authorized for issue on March 15, 2006
14. The following events will not require the enterprise to adjust its financial statements, except The sale of inventories at after
the balance sheet date that may give evidence about their net realizable value.
15. Under PAS 10, an entity shall disclose all of the following in each material category of non- adjusting events, except A
statement that an entity chooses to classify the event as a non- adjusting event rather than as an adjusting event rather than as an
adjusting event.
16. Adjusting Type I events that provide evidence of conditions existing at the balance sheet date are given the following
treatment. Recognition in the financial statements
17. Type 1 events that provide evidence of conditions existing at the balance sheet date are given the following treatment.
Recognition in the financial statements
18. These are the events that provide evidence of conditions that exist at the end of the reporting period Adjusting events after
reporting period
19. A new drug named “EEE” was introduce by an entity in the market on December 1 , 2009 . The entity’s financial year end
on December 31, 2009 . It was the only entity that was permitted to manufacture this patented drug . The drug is used by patient
suffering from an irregular heartbeat . On March 31, 2010 after the drug was introduce , more than 1,000 patient died.after a
series of investigations , authorities discovered that when this drug was simultaneously used with BBB , a drug used to regulate
hypertension , the patients blood would clot and the patient suffer a stoke . A suit for 100 million has been field against the entity
. The financial statement were authorized for issuance on April 30, 2010 . Which of the following options is the appropriate
accounting treatment for this post reporting period event? The entity should disclose P 100,000,000 as a continent liability
because it is a presents obligations with an improbable outflow
20. An entity financial statements for the year ended April 30, 2009 were approve by its finance director on July 7, 2009 and the
public announcement of its profits for the year was made on July 10,2009.
The board of director authorized the financial statements for issue on July 15, 2009 and they were approved by the shareholder
on July 20, 2009.
Under PAS10 after what date should considerations no longer be given as to weather the financial statements on April 30, 2009
need to reflect adjusting and non adjusting events? July 15, 2009
21. Events after the balance sheet date are Both adjusting and nonadjusting events
22. Which statement is incorrect regarding events after balance sheet date? If an entity declares dividends after the balance sheet
date, the entity shall recognize those dividends as a liability at the balance sheet date.
23. Which statement is incorrect? All statements are correct.
24. Type II events that are indicative of conditions that arose after the balance sheet date are given the following treatment:
Note disclosure in the financial statements.
25. Adjusting events after reporting period include all of the following , excepts The settlement of a court
of the financial statements that confirms that the entity has a presents obligations
case after the issuance
26. An entity is preparing its financial statement for the year ended June 30, 2009. The board of director reviews the final draft
financial statement and authorizes them for issue on August 15, 2009
The earning figure and key data are issued to the public on September 15, 2009. The financial statements are issued to
shareholder on October 15, 2009and approved by shareholder on October 31, 2009.
The period in respect of which the entity would considered events after the end of reporting period in accordance with PAS 10, IS
from June 30, 2009 to August 15, 2009
27. Which is usually considered as a type 1 event (i.e., adjusting event) under PAS 10? Receipt of information indicating that an
asset was impaired at the end of the reporting period.
28. An entity decided to operate a new amusement park that will cost P 1 million to build in the year 2010 .Its financial year end
is DECEMBER 31, 2009 .The entity has applied for a letter of guarantee for P 700.000 . The letter of guarantee was issued on
March 31, 2010. The audited financial statement have been authorized to be issued on April 15, 2010. The adjustment required
to be made on December 31,2009 should be Do nothing
29. The audit of Anne Company for year ended December 31, 2009 was completed on March 1, 2010. The financial statements
were signed by the managing director on March 15, 2010 and approved by the shareholders on March 31, 2010. The next events
have occurred.
·
On January 15, 2010, a customer owing 900,000 to Anne filed for bankruptcy. The financial statements
include an allowance for doubtful accounts pertaining to this customers only of P100,000
·
Anne Company’s issued share capital comprised 100,000 ordinary shares with P100 par value. The entity
issued additional 25,000 shares on March 1, 2010 at par value.
·
Specialized equipment costing P525,000 purchased on September 1, 2009 was destroyed by fire on
December 15, 2009. Anne Company has booked a receivable of P400, 000 from insurance entity. After the
insurance entity completed its investigation on February 1, 2010, it was discovered that the fire took place due to
negligence of the machine operator. As a result, the insurer’s liability was zero on this claim.
Anne Company report a total amount of “adjusting events” on December 31, 2009 at 1,200,000
Solution 1-36 Answer b
Doubtful accounts (900,000 – 100,000)
800,000
Loss on claim receivable
400,000
Total adjusting events
1,200,000
30. An entity build a new factory building during 2009at a cost of P 20 million . At December 31, 2009 , the net book value of the
building was P 19 MILLION . Subsequent to year – end March 15, 2010 , the building was destroyed by fire and the claim against
the insurance entity proved futile because the cause of the fire was negligence on the part of the care taker of the building . If
the date of the authorizations of the financial statements for the year ended December 31, 2009, was March 31, 2010 the
should Disclose this non adjusting event in the notes
31.Ginger Company is completing the preparation of its draft financial statements for the year ended December 31, 2009. The
financial statements are authorized for issue on March 31, 2010.
On March 15, 2010, A divided of P1, 750,000 was declared and a contractual profit share payment of P350, 000 was made, both
based on the profit for the year ended December 31, 2009.
On February 1, 2010, a customer went into liquidator having owed the entity P340, 000 for the past 5 months. No allowance had
been made against this debt in the draft financial statements.
On March 20, 2010, a manufacturing plant was destroyed by fire resulting in a financial loss of P2,600,000.
What total amount should be recognized in profit or loss for the year ended December 31, 2009 to reflect adjusting events after
the end of reporting period? 690, 000
32. At the end of the reporting period , December 31, 2009 , an entity carried receivable from another entity , a major customers
, The authorizations date of the financial statements is on February 16, 2010 . The customers declared bankruptcy on Valentines
day February 14, 2010. The entity should Make a provision for this post reporting period event in its financial statements as
opposed to disclosure in notes
33. The following data are provided by Norway Company. The end of the reporting period is December 31, 2009 and the financial
statements are authorized for issue on March 15, 2010.
·
On December 31, 2009, Norway Company had receivable of 400,000 from a customer that is due 60 days
after the end of reporting period. On January 15, 2010 a receiver was appointing for a said customer. The receiver
informed Norway that the P400, 000 would be paid in full by June 30, 2010.
·
Norway Company measures its investments in listed shares as held for trading at fair value through profit of
loss. On December 31, 2009, these investments were recorded at the market value of P5, 000,000. During the
period up to February 15, 2010, there was a steady decline in the market value of all the shares in the portfolio,
and at February 15, 2010, the market value had fallen to P2, 000,000.
·
Norway Company had reported a contingent liability on December 31, 2009 related to a court case in which
Norway Company was the defendant. The case was not heard until the first week of February 11, 2010, the judge
handed down a decision against Norway Company. The judge determined that Norway Company was liable to pay
damages and costs totaling P3, 000,000.
·
On December 31, 2009, Norway Company had a receivable from a large customer in the amount of P3,
500,000. ON January 31, 2010, Norway Company was advised by the liquidator of the said customer that the
customer was insolvent and would be unable to repay the full amount owed to Norway Company. The liquidator
will be paid on April 30, 2010.
Norway Company should report a total amount of “adjusting events” on December 31, 2009 at 6,150, 000
Solution 1-37 Answer a
Litigation loss
3,000,000
Bad debt expense (3, 500,000 x 90 %)
3,150,000
Total amount of adjusting events
6,150,000
The receivable of P400, 000 is nonadjusting event because the amount is still collectible although a longer term has given but not
so long as to cause it to be reclassified as noncurrent.
The investments in trading securities are measured at fair which must be determined at the end of each reporting period. The
change in the fair value on February 15, 2010 shall be recognized in the next reporting period, not December 31, 2009.
34. An entity deals extensively with foreign entities , and its financial statements reflect these foreign currency transactions.
Subsequent to the reporting period and before the date of authorizations of the issuance of the financial statements , there
were abnormal fluctuations in foreign currency rates . The entity should Disclose the post reporting period event in notes as a non
adjusting event.
35. Are the statements about the classifications of each of the following events after the end of reporting period but before the
financial statements are authorized for issue true or false?
Statement 1 A decline in the market value of investments would normally be classified as an adjusting events.
Statement 2 The settlement of long running court case would normally be classified as a non adjusting event.
36. Elysee Company’s raft financial statements showed the profit before tax for year ended December 31, 2009 at 9, 000,000.
The board of directors authorized the financial statement for issue on March 20, 2010.
A fire occurred at one of Elysee’s sites on January 15, 2010 with resulting damage costing P7, 000,000, only P4,000 ,000 of which
is covered by insurance. The repairs will take place and be paid for in April 2010. The P4, 000,0000 claim from the insurance
entity will however be received on February 14, 2010. What should be Elysee’s profit before tax in its financial
statements? 9,000,000
Solution 1-39 Answer b
The profit remains at P9, 000,000. The fire occurring on January 15, 2010 is a nonadjusting event on December 31, 2009.
37. Between the date on which the financial statement for this year were completed and the date on which they were due to be
authorized for issue , a number of events took, place . According to PAS 10 , All of the following events would be classified as non
adjusting events requiring disclosure excepts, A mistake was discovered in the calculations of the allowance for uncollectible trade
receivables
1.
Those decisions mentioned in the objective of general purpose financial reporting involve about: Determining the value
of the reporting entity.
2.
3.
Financial reports are based on the following , except: exact depictions.
Which of the following statements is incorrect? Different types of economic resources affect a user’s assessment of the
reporting entity’s prospects for future cash flows uniformly.
The enhancing qualitative characteristics are the following Comparability. verifiability, timeliness and understandability
4.
5.
6.
ll of the following statements correct, except: .Current year that were made in past years. The results of those
comparisons can help a user to correct and improve the processes that were used to make those future predictions.
All of the following statements pertaining to neutrality are correct, except: Neutral information does not mean
information with purpose or no influence on behaviour.
7.
Faithful representation requires that: the boundary of the reporting entity does not contain an arbitrary or incomplete
set of economic activities;
8.
Other general purpose financial statements present and disclose information about a reporting entity, except:
derecognised assets, liabilities, equity, income and expenses including information about their nature and about the risks
arising from those recognised assets and liabilities.
9.
The following statements are correct, except: Financial statements typically provide other types of forward-looking
information, for example, explanatory material about management’s expectations and strategies for the reporting entity.
10. Which is not an example of rights that do not correspond to an obligation of another party as mentioned in the
Conceptual Framework? Right to exchange goods.
11. Which is not an accounting element in the entity’s financial position? Income
12. Which of the following description is incorrect? Profit is also an element of the financial reports.
13. All of the following statements are correct, except: The amount at which an asset, a liability or equity is recognised in the
statement of financial position is referred to as its ‘carrying amount’ or “base amount”.
14. Recognition is the process of including within the financial statements items which meet the definition of an element
according to the IASB’s Conceptual Framework for Financial Reporting. Which of the following items should be
recognised as an asset in the statement of financial position of a company?
Select one: A receivable from a customer which has been sold (factored) to a finance company. The finance company has
full recourse to the company for any losses
15. All of the following statements are correct, except: Compliance to the derecognition procedures is strict and without
reservations.
16. Which of the following statements is incorrect? In some cases, fair value can be determined directly by observing prices
in an inactive market.
17. Which of the following statements is incorrect? The historical cost of an asset when it is incurred or taken on is the value
of the consideration received to incur or take on the liability minus transaction costs.
18. All of the following statements are correct, except: Even if an item meeting the definition of an asset or liability is not
recognised, an entity may need not to provide information about that item in the notes.
19. Effective communication of information in financial statements requires the following, except: it does not required
constrains decisions about presentation and disclosure.
20. Which of the following statements is incorrect? Classification is applied to components of such income and expenses if
those components have similar characteristics and are identified separately.
21. Which of the following statements is incorrect? Different levels of aggregation may be needed in different parts of the
financial statements. For example, typically, the statement of financial position and the statement(s) of financial
performance provide summarised information and more detailed information is provided on the face of the financial
reports.
22. Which of the following statements is incorrect? The concepts of capital maintenance include the financial capital
maintenance and unit capital maintenance.
23. Which of the following statements is incorrect? The selection of the appropriate concept of capital by an entity should
be based on the needs of the management of its financial statements.
24. Which of the following statements is incorrect? Selection of the basis under this concept is independent on the type of
financial capital that the entity is seeking to maintain.
25. The following Information are found in the general purpose financial reports, except: Financial performance reflected
by compliance to the regulatory requirements.
26. All of the following statements correct, except: Information that has predictive value often also has confirmatory value.
For example, revenue information for the current year, which can be used as the basis for predicting revenues in future
years, can also be compared with revenue predictions for the current year that were made in past years. The results of
those comparisons can help a user to correct and improve the processes that were used to make those future
predictions.
27. Faithful representation is a fundamental characteristic of useful information within the IASB’s Conceptual framework
for financial reporting. Which of the following accounting treatments correctly applies the principle of faithful
representation? Allocating part of the sales proceeds of a motor vehicle to interest received even though it was sold with
0% (interest free) finance
28. The following statements are correct as to the general purpose financial reports, except: The general purpose financial
information is provided in other statements and schedules.
29. Financial statements are prepared for a specified period of time (reporting period) and provide information about,
except: Company’s predictions fair and substantiated predictions in the coming business period.
30. Rights that have the potential to produce economic benefits take many forms, excluding: Rights guaranteed by the
constitution.
31. Which of the following description is incorrect? Income is decreases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders of equity claims.
32. Which of the following statements is incorrect? One way to apply a historical cost measurement basis to financial assets
and financial liabilities is to measure them at book value.
33. The historical cost of a liability is updated over time to depict, if applicable, except: accrual of interest to reflect any
investing component of the liability.
34. Which of the following statements is incorrect? In developing Standards, the Board may decide in exceptional
circumstances that income or expenses arising from a change in the current value of an asset or liability are to be
included in other comprehensive income when doing so would result in the statement of profit or loss providing more
relevant information, or providing a more faithful representation of the entity’s financial performance for that period.
35. The following statements are correct with regard to the concept of financial capital maintenance, except: Holding gains
may not be recognised as such, however, until the assets are recognized in an exchange transaction.
36. The fundamental qualitative characteristics are relevance and faithful representation.
37. Sometimes one entity (parent) has control over another entity (subsidiary). Which of the following statements is
incorrect? Determining the appropriate boundary of a reporting entity can be difficult if the reporting entity is a legal
entity and it does not comprise only legal entities linked by a parent-subsidiary relationship.
38. Which is not an example of rights that correspond to an obligation of another party rights to receive cash. rights to
benefit from an obligation of another party to transfer an economic resource if a specified certain future event occurs.
39. The following measurement bases are to be used, except: Replacement value and time value of money
40. Current value measurement bases include: value in use for liabilities and fulfilment value for assets.
41. Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared characteristics for
presentation and disclosure purposes. Classification is not applied to the unit of account selected for an accounting
element.
42. Which of the following statements is incorrect? Income and expenses that arise on a historical cost measurement basis
are excluded in the statement of profit or loss.
43. Which of the following statements is incorrect? And upward change in the value of its assets is profit.
44. When the classification of items in its financial statements is changed, the entity must reclassify the comparative
amounts, unless it is impracticable to do so
45. An entity decided to extend the report period from a 12-month period to a 15-month period. Which of the following is
.not required in case of change in reporting period? The entity should change the reporting period only if other similar
entities in the geographical area in which it generally operates have done so in the current year.
46. Which of the following statements is incorrect in relation to fair presentation? An entity can rectify in appropriate
accounting policies either by disclosure of the accounting policies used or by notes or explanatory material
47. Pony Company reported the following trial balance on December 31, 20Y1:
Cash overdraft
Accounts receivable
200,000
Inventory
500,000
Deferred charges
50,000
Land classified as "held for sale"
150,000
Property, plant and equipment, net
1,600,000
Accounts payable
Share capital
Share premium
Retained earnings
2,5000,000
40,000
460,000
1,500,000
150,000
350,000
2,500,000
Checks amounting to P100,000 were written to vendors and recorded on December 31, 20Y1 resulting in a cash
overdraft of P400,000. The checks were mailed on January 15, 20Y2. On January 1, 20Y1, the land was classified as held
for sale but remained unsold on December 31, 20Y1. On March 15, 20Y2, he entity decided not to sell the land but
continue to use it. The entity issued the financial statements of March 31, 20Y2. On December 31, 20Y1, what amount
should be reported as current assets?
Select one: 760,000
Solution
Cash
Cash overdraft
(40,000.00)
Add: Undelivered check
100,000.00
60,000.00
Accounts receivable
200,000.00
Inventory
500,000.00
Total current assets
760,000.00
48. Maricar Company’s trial balance reflected the following accounts balance on December 31, 20CY:
Accounts Receivable (net)
260, 000
Financial assets at FVTOCI
60, 000
Accumulated depreciation on equipment and furniture
150, 000
Cash
110, 000
Inventory
300, 000
Equipment
250, 000
Patent
40, 000
Prepaid Insurance
20, 000
Land held for future business site
180, 000
The inventory included goods held on consignment amounting to P50,000. The patent was classified as held for sale on
December 31, 20Cy. What amount of total current assets should be reported on December 31, 20CY?
Select one: 680, 000
49. At 31 December 20Y1 the following require inclusion in a company’s financial statements:
On 1 January 20Y1 the company made a loan of P12,000 to an employee, repayable on 1 January 20Y2, charging interest at 2%
per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date.
The company paid an annual insurance premium of P9,000 in 20Y1, covering the year ending 31 August 20Y2.
For these items, what total figures should be included in the company’s statement of financial position as at 31 December 20Y1?
Select one: Current assets P22,240 Current liabilities nil
Solution
Particulars
Current Asset
Current Liability
Item a
Loan receivable
12,000.00
Interest receivable
Principal
Multiplied by: Interest rate
12,000.00
2%
240.00
Item b
Prepaid insurance
Annual insurance premium
Multiply by: (Jan 1-Aug 31, Y2)
9,000.00
8 mos/12 mos
6,000.00
Item c
Rent receivable
Totals
4,000.00
22,240.00
0.00
50. Elias Company reported liabilities on December 31, 20Y3 as follows:
Accounts payable and accrued interest
1,000,000
12% note payable issued November 1, 20Y1 maturing July 1, 20Y4
2,000,000
10% debentures payable, next annual principal installment of P500,000 due February 1,
7,000,000
20Y4
On December 31, 20Y3, the entity consummated a noncancelable agreement with the lender to refinance 12% note payable
on a long-term basis. The December 31, 20Y3 financial statements were issued on March 31, 20Y4.
In the December 31, 20Y3 statement of financial position, what total amount should be reported as current liabilities? 1,500,000
Solution:
Accounts payable and accrued interest
Current portion of 10% debentures payable
Total current liabilities
1,000,000.00
500,000.00
1,500,000.00
51. DL Company reported the following information relating to liabilities on December 31, 20Y1:
Accounts payable for goods and services purchased on open account amounted to P60,000 and accrued expenses
totaled P50,000 on December 31, 20Y1.
On July 1, 20Y1, the entity issued P500,000, 8% bonds for P440,000 to yield 10%. The bonds mature on June 30, 2022,
and pay interest annually every June 30. On December 31, 20Y1, the bond were trading in the open market at 86 to
yield 12%. The effective interest method is used to amortize bond discount.
The pretax financial income for 20Y1 was P1,050,000 and the taxable income was P900,000. The difference is due to
P100,000 permanent difference and P50,000 temporary difference which is expected to reverse in 20Y2. The entity is
subject to the income tax rate of 30% and made estimated income tax payments during the year of P100,000. What
amount of current liabilities should be reported on December 31, 20Y1?
Select one: 300,000
Solution
Accounts payable
60,000.00
Accrued expenses
50,000.00
Interest payable
Face amount of bonds
500,000.00
Multiply by: Nominal rate
Annual nominal interest
Multiply by:
8%
40,000.00
6 mos/12 mos
20,000.00
Income tax payable
Taxable income
900,000.00
Multiply by: Income tax rate
30%
Current tax expense
270,000.00
Less: Income tax payments
100,000.00
Current liabilities
170,000.00
300,000.00
52. Which is false on the derecognition of a financial liability?
Select one: The difference between the carrying amount of a financial liability extinguished or transferred to another party and the
consideration paid, including any non-cash assets transferred or liabilities assumed, shall not be recognized in profit or loss.
53. Rica Company reported the following changes in all the account balances for the current year, except for retained
earnings:
Cash
Accounts receivable, net
Inventory
Investments
Accounts payable
Bonds payable
Share capital
Share premium
Increase (Decrease)
790,000
240,000
1,270,000
(470,000)
(380,000)
820,000
1,250,000
130,000
There were no entries in the retained earnings account except for Profit and a dividend declaration of P190,000 which was paid
in the current year. What is the Profit for the current year? 200,000
Solution
Increase/decrease
Cash
790,000.00
Accounts receivable, net
240,000.00
Inventory
1,270,000.00
Investments
(470,000.00)
Accounts payable
Bonds payable
Share capital
Share premium
Net change in retained earnings
380,000.00
(820,000.00)
(1,250,000.00)
(130,000.00)
10,000.00
Add: Dividend declared
190,000.00
Profit
200,000.00
54. Which of the following terms cannot be used to describe a line item in the statement of comprehensive income?
extraordinary item
55. On July 1, 20CY, Rica Company handed over to a client a new computer system. The contract price for the supply of
the system and after-sales support for 12 months was P1,000,000. Rica Company estimates the cost of the after-sales
support at P150,000 and it normally marks up such cost by 50%.
The total revenue reported by Rica Company in its 20CY statement of comprehensive income is 887,500
Solution
Total contract price
1,000,000.00
Less: Contract price of after-sales support (whole year)
Cost of after-sales support
Multiply by: Cost plus markup rate
150,000.00
150%
Contract price of computer system
225,000.00
775,000.00
Add: After-sales support earned
Contract price of after-sales support
225,000.00
Divide by:
12 months
Monthly price of after-sales support
18,750.00
Multiply by: July 1 to Dec 31
6 months
Total revenue
112,500.00
887,500.00
13. If (P2,450) net of tax is the reclassification adjustment in cluded in other comprehensive income in the year the securities are
sold, what is the gain (loss) that is included in income from continuing operations before income taxes? Assume a 30% tax rate.
P3,500
Solution
Reclassification adjustment, net of tax
2,450.00
Divide by: After tax rate (100% minus 30%)
Gain
70%
3,500.00
14. Madsen Company reported the following information for 20CY:
Sales revenue
Cost of goods sold
Operating expenses
Unrealized holding gain on FVOCI securities
Cash dividends received on the securities
510,000
350,000
55,000
40,000
2,000
For 20CY, Madsen would report other comprehensive income of 40,000
Solution
Only the unrealized holding gain FVOCI securities are reported under other comprehensive income portion of statement of
comprehensive income.
15. Searles does not elect the fair value option for recording financial assets and liabilities. What amount of comprehensive
income should Searles Corporation report on its statement of income and comprehensive income given the following net of tax
figures that represent changes during a period? P86,500
Pension liability adjustment recognized in OCI
P (3,000)
Unrealized gain on available-for-sale securities
15,000
Reclassifi cation adjustment, for securities gain in cluded in
Profit
Stock warrants outstanding
Profit
(2,500)
4,000
77,000
Solution
Profit
77,000.00
Pension liability adjustment recognized in OCI
(3,000.00)
Unrealized gain on available-for-sale securities
15,000.00
Reclassification adjustment, for securities gain included in profit
(2,500.00)
Total comprehensive income
86,500.00
16. Retained earnings is a subcategory of Equity
17. Which of the following reports is not a component of the financial statements according to PAS 1? Director’s Report.
18. Choose the correct statement The elements in the owners’ equity section of a statement of financial position are classified
primarily by source.
19. The cross-reference between each line item in the financial statements and any related information disclosed in the notes to
the financial statements is mandatory
20. The presentation of the notes to the financial statements in a systematic manner is mandatory, as far as is practicable
21. Which of the following about note disclosures are considered mandatory rather than voluntary (optional)? I, II , III and IV
I. Disclosure of information about key sources of estimation uncertainly
II. Disclosure of information about judgement that management has made in the process of applying accounting policies.
III. The presentation of notes to the financial statements in a systematic manner.
IV. The cross- reference between each line in the financial statements and any related information disclosed in the notes to the
financial statements.
22. During the financial year, Cresswell Limited had a Cost of Sales amounting to P260 000. Beginning and ending balances were:
Inventory
Beginning Ba lance
P46 000
Ending Balance
P55 000
Accounts Payable
P18 000
P26 000
A discount of P2 000 for prompt payment was received. The amount of cash paid for goods purchased during the year was:
P259 000
Solution
Cost of sales
260,000.00
Add: Inventory, ending
55,000.00
Total credits (Goods available for sale)
315,000.00
Less: Inventory, beginning
46,000.00
Purchases
269,000.00
Add: Accounts payable, beginning
18,000.00
Total A/P credits side
Less: Accounts payable, ending
Purchase discounts
Cash paid for goods purchased
287,000.00
26,000.00
2,000.00
28,000.00
259,000.00
23. Cash advances and loans from bank overdrafts should be reported as: Operating activities.
24. During the financial year Marina Limited had sales of P720 000. The beginning balance of Accounts receivable was P103
000, and the ending balance was P139 000. Bad debts amounting to P34 000 were written off during the period. The
cash receipts from customers during the year amounted to: P650 000;
25. Marie Company provided the following information for the current year:

Purchased a building for P1,200,000. Paid P400,000 and signed a mortgage with the seller for the remaining P800,000.

Executed a debt-equity swap and replaced a P600,000 loan by giving the lender ordinary shares worth P600,000 on the
date the swap was executed

Purchased land for P1,000,000. Paid P350,000 and issued ordinary shares worth P650,000.

Borrowed P550,000 under a long-term loan agreement. Used the cash from the loan proceeds as follows: P150,000 for
the purchase of additional inventory, P300,000 to pay cash dividend, and P100,000 to increase the cash balance.
What amount should be reported as net cash used in investing activities in the statement of cash flows? 750,000
26. In 20CY, a typhoon completely destroyed a building belonging to Carpet Corporation. The building cost P2,500,000 and
had accumulated depreciation of P1,200,000 at the time of the loss. carpet received a cash settlement from the
insurance and reported a loss of P525,000.
In Carpet’s 20CY cash flow statement, how much would be the net changes that would be reported in the cash flows
from investing activities section?
Select one: P775,000 increase
Solution
Building, at original cost
2,500,000.00
Less: Accumulated depreciation
1,200,000.00
Carrying amount
1,300,000.00
Less: Loss on insurance settlement
525,000.00
Cash proceeds from insurance
775,000.00
a.
Company sold some of its plant assets during 20CY. The original cost of the plant assets was P900,000 and
the accumulated depreciation at date of sale was P840,000. The proceeds from the sale of the plant assets
were P90,000. The information concerning the sale of the plant assets should be shown on Hager's
statement of cash flows (indirect method) for the year ended December 31, 20CY, as a(n) subtraction from
Profit of P30,000 and a P90,000 increase in cash flows from investing activities.
27. Solution
Proceeds from sale
90,000.00
Less: Carrying amount of plant assets
Cost
Accumulated depreciation
900,000.00
(840,000.00)
Gain on sale of plant assets
60,000.00
30,000.00
28. Gain on sale of plant asset amounting to P30,000 is deducted from profit while P90,000 proceeds from sale of plant
asset is classified as increase in cash flows from investing activities.
29.
29. The balance in retained earnings at December 31, 20Y1 was P1,440,000 and at December 31, 20Y2 was P1,164,000.
Profit for 20Y2 was P1,000,000. A stock dividend was declared and distributed which increased common stock P500,000 and
paid-in capital P220,000. A cash dividend was declared and paid. The amount of the cash dividend was P556,000
Solution
Retained earnings, Dec 31 20Y1
1,440,000.00
Add: Profit for 20Y2
1,000,000.00
Total R/E credit side
2,440,000.00
Less:
Stock dividend (500,000+220,000)
Retained earnings, Dec 31, 20Y2
Cash dividend
720,000.00
1,164,000.00
1,884,000.00
556,000.00
52. A company borrows P10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect
method), this event would be reflected as a(n) cash inflow from financing activities.
53. Which of the following subsequent events would require adjustment of the accounts before issuance of the financial
statements? Loss on a lawsuit, the outcome of which was deemed uncertain at year end
54. If dividends are declared after the reporting period but before the financial statements are authorized for issue No liability
shall be recognized at the end of the reporting period
56. At the balance sheet date, December 31, 20Y1, ABC Inc. carried a receivable from XYZ, a major customer, at P10
million. The “authorization date” of the financial statements is on February 16, 20Y2. XYZ declared bankruptcy on
Valentine’s Day (February 14, 20Y2). ABC Inc. will Make a provision for this post–balance sheet event in its financial
statements (as opposed to disclosure in footnotes).
57. Most likely a non-adjusting event Decline in market value of investments between the end of the reporting period and
the date when the financial statements are authorized for issue
58. ABC Ltd. decided to operate a new amusement park that will cost P1 million to build in the year 20Y1. Its financial
year-end is December 31, 20Y1. ABC Ltd. has applied for a letter of guarantee for P700,000. The letter of guarantee
was issued on March 31, 20Y2. The audited financial statements have been authorized to be issued on April 18, 20Y2.
The adjustment required to be made to the financial statement for the year ended December 31, 20Y1, should be Do
nothing
59. During 20Y3, a construction company changed from the cost-recovery method to the percentage-of-completion
method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three
years appear below:
Cost-Recovery
Percentage-of-Completion
20Y1
P 475,000
P 800,000
20Y2
625,000
950,000
20Y3
700,000
1,050,000
P1,800,000
P2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be
reported by a credit of P390,000 on the 2011 retained earnings statement.
60. Which of the following statement is not correct? A change from an in appropriate accounting policy to a proper one shall
be accounted for as an accounted for as a changed in accounting policy
61. An entity changed from an accounting principles that is not generally accepted to one that is generally accepted. The
effect of the change shall be reported , net of applicable income tax , in the current year Retained earnings statement
as an adjustment of the opening balance
62. Diony Company operates two restaurants, one in Boracay and one in Dakak. The operations and cash flows of each of
the two restaurants are clearly distinguishable. During 20Y3, Jazz Company decided to close the restaurant in Dakak
and sell the property. It is probable that the disposal will be completed early next year. The revenue and expenses of
Jazz Company for 20Y3 and for the preceding two years as follows:
20Y3
20Y2
20Y1
Sales – Boracay
60,000
48,000
40,000
Cost of goods sold – Boracay
26,000
22,000
18,000
Other expenses – Boracay
14,000
13,000
12,000
Sales – Dakak
23,000
30,000
52,000
Cost of goods sold- Dakak
14,000
19,000
20,000
Other expenses – Dakak
17,000
16,000
15,000
63.
The other expenses do not included tax expense. During the later part of 20Y3, Diony Company sold much of the
kitchen equipment of the Dakak restaurant and recognized a pretax gain of P15,000 on the disposal. The income tax
rate is 30%.
Diony Company should report income or loss from discontinued operations for 20y3 at 4,900 gain
Solution 3-12
Sales – Dakak
23,000
Cost of goods – Dakak
(14,000)
Other expenses – Dakak
(17,000)
Gain on disposal
15,000
Income before tax
7,000
Income tax (30% x 7,000)
(2,100)
Income from discontinued operation
4,900
64. Flame
65. Company has two divisions, North and south. Both qualify as business components. In 20Y2, the firm decided to
dispose of the assets and liabilities of division South and it is probable that the disposal will be completed early next
year. The revenue and expenses of Flame Company for 20Y2 and 20Y1 are as follows:
20Y2
20Y1
Sales – North
5,000,000
4,600,000
Total nontax expenses – North
4,400,000
4,100,000
Sales – South
3,500,000
5,100,000
Total nontax expenses South
3,900,000
4,500,000
During the later part of 20Y1, flame disposed of a portion of division South recognized a pretax loss of P2, 000,000 on
the disposal. The income tax rate for Flame Company is 30%. Flame Company should report loss from discontinued
operation in 20Y1 at 1,680,000
Solution 3-11
Sales – South
3,500,000
Expenses – South
3,900,000
Operating loss
(400,000)
Loss on disposal
(2,000,000)
Total loss
(2,400,000)
Tax saving (30% x 2,400,000)
Loss from discontinued operations
720,000
(1,680,000)
66. Which of the following most likely would be considered a discontinued operations? An entity that is franchisor in the
quick service restaurant business also operates company owned restaurant that are unprofitable in a certain region and
as a result , the entity decided to exit both the quick service business as well as the company – owned restaurant in that
region.
67. Items of dissimilar nature or function must be presented separately in financial statements if those items are material
68. Separate line items in an analysis of expenses by function include cost of sales, administrative expenses, distribution
expenses etc.
69. The elements of the equity section of the statement of financial position should be classified primarily by: Source
70. PAS 1 requires the following items to appear on the face of the Statement of Changes in Equity: I,II,III and IV

The net amount of cash from the issue of my securities during the period

The cumulative effect of changes in accounting policy and the correction of errors

Total comprehensive income for the period

Profit or loss for the period
71. An entity other than a financial institution receives dividends from investment in shares. How should it disclose the
dividends received in the statement of cash flows? Either as operating cash inflow or as investing cash inflow.
72. If dividends are declared after the reporting period but before the financial statements are authorized for issue No
liability shall be recognized at the end of the reporting period
73. Per PAS 10 Events after the Reporting Period, these are events that provide evidence of conditions that existed at the
end of the reporting period Adjusting events
74. Each of the following events occurred after the reporting date of 31 March 2CY, but before the financial statements
were authorised for issue. Which would be treated as a non-adjusting event under IAS 10 Events After the Reporting
Period?
Select one: A public announcement in April 20CY of a formal plan to discontinue an operation which had been approved
by the board in February 20CY.
75. International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign currency
transactions. Subsequent to the balance sheet date, and before the “date of authorization” of the issuance of the
financial statements, there were abnormal fluctuations in foreign currency rates. International Inc. should Disclose the
post–balance sheet event in footnotes as a non-adjusting event.
76. An entity changed from an accounting principles that is not generally accepted to one that is generally accepted. The
effect of the change shall be reported , net of applicable income tax , in the current year Retained earnings statement
as an adjustment of the opening balance
77. Which of the following is true regarding accounting and reporting standard for discontinued operations? A recognitions
of an impairment loss would be necessary for a component that had not been sold by year end- if the fair value of the
component was determined to be less than the carrying amount
78. Icar Corp.’s accounts payable at December 31, 20Y1, totaled P800,000 before any necessary year-end adjustments
relating to the following transactions:
·
On December 27, 20Y1, Icar Corp. wrote and recorded checks to creditors totaling P350,000 causing an
overdraft of P100,000 in Icar Corp.’s bank account at December 31, 20Y1. The checks were mailed on January 10,
20Y2.
·
On December 28, 20Y1, Icar Corp. purchased and received goods for P200,000, terms 2/10, n/30. Icar Corp.
records purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, 20Y2.
·
Goods shipped FOB destination on December 20, 20Y1 from a vendor to Icar Corp were received January 2,
20Y2. The invoice cost was P65,000.
At December 31, 20Y1, what amount should Icar Corp report as total accounts payable?
Select one: P1,346,000
Solution
Accounts payable, unadjusted
800,000.00
Undelivered checks
350,000.00
Unrecorded purchases, net of discount (200,000 x 98%)
196,000.00
Accounts payable, adjusted
1,346,000.00
79. Items of other comprehensive income are presented in the statement of comprehensive income analysed by nature
80. Which information should be disclosed in the summary of significant accounting policies? Criteria for determining which
investments are treated as cash equivalents.
81. Top Toms Co has been trading for a number of years and is currently going through a period of expansion. An extract
from the statement of cash flows for the year ended 31 December 20CY for Top Toms Co is presented as follows (in
thousands):
Net cash from operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
995
(540)
(200)
255
200
455
Which of the following statements is correct according to the extract of Top Toms Co’s statement of cash
flows?
Select one: Net cash generated from operating activities has been used to fund the additions to non-current assets
82. Which of the following is not added to Profit as an adjustment to reconcile Profit as an adjustment to reconcile Profit to
cash from operating activities in the statement of cash flows? Increase in deferred tax asset
83. Most likely an adjusting event The discovery of fraud or errors that show that the financial statements are incorrect
84. Excellent Inc. built a new factory building during 20Y1 at a cost of P20 million. At December 31, 20Y1, the net carrying
value of the building was P19 million. Subsequent to year-end, on March 15, 20Y2, the building was destroyed by fire
and the claim against the insurance company proved futile because the cause of the fire was negligence on the part of
the caretaker of the building. If the date of authorization of the financial statements for the year ended December 31,
20Y1, was March 31, 20Y2, Excellent Inc. Should Disclose this non-adjusting event in the footnotes
85. During 20CY, Titus Company decided to change from the FIFO method of inventory valuation to the weighted average
method. Inventory balances under each method were as follows:
FIFO
Weighted Average
January 1
7,100,000
7,700,000
December 31
7,900,000
8,300,000
Ignoring income tax, in its 20CY statement of retained earnings, what amount should Titus report as the cumulative
effect of this accounting change? 600,000 addition
Solution
January 1, Weighted average
7,700,000.00
January 1, FIFO
7,100,000.00
Cumulative effect
600,000.00
Adjustment of 600,000 is added to the Beginning inventory (asset) with a previous balance of 7,100,000 thus affecting
retained earnings through cumulative effect as an increase by 600,000.
86. The international accounting standard board was formed to Develop word wide accounting standard
87. It is a global phenomenon intended to bring about transparency and a higher degree of comparability in financial
reporting , both of which will benefit the investors and are essential to achieved the goal of one uniform and globally
accepted financial reporting standard IFRS
88. As independent or external auditor , CPA are primarily responsible for Expressing an opinion as to the fairness of
financial statement
89. Treating a group of rights and obligations as a single unit of account may provide more relevant information than
treating each right or obligation as a separate unit of account if those rights and obligations 1, 2, 4
1.
cannot be or are unlikely to be the subject of separate transactions.
2.
cannot or are unlikely to expire in different patterns.
3. have similar economic characteristics and risks and hence are likely to have similar implications for the
prospects for future economic returns or net cash flows to the entity.
4. are used together in the business activities conducted by an entity to produce cash flows and are
measured by reference to estimates of their interdependent future cash flows.
90. The cash-flow-based measurement technique may be used in the following level of measurement uncertainty
91. How is expenses considered in the consumption or sale of the asset, or of part of the asset, measured using the
historical cost basis?
92. The fair value of an asset or liability may be determined by observing prices in an active market or by estimating it
when the prices are not observable in an active market. Which of the following are features of measuring prices in a
direct observation process? 1, 2, 3
1.
2.
3.
4.
Low-cost
Simple
Easy to understand
More accurate
93. Sun Company provided the following data for the preparation of the statement of cash flows for the current year:
Increase in accounts receivable
Decrease in income tax payable
Depreciation
Net income
Gain on sale equipment
Loss on sale building
300,000
170,000
1,000,000
250,000
440,000
210,000
Using the indirect method, how much should be reported as cash flow from operating activities? 550,000
93. What are the two concepts of capital maintenance and the determination of profit? 1, 3
1.Financial capital maintenance
2.Economic capital maintenance
3.Physical capital maintenance
4.Productivity capital maintenance
94. Which of the following statements relating to the concept of financial capital maintenance is correct? Both
1. In terms of nominal monetary units, profit represents the increase in nominal money capital over the period.
2. Under the nominal monetary units concept, increases in the prices of assets held over the period,
conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however,
until the assets are disposed of in an exchange transaction.
95. Under the concept of physical capital maintenance, profit represents Increase in that capital over that period.
96. For the purpose of stating the working capital of Mukherjee Corporation on December 31,2013, the following data are
submitted:
Cash on hand and in bank, net of bank of overdraft of P5,000s
P136,000
Petty cash(unreplenished petty cash expense, P400)
1,000
Accounts receivable, including discounted accounts with credit balance of P10,000
110,000
Merchandise inventory, including goods held on consignment of P18,000
148,000
Prepaid expenses
9,000
Total current assets
P399,000
Accounts payable, including accounts with debit balance o f P5,000
Notes payable in annual instalment at P100,000 payable every May 31
Accrued expenses
Total current liabilities
P60,000
200,000
8,000
P268,000
How much is the total current liability of Mukherjee Corp. or December 31, 2013? P178,000
97. The following information provided by Maricar Company in preparing this year’s comprehensive income statement:
Sales
8,000,000
Cost of sales
4,200,000
Depreciation and amortization expense
700,000
Employee benefit expense
900,000
Impairment of property, plant and equipment
200,000
Finance costs
800,000
Share of profit of associates
1,200,000
Translation loss on foreign operations
500,000
Loss on sale of financial instruments held for trading
300,000
Gain on sale of available-for-sale securities
450,000
Remeasurement gains on trading securities
400,000
Remeasurement gains on available for sale securities
300,000
Actuarial loss on employee benefits
100,000
Reduction of revaluation surplus as a result of a devaluation
200,000
Derivative gains on call options (speculation)
100,000
Gain on forward contract designated as a cash flow hedge
150,000
The amount included in the profit or loss section of the current year’s comprehensive income statement is 3,050,000
98. The following information provided by Maricar Company in preparing this year’s comprehensive income statement:
Sales
8,000,000
Cost of sales
4,200,000
Depreciation and amortization expense
700,000
Employee benefit expense
900,000
Impairment of property, plant and equipment
200,000
Finance costs
800,000
Share of profit of associates
1,200,000
Translation loss on foreign operations
500,000
Loss on sale of financial instruments held for trading
300,000
Gain on sale of available-for-sale securities
450,000
Remeasurement gains on trading securities
400,000
Remeasurement gains on available for sale securities
300,000
Actuarial loss on employee benefits
100,000
Reduction of revaluation surplus as a result of a devaluation
200,000
Derivative gains on call options (speculation)
Gain on forward contract designated as a cash flow hedge
100,000
150,000
The amount included in the other comprehensive income of the current year’s comprehensive income statement is
(350,000)
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 autho ritative
guidance, with a view to reaching consensus as to the appropriate accounting
treatment?
International Financial Reporting Interpretations Committee (IFRIC)
Advisory
(IASB)
Council
(SAC)
International
Accounting
Standards
Standards
Board
International Accounting Standards Committee Foundation (IASC Foundation)
Are the following statements about the Norwalk Agreement true or false?
Statement 1: The Norwalk Agreement requires the consolidated financial
statements of all listed United States companies, starting after 1 January 2005,
to be prepared in accordance with International Accounting Standards.
Statement 2: The Norwalk Agreement was an agreement for short-term financial
reporting convergence between the European Commission and the Unit ed States
government
False, False
False, True
True, False
True, True
Qualitative Characteristics
To achieve faithful representation, the financial statements - Must be complete, neutral
and reasonably free from error
What is the underlying concept that supports estimating a fixed asset impairment
charge? - Faithful representation
What is the concept that supports the issuance of interim reports? – Relevance
underlying assumptions
During the lifetime of an entity, accountants produce financial statements at arbitrary points in
time in accordance with which basic accounting concept? - Periodicity assumption
Which of the following basic assumptions of accounting (used by the International Accounting
Standards Board) makes depreciation and amortization policies justifiable and appropriate Going concern
Which accounting assumption or principle is being violate d if a company provides financial
reports in connection with a new product introduction? - Economic entity
Which basic assumption may not be followed when a firm in bankruptcy reports financial results?
- Going concern assumption
The basic assumptions of accounting used by the International Accounting Standards Board (IASB)
include all of the following except: - Materiality
The economic entity assumption - is applicable to all forms of business organizations
Which of the following is not a basic assumption underlying the financial accounting structure? Historical cost assumption
When a parent and subsidiary relationships exist, consolidated financial statement are prepared in
recognitions of - Economic entity
The basic assumptions of accounting used by the International Accounting Standards Board
(IASB) include – Periodicity
Which of the following basic accounting assumptions is threatened by the existence of severe
inflation in the economy? - Monetary unit assumption
The assumption that a business enterprise will not be sold or liquidated in the near future is
known as the - none of these
Under current IFRS, inflation is ignored in accounting due to the - monetary unit assumption
Which basic assumption is illustrated when a firm reports financial results on an annual basis? Periodicity assumption
Preparation of consolidated financial statements when a parent -subsidiary relationship exists is
an example of the - economic entity assumption
Identify the pervasive constraint and underlying assumption mentioned in the Conceptual Framework.
Pervasive constraint
Underlying assumption
Cost
Going concern
Which of the following basic accounting assumptions is threatened by the existence of severe
inflation in the economy? - Monetary unit assumption
During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept
of - No
Yes
Proponents of historical cost ordinarily maintain that in comparison with all other valuation
alternatives for general purpose financial reporting, statements prepared using historical costs
are more verifiable
Which of the following is an implication of the going concern assumption? - All of these
Valuing assets at their liquidation values rather than their cost is inconsistent with the - historical
cost principle
elements of financial statements (definition, recognition and
measurement)
Recognition of expense related to amortization of an intangible asset illustrates which
principle of accounting? - Expense recognition.
Issuance of common stock for cash affects which basic element of financial sta tements?
- Equity.
Which of the following is not a time when revenue may be recognized? - All of these are
possible times of revenue recognition.
Which of the following is an argument against using historical cost in accounting? - Fair
values are more relevant.
The International Accounting Standards Board (IASB) defines five interrelated elements
of financial statements. Which of the following is not one of those elements? - All of the
choices are elements defined by the IASB
Revenue is generally recognized when a sale occurs. This statement describes the revenue recognition principle
What is the general approach as to when product costs are recognized as expenses? In the period when the related revenue is recognized.
concepts of capital and capital maintenance
Under the financial capital concepts, a profit is earned only if - The monetary amount of
net asset at the end of the period exceeds the monetary amount of net asset at the
beginning of the period , after excluding any distributions to and cont ributions from
owners
The financial capital concepts requires that net assets shall be stated at - Historical cost
Which of the following statements is incorrect? - Selection of the basis under this concept is
independent on the type of financial capital that the entity is seeking to maintain.
Which of the following statements is incorrect? - And upward change in the value of its
assets is profit.
The following statements are correct with regard to the concept of financial capital maintenance,
except: - Holding gains may not be recognised as such, however, until the assets are
recognized in an exchange transaction.
Which of the following statements is incorrect? - The concepts of capital maintenance include
the financial capital maintenance and unit capital maintenance.
Which of the following statements is incorrect? - The selection of the appropriate concept of
capital by an entity should be based on the needs of the management of its financial
statements.
The physical capital maintenance concept required the adoptions of which
measurements basis? - Current cost
Under the physical capital concepts, a profit is earned only if - 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
Which of the following statements regarding the concept of capital maintenance is incorrect? Only outflows of assets in excess of amounts needed to maintain capital may be regarded as
profit and therefore as a return on capital.
Which of the following statements regarding the concept of capital maintenance is incorrect? Only outflows of assets in excess of amounts needed to maintain capital may be regarded as
profit and therefore as a return on capital.
General Features of FS
Which of the following statements is incorrect in relation to fair presentation? - An entity
can rectify in appropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material
When the classification of items in its financial statements is changed, the entity - must
reclassify the comparative amounts, unless it is impracticable to do so
An entity decided to extend the report period from a 12-month period to a 15-month
period. Which of the following is .not required in case of change in reporting period? The entity should change the reporting period only if other similar entities in the
geographical area in which it generally operates have done so i n the current year.
Items of dissimilar nature or function - must be presented separately in financial
statements if those items are material
Statement of Comprehensive Income -Income Statement/ Profit or
Loss from Continuing Operations
Which of the following terms cannot be used to describe a line item in the statement of
comprehensive income? - extraordinary item
Separate line items in an analysis of expenses by function include - cost of sales,
administrative expenses, distribution expenses etc.
Rica Company reported the following changes in all the account balances for the current
year, except for retained earnings: - 200,000
Solution
Cash
Accounts receivable, net
Inventory
Investments
Accounts payable
Bonds payable
Share capital
Increase/decrease
790,000.00
240,000.00
1,270,000.00
(470,000.00)
380,000.00
(820,000.00)
(1,250,000.00)
Share premium
Net change in retained
earnings
Add: Dividend declared
Profit
(130,000.00)
10,000.00
190,000.00
200,000.00
On July 1, 20CY, Rica Company handed over to a client a new computer system. The
contract price for the supply of the system and after-sales support for 12 months
was P1,000,000. Rica Company estimates the cost of the after-sales support at
P150,000 and it normally marks up such cost by 50%.
The total revenue reported by Rica Company in its 20CY statement of
comprehensive income is - 887,500
Solution
Total contract
price
1,000,000.00
Less: Contract price of after-sales support (whole year)
Cost of after-sales support
150,000.00
Multiply by: Cost plus markup rate
150%
225,000.00
Contract price of computer system
775,000.00
Add: After-sales support
earned
Contract price of after-sales support
225,000.00
Divide by:
12 months
Monthly price of after-sales support
18,750.00
Multiply by: July 1 to Dec
31
6 months
112,500.00
Total revenue
887,500.00
The following information provided by Maricar Company in
preparing this year’s comprehensive income statement:
Sales
Cost of sales
Depreciation and amortization expense
Employee beneft expense
Impairment of property, plant and equipment
8,000,000
4,200,000
700,000
900,000
200,000
Finance costs
800,000
Share of proft of associates
1,200,000
Translation loss on foreign operations
500,000
Loss on sale of fnancial instruments held for trading
300,000
Gain on sale of available-for-sale securities
450,000
Remeasurement gains on trading securities
400,000
Remeasurement gains on available for sale securities
300,000
Actuarial loss on employee benefts
100,000
Reduction of revaluation surplus as a result of a devaluation
200,000
Derivative gains on call options (speculation)
100,000
Gain on forward contract designated as a cash fow hedge
150,000
The amount included in the proft or loss section of the current year’s
comprehensive income statement is - 3,050,000
Solution:
Sales
Less: Cost of sales
Gross profit from sales
Share of profit of associates
Gain on sale of available-for-sale securities
Remeasurement gain on trading securities
Derivative gains on call options
Total income
Less: Expenses and losses
Depreciation and amortization expenses
Employee benefit expense
Impairment of property, plant and equipment
8,000,000.00
4,200,000.00
3,800,000.00
1,200,000.00
450,000.00
400,000.00
100,000.00
5,950,000.00
700,000.00
900,000.00
200,000.00
Finance cost
Loss on sale of financial instruments held for trading
Profit (loss)
800,000.00
300,000.00 2,900,000.00
3,050,000.00
An entity presents an analysis of expenses using a classification based on - either the
nature of expenses or the function of expenses within the entity, whichever provides
information that is reliable and more relevant
Statement of Changes in Equity
Choose the correct statement - The elements in the owners’ equity section of a
statement of financial position are classified primarily by source.
The elements of the equity section of the statement of financial position should be
classified primarily by: - Source
Changes in account balances of Agamata Business Consultancy (ABC) for 2013
are as follows:
Increase
(Decrease)
Cash
P2,500,000
Accounts receivable net
1,750,000
Inventory
1,000,000
Investments
(250,000)
Accounts payable
(1,500,000)
Bonds payable
2,000,000
Share capital
3,000,000
Share premium
500,000
Unrestricted Retained
Earnings
750,000
Restricted Retained
Earnings
250,000
What should be the 2013 net income, assuming there were no entries in the
retained earnings account except for the net income and a dividend declaration of
P1,000,000 which was paid in the current year? - P2,000,000
Solution:
Increase in unrestricted retained earnings
750,000.00
Increase in restricted retained earnings
250,000.00
Dividend declaration
1,000,000.00
Profit (loss)
2,000,000.00
Retained earnings is a subcategory of – Equity
Which of the following reports is not a component of the financial statements according
to PAS 1? - Director’s Report.
On December 31, 2010, the stockholders’ equity section of Alexandra Corp
was as follows:
Common stock, par value P10; authorized
30,000 shares; issued and outstanding 9,000
shares
P 90,000
Additional paid-in
capital
116,000
Retained
earnings
146,000
Total stockholders’
equity
P352,000
On March 31, 2011, Alexandra declared a 10% stock dividend. Accordingly,
900 shares were issued when the fair market value was P16 per share. For
the 3 months ended March 31, 2011, Alexandra sustained a net loss of
P32,000. The balance of Alexandra’s retained earnings as of March 31, 2011
should be - P99,600
Solution:
Retained earnings, 1/1/2010
146,000.00
Less: Small share dividend
(P16 x 900)
14,400.00
Net loss
32,000.00
46,400.00
Retained earnings, 3/31/2011
99,600.00
Which of the following should be presented in the statement of changes in equity? - All
of the above
Notes of FS
Which information should be disclosed in the summary of significant accounting policies?
- Criteria for determining which investments are treated as cash equivalents.
The cross-reference between each line item in the financial statements and any related
information disclosed in the notes to the financial statements - is mandatory
Which of the following about note disclosures are considered mandatory rather
than voluntary (optional)?
I. Disclosure of information about key sources of estimation uncertainly
II. Disclosure of information about judgement that management has made in the
process of applying accounting policies.
III. The presentation of notes to the financial statements in a systematic manner.
IV. The cross- reference between each line in the financial statements and any
related information disclosed in the notes to the financial statements.
- I, II , III and IV
The presentation of the notes to the financial statements in a systematic manner - is
mandatory, as far as is practicable
Operating Activities
During the financial year Marina Limited had sales of P720 000. The beginning balance
of Accounts receivable was P103 000, and the ending balance was P139 000. Bad
debts amounting to P34 000 were written off during the period. The cash receipts from
customers during the year amounted to: - P650 000;
Solution:
Accounts receivable, beginning
103,000.00
Sales
720,000.00
Total debits
823,000.00
Less: Accounts receivable, ending 139,000.00
Accounts written off
34,000.00 173,000.00
Cash receipts from customers
650,000.00
Corinthians Company prepared the following balance sheet data.
December 31,
December 31,
2013
2012
Cash and cash equivalents
518,500
675,000
Accounts receivable (net)
360,000
345,000
Merchandise inventory
750,000
654,000
Prepaid insurance
4,500
6,000
Buildings and equipment
5,515,500
4,350,000
Accm dep’n – buildings &
(2,235,000)
(1,995,000)
equipment
Total Assets
4,913,500
4,035,000
Accounts payable
Salaries payable
Notes payable – bank
613,500
75,000
150,000
945,000
105,000
600,000

(current)
Notes payable – bank
1,200,000
(long-term)
Common stock, P20 par value
2,000,000
1,800,000
Premium on common shares
700,000
600,000
Retained earnings (deficit)
175,000
(15,000)
Total liabilities &
4,913,500
4,035,000
stockholder’s equity
Cash needed to purchase new equipment and to improve the company’s
working capital position was raised by borrowing from the bank with a long -term
note.

Allowance for bad debts on December 31, 2012 and December 31, 2013 were
P25,000 and P40,000 respectively. The bad debts expense for 2013 amounted to
P40,000 while write-offs amounted to P25,000

Equipment costing P75,000 with a book value of P15,000 was sold for
P18,000; the gain on sale was included in net income.

Corinthians Company issued 10,000 common shares as settlement for the
acquisition of a building acquired in June 2013. The building’s fair value at the time
of purchase was P300,000 while the shares market value was P28.75

The company paid cash dividends of P110,000 and reported earnings of
P300,000 for 2013. There were no entries in the retained earnings account other
than to record the dividend and net income for the year.
The cash provided by (used in) operating activities is
- 126,000
Solution:
Cost of equipment sold
Less: Book value of equipment
Accumulated depreciation of equipment sold
Accumulated depreciation, 12/31/013
Totals
Less: Accumulated depreciation, 12/31/2012
Depreciation, 2013
Net income
Depreciation
Gain on sale of equipment (P18,000-P15,000)
Increase in accounts receivable (net)
(P360,000-P345,000)
Increase in merchandise inventory
(P750,000-P654,000)
75,000.00
15,000.00
60,000.00
2,235,000.00
2,295,000.00
1,995,000.00
300,000.00
300,000.00
300,000.00
-3,000.00
-15,000.00
-96,000.00
Decrease in prepaid insurance (P6,000-P4,500)
Decrease in accounts payable (P945,000-P613,500)
Decrease in salaries payable (P105,000-P75,000)
Net cash provided by (used in) operating activities
1,500.00
-331,500.00
-30,000.00
126,000.00
The direct method - Shows each major class of gross cash receipts and gross cash
payments.
Katsis Limited had the following cash flows during the reporting period:
·
·
·
·
·
·
Purchase of intangibles - P30,000
Proceeds from sale of plant - P28,000
Receipts from customers - P832,000
Payments to suppliers - P593,000
Interest received - P17,600
Income taxes paid - P45,500
The net cash connected to operating activities was:
-
P211,100
Solution:
Receipts from customers
832,000.00
Interest received
17,600.00
Payments to suppliers
-593,000.00
Income taxes paid
-45,500.00
Cash flow from operating activities 211,100.00
Star Company provided the following data for the preparation of statement of cash
flows for the current year using the direct method:
Cash balance, beginning
Cash paid to purchase inventory
Cash received from sale of building
Cash paid for interest
Cash paid to repay a loan
Cash collected from customers
Cash received from issuance of
ordinary shares
Cash paid for dividend
Cash paid for income taxes
Cash paid to purchase machinery
1,500,000
7,800,000
5,600,000
450,000
1,000,000
10,000,000
1,200,000
780,000
1,320,000
1,950,000
How much was the cash flow for operating activities?
430,000
Solution:
Cash collected from customers
10,000,000.00
Cash paid to purchase inventory
-7,800,000.00
Cash paid for interest
-450,000.00
Cash paid for income taxes
-1,320,000.00
Cash flow from operating activities
430,000.00
Black town Company had the following account balances for the current year:
Accounts payable
Inventory
Accounts receivable
Prepaid expenses
·
·
·
December 31
500,000
300,000
800,000
400,000
January 1
650,000
250,000
900,000
600,000
All purchases of inventory were on account.
Depreciation expense of P900,000 was recognized during the year.
Equipment was sold during the year and gain of P300,000 was recognized.
Black town provided following cash flow information for the current year:
Cash collected from customers
9,500,000
Cash paid for inventory
(4,100,000)
Cash paid for other expenses
(1,400,000)
Cash flows from operations
4,000,000
What was black town Company’s net income for the current year?
3,300,000
Solution 54-16 Answer a
Net income (SQUEEZE)
Decrease in accounts payable
Increase in inventory
Decrease in accounts receivables
Decrease in prepaid expenses
Depreciation
Gain on sale of equipment
3,300,000
(150,000)
(50,000)
100,000
200,000
900,000
(300,000)
Cash flow from operations
4,000,000
The net income is “squeezed” by working back from the cash flow from
operations.
During the financial year, Cresswell Limited had a Cost of Sales amounting to $260
000. Beginning and ending balances were:
Beginning
balance
$46 000
$18 000
Inventory
Accounts Payable
A discount of $2 000 for prompt payment was received.
for goods purchased during the year was:
- $259 000;
Ending
balance
$55 000
$26 000
The amount of cash paid
- Solution:
Cost of sales
260,000.00
Inventory, end
55,000.00
Inventory, beg
-46,000.00
Purchases
269,000.00
Accounts payable, beg
18,000.00
Accounts payable, end
-26,000.00
Purchases discounts
-2,000.00
Cash payments to suppliers 259,000.00
In a cash flow statement, if used equipment is sold at a gain, the amount shown as a
cash flow from investing activities equals the carrying amount of the equipment - Plus
the gain
Which of the following cash flows does not appear in a cash flow statement using
indirect method? - Cash received from customers
Brett Limited had a net profit after tax of P850,000 for the financial year.
in this profit was:
Included
·
Depreciation expense of P120,000
·
Gain on sale of Investments of P28,000
Also, Accounts Receivable increased by P39,000 and Inventories decreased by
P12,000. The cash flow from operating activities during the year was:
P915,000
Solution:
Net income
Depreciation expense
Gain on sale of investments
850,000.00
120,000.00
-28,000.00
Increase in accounts receivable
-39,000.00
Decrease in inventory
12,000.00
Net cash flow from operating activities 915,000.00
Corinthians Company prepared the following balance sheet data.
December 31,
December 31,
2013
2012
Cash and cash equivalents
518,500
675,000
Accounts receivable (net)
360,000
345,000
Merchandise inventory
750,000
654,000
Prepaid insurance
4,500
6,000
Buildings and equipment
5,515,500
4,350,000
Accm dep’n – buildings &
(2,235,000)
(1,995,000)
equipment
Total Assets
4,913,500
4,035,000
Accounts payable
Salaries payable
Notes payable – bank
(current)
Notes payable – bank
(long-term)
Common stock, P20 par value
Premium on common shares
Retained earnings (deficit)
Total liabilities &
stockholder’s equity
613,500
75,000
150,000
945,000
105,000
600,000
1,200,000
-
2,000,000
700,000
175,000
4,913,500
1,800,000
600,000
(15,000)
4,035,000

Cash needed to purchase new equipment and to improve the company’s
working capital position was raised by borrowing from the bank with a long -term
note.

Allowance for bad debts on December 31, 2012 and December 31, 2013 were
P25,000 and P40,000 respectively. The bad debts expense for 2013 amounted to
P40,000 while write-offs amounted to P25,000

Equipment costing P75,000 with a book value of P15,000 was sold for
P18,000; the gain on sale was included in net income.

Corinthians Company issued 10,000 common shares as settlement for the
acquisition of a building acquired in June 2013. The building’s fair value at the time
of purchase was P300,000 while the shares market value was P28.75

The company paid cash dividends of P110,000 and reported earnings of
P300,000 for 2013. There were no entries in the retained earnings account other
than to record the dividend and net income for the year.
The cash provided by (used in ) financing activities is
640,000
Solution:
Notes payable - bank (current), 12/31/2012
Less: Notes payable - bank (current), 12/31/2013
Cash payments for settlement of loan
Notes payable - bank (long-term)
600,000.00
150,000.00
450,000.00
1,200,000.00
Paid-in capital, 12/31/2013 (P2M+P0.7M)
2,700,000.00
Less: Paid-in capital, 12/31/2012 (P1.8M+P0.6M) 2,400,000.00
Increase in paid-in capital
300,000.00
Less: Issuance of shares for acquisition of building
300,000.00
Proceeds from issuance of shares
0.00
Proceeds from long-term notes
Payments for settlement of short-term notes
Payment of cash dividends
Net cash provided by (used in) financing activities
1,200,000.00
-450,000.00
-110,000.00
640,000.00
Which should not be disclosed in the cash flow statement using the indirect method? Cash flow per share
Which of the following is not added to net income as an adjustment to reconcile net
income to cash from operating activities in the statement of cash flows? - Increase in
deferred tax asset
Mahogany Company had the following accounts balances for the current year:
Accounts payable
Inventory
Accounts receivable
December 31
500,000
300,000
800,000
January 1
700,000
450,000
750,000
All purchases of inventory were on account. Mahogany Company provided the
following income information statement information for the current year:
Revenue
9,800,000
Cost of goods sold
(4,000,000)
Other expenses
(1,300,000)
Depreciation expenses
(1,000,000)
Loss on sale of equipment
(100,000)
Net income
3,400,000
The statement of cash flows should show net cash flow from operating activities at
4,400,000
Solution
Net income
Depreciation
Loss on sale of equipment
Decrease in accounts payable
Decrease in inventory
Increase in accounts receivable
3,400,000
1,000,000
100,000
(200,000)
150,000
(50,000)
Net cash flow from operating activities
4,400,000
Cash receipts from royalties, fees and commissions and other revenue are - Cash
inflows from operating activities
Presentation and Preparation of FS. PAS 7 - Statement of Cash
Flows. Investing Activities
Corinthians Company prepared the following balance sheet data.
December 31,
December 31,
2013
2012
Cash and cash equivalents
518,500
675,000
Accounts receivable (net)
360,000
345,000
Merchandise inventory
750,000
654,000
Prepaid insurance
4,500
6,000
Buildings and equipment
5,515,500
4,350,000
Accm dep’n – buildings &
(2,235,000)
(1,995,000)
equipment
Total Assets
4,913,500
4,035,000
Accounts payable
Salaries payable
Notes payable – bank
(current)
Notes payable – bank
613,500
75,000
150,000
945,000
105,000
600,000
1,200,000
-
(long-term)
Common stock, P20 par value
Premium on common shares
Retained earnings (deficit)
Total liabilities &
stockholder’s equity
2,000,000
700,000
175,000
4,913,500
1,800,000
600,000
(15,000)
4,035,000

Cash needed to purchase new equipment and to improve the company’s
working capital position was raised by borrowing from the bank with a long -term
note.

Allowance for bad debts on December 31, 2012 and December 31, 2013 were
P25,000 and P40,000 respectively. The bad debts expense for 2013 amounted to
P40,000 while write-offs amounted to P25,000

Equipment costing P75,000 with a book value of P15,000 was sold for
P18,000; the gain on sale was included in net income.

Corinthians Company issued 10,000 common shares as settlement for the
acquisition of a building acquired in June 2013. The building’s fair value at the time
of purchase was P300,000 while the shares market value was P28.75

The company paid cash dividends of P110,000 and reported earnings of
P300,000 for 2013. There were no entries in the retained earnings account other
than to record the dividend and net income for the year.
The cash provided by (used in) investing activities is
(922,500)
Solution:
Buildings and equipment, 12/31/2013
Original cost of equipment sold
Total credits
Less: Buildings and equipment, 12/31/2012
Additions, 2013
Less: Acquisition of building through shares
Acquisition of equipment through cash
Cash payments for acquisition of equipment
Proceeds from sale of equipment
Net cash provided by (used in) investing activities
5,515,500.00
75,000.00
5,590,500.00
4,350,000.00
1,240,500.00
300,000.00
940,500.00
-940,500.00
18,000.00
-922,500.00
Hager Company sold some of its plant assets during 20CY. The original cost of the plant
assets was P900,000 and the accumulated depreciation at date of sale was P840,000.
The proceeds from the sale of the plant assets were P90,000. The information
concerning the sale of the plant assets should be shown on Hager's statement of cash
flows (indirect method) for the year ended December 31, 20CY, as a(n) - subtraction
from Profit of P30,000 and a P90,000 increase in cash flows from investing activities.
IAS 7 - statement of cash flows - financing activities
In a statement of cash flows, which of the following items is reported as a cash
flow from financing activities?
I.
Payments to retire mortgage notes
II.
Interest payments on mortgage notes
III.
Dividends payments
I and III - Cash flows from financing activities include transactions that involve either
non-current liabilities or the equity.
Jennifer Co. provided the following information on selected transactions during
2013:
Purchase of land by issuing
bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury shares
Loans made to affiliated
corporations
Dividends paid to preference
shareholders
Proceeds from issuing
preference shares
Proceeds from sale of
equipment
P200,000
300,000
650,000
90,000
250,000
80,000
240,000
50,000
The net cash provided by financing activities during 2013 is
P370,000
Solution:
Proceeds from issuing bonds
Proceeds from issuing preference shares
Total cash receipts
Less: Purchases of treasury shares
90,000.00
Dividends paid to preference shareholders 80,000.00
Net cash provided by (used in) financing activities
300,000.00
240,000.00
540,000.00
170,000.00
370,000.00
During 20Y2, Stout Inc. had the following activities related to its financial
operations:
Carrying value of convertible preferred stock in Stout, converted into
common shares of Stout
Payment in 20Y2 of cash dividend declared in 20Y1 to preferred
shareholders
Payment for the early retirement of long-term bonds payable
(carrying amount P3,930,000)
Proceeds from the sale of treasury stock (on books at cost of
P387,000)
The amount of net cash used in financing activities to appear in Stout's
of cash flows for 20Y2 should be - P3,804,000
Solution
Cash paid on dividend declared to preference
shareholders
Cash paid on early retirement of bonds payable
Cash received from sale of treasury stock
Net cash used in financing activities
540,000
279,000
3,975,000
450,000
statement
-279,000.00
-3,975,000.00
450,000.00
-3,804,000.00
Napier Co. provided the following information on selected transactions during
2018:
Purchase of land by issuing bonds
$1,000,000
Proceeds from issuing bonds
3,000,000
Purchases of inventory
3,800,000
Purchases of treasury stock
600,000
Loans made to affiliated corporations
1,400,000
Dividends paid to preferred stockholders
400,000
Proceeds from issuing preferred stock
1,600,000
Proceeds from sale of equipment
300,000
The net cash provided by financing activities during 2018 is? - $3,600,000.
Solution:
Proceeds from issuing bonds
3,000,000.00
Purchases of treasury stock
-600,000.00
Dividends paid to preferred stockholders -400,000.00
Proceeds from issuing preferred stock
1,600,000.00
Net cash provided by financing activities 3,600,000.00
Presentation and Preparation of FS. IAS 10 - Events After Reporting
Period. Adjusting Events
Timothy Company carried a provision of P 2,000,000 in its draft financial
statements on December 31, 2009 in relation to an unresolved court case. On
January 31, 2010, when the financial statements on December 31, 2009 had not
yet been authorized for issue, the case was settled and the court decided the
final total damages payable by Timothy to be P2,800,000.
The amount of adjustment to the December 31, 2009 statement of financial
position in relation to this event is - 800,000
Thessalonians Company is completing the preparation of its draft financial
statements for the year ended December 31, 2009. The financial statements are
authorized for issue on March 31, 2010.
On March 15, 2010, a dividend of P 1,750,000 was declared and a contractual
profit share payment of P 350,000 was made, both based on the profit for the
year ended December 31, 2009.
On February 1, 2010, a customer went into liquidation having owed the entity
P 340,000 for the past 5 months. No allowance had been made against this debt
in the draft financial statements.
On March 20, 2010, a manufacturing plant was destroyed by fire resulting in a
financial loss of P 2,600,000.
The profit or loss for the year ended December 31, 2009 to reflect adjusting
events is - 690,000
Solution:
Contractual profit share payment
350,000.00
Allowance for uncollectible account 340,000.00
Total adjusting events
690,000.00



The following data are provided by Colossians Company. The end of the
reporting period is December 31, 2009 and the financial statements are authorized
for issue on March 15, 2010.
On December 31, 2009, Colossians Company had a receivable of P 400,000
from a customer that is due 60 days after the end of reporting period. On January 15,
2010, a receiver was appointed for the said customer. The receiver informed
Colossians that the P 400,000 would be paid in full by June 30, 2010.
Colossians Company measures its investments in listed shares as held for
trading at fair value through profit or loss. On December 31, 2009, these investments
were recorded at the market value of P 5,000,000. During the period up to February
15, 2010, there was a steady decline in the market value of all the shares in the
portfolio, and at February 15, 2010, the market value had fallen to P 2,000,000.

Colossians Company had reported a contingent liability on December 31, 2009
related to a court case in which Colossians Company was the defendant. The case
was not heard until the first week of February 2010. On February 11, 2010, the judge
handed down a decision against Colossians Company. The judge determined that
Colossians Company was liable to pay damages and costs totaling P 3,000,000.

On December 31, 2009, Colossians Company had a receivable from a large
customer amounting to P3,500,000. On January 31, 2010 Colossians Company was
advised by the liquidator of the customer that the customer was insolvent and would
be unable to repay the full amount owed.. The liquidator advised Colossians
Company in writing that only 10% of the receivable will be paid on April 30, 2010.
Colossians Company should report a total amount of “adjusting events” on
December 31, 2009 at - 6,150,000
Solution:
Contingent liability on court case
3,000,000.00
Liquidated uncollectible amount from a large customer
(P3,500,000 x 90%)
3,150,000.00
Total adjusting events
6,150,000.00
Adjusting event: An event after the reporting period that provides further evidence
of conditions that existed at the end of the reporting period, including an event that
indicates that the going concern assumption in relation to the whole or part of the
enterprise is not appropriate. [IAS 10.3]
A new drug named “EEE” was introduced by Genius Inc. in the market on December 1,
20Y1. Genius Inc.’s financial year ends on December 31, 20Y1. It was the only company
that was permitted to manufacture this patented drug. The drug is used by patients
suffering from an irregular heartbeat. On March 31, 20Y2, after the drug was introduced,
more than 1,000 patients died. After a series of investigations, authorities discovered
that when this drug was simultaneously used with “BBB,” a drug used to regulate
hypertension, the patient’s blood would clot and the patient suffered a stroke. A lawsuit
for P100,000,000 has been filed against Genius Inc. The financial statements were
authorized for issuance on April 30, 20Y2. Which of the following options is the
appropriate accounting treatment for this post–balance sheet event under PAS 10? - The
entity should disclose P100,000,000 as a “contingent liability” because it is a present
obligation with an improbable outflow.
Presentation and Preparation of FS. IAS 8 - Accounting Policies,
Change in Accounting Estimates and Errors. Accounting Policies
Denny Company completed construction of its warehouse on January 1, 2008 at a
cost of P2,000,000. Denny Company uses the cost model as its accounting policy.
The warehouse was to be depreciated under the straight-line method over useful
period of 10 years with no expected residual value.
On January 1, 2011 Denny Company changes its accounting policy in the
measurement of its warehouse from cost model to revalued model. The foll owing
information was derived from the independent appraiser hired by Denny
Company: (a) no changes in the original useful life of the warehouse; (b) the
expected residual value remains at P0; (c) sound value of the warehouse on
January 1, 2010 and January 1, 2011 were computed as P2,236,500 and
P2,520,000.
The revaluation surplus recognized on January 1, 2011 as a result of the change
in accounting policy from cost to revalued model is - 1,120,000
Solution:
Sound Value
2,520,000.00
Less: Carrying amount
Original cost
2,000,000.00
Less: Accumulated depreciation
(P2,000,000 x 3/10)
600,000.00 1,400,000.00
Revaluation Surplus
1,120,000.00
Denny Company completed construction of its warehouse on January 1, 2008 at a
cost of P2,000,000. Denny Company uses the cost model as its accounting policy.
The warehouse was to be depreciated under the straight-line method over useful
period of 10 years with no expected residual value.
On January 1, 2011 Denny Company changes its accounting policy in the
measurement of its warehouse from cost model to revalued model. The following
information was derived from the independent appraiser hired by Denny
Company: (a) no changes in the original useful life of the warehouse; (b) the
expected residual value remains at P0; (c) sound value of the warehouse on
January 1, 2010 and January 1, 2011 were computed as P2,236,500 and
P2,520,000.
The depreciation expense for 2010 in the 2011 comparative income statement is 200,000
Solution:
Original cost
2,000,000.00
Divide by: Estimated useful life
10 yrs
Annual depreciation
200,000.00
Iceman Corporation began operations in 2010. The company has been using
the first-in, first-out method in costing its raw materials. However, during
2012, Iceman Corporation decided to change to average costing
method. Inventory balances under each method were as follows:
FIFO
Average
December 31,
2010
P 490,000
465,000
December 31,
2011
P 438,000
374,000
December 31,
2012
P 576,000
482,000
In its 2012 statement of changes in retained earnings, Iceman Corporation should
report a cumulative effect of this accounting change of - P64,000
Solution:
Dec 31, 2011, FIFO
438,000.00
Dec 31, 2011, Average
374,000.00
Understatement in Dec 31, 2011 Inventory
64,000.00


During 2011, Eden Company made the following accounting policy changes:
Change from straight-line method to the declining balance method of
depreciation for its manufacturing equipment. The equipment was acquired on
January 1, 2009 for P1,200,000; expected useful life of 10 years with no expected
residual value.
Change from completed contract to percentage of completion with respect to a
specially made unit for a contract price of P750,000. The total estimated cost of
manufacturing the unit remained the same at P400,000 since Eden Company started
on the project in 2009. Cost incurred for 2009, 2010 and 2011 were P120,000,
180,000 and P100,000 respectively.
The adjustment to the opening balance of the retained earnings as shown in the
2011 statement of changes in equity as a result of the above -mentioned changes
in accounting policy is - 262,500
Solution:
Cost incurred, 2009
Cost incurred, 2010
Cost incurred to date
120,000.00
180,000.00
300,000.00
Contract price
750,000.00
Less: Total estimated cost
400,000.00
Gross profit
350,000.00
Multiply by: Ratio
300K/400K
Realized gross profit to date
262,500.00
Less: Income, cost recovery, to date
0.00
Net change in retained earnings
262,500.00
The effect of a change in accounting policy that is inseparable from the effect of a
change in accounting estimates shall be reported - As a component of income from
continuing operations in the period of change and future periods if the change affects
both
Per PAS 8, these are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements. - Accounting
policies
IAS 8 - accounting policies - change in accounting policies
Prospective recognition of the effect of a change in an accounting estimates means that
the change is applied to transaction from the? - Date of the change in estimates.
Presentation and Preparation of FS. IAS 8 - Accounting Policies,
Change in Accounting Estimates and Errors. Change in Accounting
Estimates
During 2009, Titus Company decided to change from the FIFO method of
inventory valuation to the weighted average method. Inventory balances under
each method were as follows:
FIFO
Weighted
Average
January 1
7,100,000
7,700,000
December 31
7,900,000
8,300,000
Ignoring income tax, in its 2009 statement of retained earnings, what amount
should Titus report as the cumulative effect of this accounting change? - 600,000
addition
Solution:
January 1 at Weighted Average
7,700,000.00
January 1 at FIFO
7,100,000.00
Understatement in retained earnings
600,000.00 Addition
Which statement is incorrect concerning accounting estimate? - By its very nature, the
revision of an estimate relates to a prior period and is a correction of error.
On January 1, year 1, Taft Co. purchased a patent for $714,000. The patent is being
amortized over its remaining legal life of fifteen years expiring on January 1, year 16.
During year 4, Taft determined that the economic benefits of the patent would not last
longer than ten years from the date of acquisition. What amount should be reported in
the balance sheet for the patent, net of accumulated amortization, at December 31, year
4? - $489,600
Solution
This situation is a change in accounting estimate and should be accounted for
currently and prospectively. From 1/1/Y1 to 12/31/Y3, patent amortization was
recorded using a fi fteen-year life. Yearly amortization was $47,600 ($714,000 ÷ 15),
accumulated amortization at 12/31/Y3 was $142,800 ($47,600 × 3), and the book
value of the patent at 12/31/Y3 was $571,200 ($714,000 – $142,800). Beginning in
year 4, this book value must be amortized over its remaining useful life of 7 years
(10 years – 3 years). Therefore, year 4 amortization is $81,600 ($571,200 ÷ 7) and
the 12/31/Y4 book value is $489,600 ($571,200 – $81,600).
Presentation and Preparation of FS. IFRS 5 - Discountinued
Operations. Definition, Presentation and Measurement –
On November 1, 2011 Romans Company approved the disposal of its
subsidiary. The sale of which was expected to be completed by March of
2012.
The following information in relation to the subsidiary is as follows:
January 1 – October 30
Revenues
Expenses
8,500,000
7,500,000
November 1 –
December 31
2,500,000
3,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2011 was
P18,000,000 and the fair value less cost to sell was P16,000,000.
The sale contract requires Romans Company to terminate certain employees
and the expected cost is estimated at P1,000,000.
The amount reported under “disposal group held for sale” in Romans Company’s
December 31, 2011 statement of financial position is - 16,000,000
Solution:
Disposal group shall be reported at lower of carrying amount and fair value less cost
of disposal:
Carrying amount: P18,000,000
Fair value less cost of disposal: P16,000,000
Lower: P2,000,000
On October 1, 2011 Acts Company approved the disposal of its subsidiary.
sale of which was expected to be completed by July of 2012.
The following information in relation to the subsidiary is as follows:
January 1 – September October 1 – December
30
31
Revenues
17,500,000
7,500,000
The
Expenses
13,500,000
5,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2011 was
P28,000,000 and the fair value less cost to sell was P30,500,000.
The sale contract requires Acts Company to terminate certain employees and
the expected cost is estimated at P2,000,000. Income tax rate for 2011 is
30%
The amount reported as income (loss) from discontinued operations i s 3,150,000
Solution:
Revenues (P17.5M+P7.5M)
25,000,000.00
Less: Expenses (P13.5M+P5M) 18,500,000.00
Termination cost
2,000,000.00 20,500,000.00
Income before tax
4,500,000.00
Less: Income tax (P4.5M x 30%)
1,350,000.00
Income (loss) from discontinued operations
3,150,000.00
On November 1, 2011 Romans Company approved the disposal of its
subsidiary. The sale of which was expected to be completed by March of
2012.
The following information in relation to the subsidiary is as follows:
January 1 – October 30
Revenues
Expenses
8,500,000
7,500,000
November 1 –
December 31
2,500,000
3,000,000
The carrying amount of the subsidiary’s net assets at December 31, 2011 was
P18,000,000 and the fair value less cost to sell was P16,000,000.
The sale contract requires Romans Company to terminate certain employees
and the expected cost is estimated at P1,000,000.
The amount reported as income (loss) from discontinued operations is (2,500,000)
Solution:
Revenues (P8.5M+P2.5M)
Less: Expenses (P7.5M+P3M)
11,000,000.00
10,500,000.00
Impairment loss (P18M-P16M
Termination cost
Net income (loss) before tax
2,000,000.00
1,000,000.00 13,500,000.00
-2,500,000.00
One element of the objective of financial reporting is to provide information
that will attract new investors.
that is useful in assessing cash flows prospects.
about the investors in the entity.
about the liquidation value of the resources held by the entity.