ACCO 20033

FINANCIAL ACCOUNTING AND REPORTING 1

Theories

1. Which of the following is not part of the summarizing phase of financial accounting process?
a. Adjusting entries are journalized and posted to the general ledger.
b. Adjusted trial balance is prepared.
c. Journal entries are posted to the ledger.
d. Financial statements are prepared.

2. Accrued revenue adjusting entries are required when

a. Cash is received before the revenue is earned.
b. Revenue is recorded as cash is received.
c. Cash is received after the revenue is earned.
d. There is no revenue earned.

3. Which of the following is a characteristic of a sole proprietorship?

a. The owner is personally responsible for the debts of the business even if the debts are more
than the owner’s investment in the business.
b. It is a legal entity separate from its owner.
c. Its income is taxed twice – once on the company’s income tax return and again on the owner’s
individual income tax returns.
d. It is the only organizational form appropriate for service businesses.

4. Which of the following is not a valid statement relating to the accrual basis of accounting?
a. Accrual basis emphasizes the timing of cash receipts and cash disbursements in the recognition
of income and expenses.
b. Accrual basis results to more complete financial information compared to the cash basis.
c. Expenses are recorded in the period that they are incurred rather than in the period in which
cash is paid.
d. Revenues are recorded in the period that they are earned rather than in the period in which cash
is collected.

5. An entity prepares reversing entries at the beginning of the accounting period. Which of the following
adjusting entries should not be reversed?
a. The entry to take up the expired portion of the insurance premium paid in advance.
b. The entry to record interest earned but not yet collected at the end of the period.
c. The entry to take up unused supplies at the end of the period.
d. The entry to record salaries incurred but not yet paid at the end of the period.

6. Which of the following expressions of the accounting equation is correct?

a. Liabilities + Assets = Stockholder’s Equity
b. Stockholder’s Equity + Assets = Liabilities
c. Assets = Liabilities – Stockholder’s Equity
d. Stockholder’s Equity = Assets – Liabilities
7. An economic resource that is owned by a company and will provide future benefits is referred to as:
a. Revenue c. Retained Earnings
b. Asset d. Net Income

8. Which of the following statements about a fiscal year is correct?

a. Companies can choose to end their fiscal year on any date they feel is most relevant.
b. Companies must end their fiscal year on March 31, June 30, September 30, or December 31.
c. Companies can select any date except a holiday to end their fiscal year.
d. Companies must end their fiscal year on December 31.

9. Which of the following would be reported on the income statement for Year 2?
a. Supplies that were purchased and used in Year 1 but paid for in Year 2.
b. Supplies that were purchased in Year 1, but used in Year 2.
c. Accounts Receivable as of December 31, Year 2.
d. None of the above.

10. Year-end net assets would be understated and current expenses would be overstated as a result of
failure to record which of the following adjusting entries?
a. Unexpired portion of insurance premiums paid
b. Accrued wages payable
c. Depreciation of fixed assets
d. Expiration of prepaid insurance

11. Jay Company prepares reversing entries at the beginning of the accounting period. Which of the
following adjusting entries prepared by Jay will be reversed?
a. The entry to provide doubtful accounts expense.
b. The entry to take up the unused supplies at the end of the period.
c. The entry to take up the unused portion of rent collected in advance.
d. The entry to take up the unused portion of the insurance premium paid in advance.

12. An entity uses a periodic inventory system. If the company’s beginning inventory in the current year is
overstated, and that is the only error in the current year, then the company’s profit for the current year
will be
a. understated and assets are correctly stated
b. understated and assets are overstated
c. overstated and assets are also overstated
d. understated and assets are also understated

13. Goods in transit at year-end, purchased FOB shipping point were appropriately recorded in the
purchases account but were incorrectly excluded from the ending inventory. What effect will this
omission have on the company’s assets, liabilities, profit and retained earnings, respectively?
a. No effect ; No effect ; Overstated ; Overstated
b. No effect ; No effect ; Understated ; Understated
c. Understated ; No effect ; Understated ; Understated
d. Understated ; No effect ; Overstated ; Overstated
14. The general journal, sales journal, purchases journal, cash receipts journal and cash disbursements
journal are collectively known as
a. business document c. books of original entry
b. books of accounts d. books of final entry

15. The premium on a three-year insurance policy expiring on December 31, 2014 was paid in total on
January 1, 2012. The original payment was initially debited to an asset account. The appropriate journal
entry has been recorded on December 31, 2012. The balance in the prepaid asset account on
December 31, 2012 should be
a. Higher than if the original payment had been debited to an expense account
b. The same as the original payment
c. The same as it would have been if the original payment had been debited initially to an expense
account
d. Zero

16. In this period, a company recorded Sales Revenue of PHP 50,000.00 from sales of goods to customers
who agreed to pay later. In the next period, the company received payment from customers of PHP
45,000.00. Which of the following statements is correct?
a. Revenue for this period is PHP 45,000.00.
b. Accounts Receivable at the end of this period is PHP 50,000.00.
c. Accounts Payable at the end of this period is PHP 5,000.00 (or PHP 50,000.00 – PHP 45,000.00).
d. Expenses for next period will increase by PHP 5,000.00 (or PHP 50,000.00 – PHP 45,000.00).

17. At the middle of the year, an entity paid for insurance premium for the current year and debited the
amount to Prepaid Insurance. At year-end, the bookkeeper forgot to record the amount expired. In the
financial statements prepared at year-end, the omission
a. Overstates owners’ equity c. Understates net income
b. Understates assets d. Overstates liabilities

18. An entity used a periodic inventory system and neglected to record a purchase of merchandise on
account at year-end. This merchandise was omitted from the year-end physical count.

How will these errors affect assets, liabilities and shareholders’ equity at year end and net earnings for
the year, respectively?
a. Understate ; Understate ; No effect ; No effect
b. Understate ; No effect ; Understate ; Understate
c. No effect ; Understate ; Overstate ; Overstate
d. No effect ; Overstate ; Understate ; Understate

19. The costing of inventory must be deferred until the end of reporting period under which of the following
method of inventory valuation?
a. Moving average c. LIFO perpetual
b. Weighted average d. FIFO perpetual
20. The cost of inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be measured using
a. FIFO c. LIFO
b. Average method d. Specific identification

21. Which of the following should be included in inventory at the end of reporting period?
a. Goods in transit which were purchased FOB shipping point
b. Goods in transit which were purchased FOB destination
c. Goods received from another entity on consignment
d. Goods in transit to a customer which were sold to the customer FOB shipping point

22. Adjusting entries are necessary in order to

a. Measure properly the period’s net income
b. Bring the asset accounts to correct balances
c. Bring liability accounts to correct balances
d. All of these

23. How is a significant amount of consignment inventory reported?

a. Reported separately by the consignor
b. Combined with other inventory of the consignor
c. Reported separately by the consignee
d. Combined with other inventory of the consignee

24. Entities must allocate the cost of all goods available for sale between
a. The cost of goods on hand at the beginning and the cost of goods purchased during the period.
b. The cost of goods on hand at the end and the cost of goods purchased during the period.
c. The income statement and the statement of financial position.
d. None of the above.

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

Problems

26. Nevereverland recorded PHP 220,000.00 in revenues, PHP 165,000.00 in expenses and PHP 30,000.00
of dividends for the year. The company began the year with total assets of PHP 190,000.00 and
stockholder’s equity of PHP 87,000.00. What net income (loss) was reported by Nevereverland for the
year?
a. PHP 25,000.00 c. PHP 55,000.00
b. PHP 63,000.00 d. PHP 33,000.00

27. Sana has 10,000 gallons of insecticide supplies on hand that cost PHP 300,000.00; a bill from the vendor
for PHP 100,000.00 of these supplies has not yet been paid. The company expects to earn PHP
 800,000.00 for its services when it uses the insecticide supplies. The company’s balance sheet would
include an asset, Supplies, in the amount of:
a. PHP 10,000.00 c. PHP 300,000.00
b. PHP 200,000.00 d. PHP 800,000.00

28. If total liabilities decreased by PHP 25,000.00 and stockholders’ equity increased by PHP 5,000.00 during
a period of time, then total assets must change by what amount and direction during the same time
period?
a. PHP 20,000.00 increase c. PHP 30,000.00 increase
b. PHP 20,000.00 decrease d. PHP 30,000.00 decrease

29. During the year 2015, Sleep Tonight Company collected interest of PHP 17,650.00. On its statement of
financial position, the company has interest receivable of PHP 1,850.00 at December 31, 2015 and PHP
5,300.00 at December 31, 2014. How much interest revenue was reported by Sleep Tonight Company
for the year 2015?
a. PHP 14,200.00 c. PHP 8,900.00
b. PHP 12,350.00 d. PHP 3,450.00

30. I Fall Apart Company paid a two-year insurance premium of PHP 37,500.00 during 2014 which was
charged to Prepaid Insurance account. The company showed PHP 84,000.00 in Prepaid Insurance on its
December 31, 2013 statement of financial position and PHP 96,000.00 on December 31, 2014. How
much Insurance Expense was reported by I Fall Apart on its Statement of Comprehensive Income for the
year 2014?
a. PHP 49,500.00 c. PHP 25,500.00
b. PHP 37,500.00 d. PHP 49,000.00

31. Under Sincerely Company’s accounting system, all insurance premiums paid are debited to Prepaid
Insurance. For interim financial reports, Sincerely makes monthly estimated charged to insurance
expense with credits to Prepaid Insurance. Additional information for the year ended December 31,
2015, is as follows:
Prepaid Insurance at December 31, 2014 PHP 105,000.00
Charges to Insurance Expense during 2015
(including a year-end adjustment of PHP 27,500.00) 437,500.00
Prepaid Insurance at December 31, 2015 87,500.00

What was the total amount of insurance premiums paid by Sincerely during 2015?
a. PHP 455,000.00 c. PHP 420,000.00
b. PHP 437,500.00 d. PHP 332,500.00

32. A law firm began operations in July with office supplies of PHP 86,000.00. During the month, the firm
purchased supplies of PHP 116,000.00. At July 31, supplies on hand total PHP 96,000.00.

The adjusting entry at July 31 will result in supplies expense of

a. PHP 180,000.00 c. PHP 96,000.00
b. PHP 106,000.00 d. PHP 84,000.00
33. Orion Company had the following data during the year 2016:
Capital, January 1 150,000.00 Additional Investments 83,200.00
Capital, December 31 222,800.00 Withdrawals 30,000.00
Revenue from Sales 380,000.00

How much were the total costs and expenses during 2016:
a. PHP 380,000.00 c. PHP 252,800.00
b. PHP 360,400.00 d. PHP 19,600.00

34. Examination of the records of Eine Kleine Company for the year ended December 31, 2016 revealed the
following:
 Inventory at December 31, 2015 was overstated by PHP 71,000.00.
 Inventory at December 31, 2016 was understated by PHP 96,000.00.
 Prior to the discovery of the errors, profit for the year 2016 was PHP 508,000.00 and cost of
goods sold was PHP 534,500.00.

What is the correct cost of goods sold for the year ended December 31, 2016?
a. PHP 509,500.00 c. PHP 701,500.00
b. PHP 559,500.00 d. PHP 367,500.00

35. Examination of the records of Di Na Muli Company for the year ended December 31, 2016 revealed the
following:
 During 2016, Di Na Muli received PHP 40,000.00 as cash advance from a customer for
merchandise to be manufactured and shipped in early 2017. The PHP 40,000.00 was credited to
sales.
 Goods costing PHP 12,000.00 were counted twice in the December 31, 2016 physical count.
 Profit reported for 2016 before discovery of the errors was PHP 658,000.00.

What is the correct profit for the year ended December 31, 2016?
a. PHP 606,000.00 c. PHP 710,000.00
b. PHP 630,000.00 d. PHP 658,000.00

36. Examination of the records of Sa Ngalan Ng Pag-Ibig Company for the year ended December 31, 2016
revealed the following:
 Two-year insurance premium of PHP 18,000.00 was paid on August 1, 2016, effective on that
date. The entire amount was charged to insurance expense and no adjustment was made at the
end of the year.
 Accrued salaries of PHP 5,000.00 were omitted on December 31, 2016.
 Profit reported for 2016 before discovery of the errors was PHP 658,000.00.

What is the correct profit for the year ended December 31, 2016?
a. PHP 677,250.00 c. PHP 648,750.00
b. PHP 667,250.00 d. PHP 658,000.00

37. Leaves Company’s beginning inventory at January 1, 2016 was understated by PHP 52,000.00 and its
ending inventory was overstated by PHP 104,000.00.
 As a result, Leaves Company’s cost of goods sold for 2016 was
a. PHP 52,000.00 U c. PHP 52,000.00 O
b. PHP 156,000.00 U d. PHP 156,000.00 O

38. Departures Manufacturing Company ships merchandise costing PHP 180,000.00 on consignment to
Missing You Stores. Departures pays PHP 18,750.00 of freight costs and Missing You pays PHP 11,250.00
for local advertising costs that are reimbursable from Departures. By the end of the period, two-thirds of
the consigned merchandise has been sold for PHP 200,000.00 cash. Missing You notifies Departures of
the sales, retains a 10% commission, and remits the cash due to Departures.

The amount remitted by Missing You Stores to Departures Manufacturing Company is

a. PHP 168,750.00 c. PHP 188,250.00
b. PHP 180,000.00 d. PHP 200,000.00

39. Using the above information, the net income earned by the consignor on the above shipment is
a. PHP 20,000.00 c. PHP 31,250.00
b. PHP 26,250.00 d. PHP 57,500.00

40. The trial balance of My Dearest Company shown below does not balance.

My Dearest Company
Trial Balance
April 30, 2017
Debit Credit
Cash 48,000.00
Accounts Receivable 25,700.00
Prepaid Insurance 7,000.00
Equipment 80,000.00
Accounts Payable 45,000.00
Property Tax Payable 5,600.00
My Dearest, Capital 112,000.00
Service Revenue 69,600.00
Salaries Expense 42,000.00
Advertising Expense 11,000.00
Property Tax Expense 8,000.00
208,900.00 245,000.00

Your review of the ledger reveals the following:

(a) Each account in the general ledger had a normal balance.
(b) The debit footings in Prepaid Insurance, Accounts Payable, and Property Tax Expense were each
understated by PHP 1,000.00.
(c) A transposition error was made in Accounts Receivable and Service Revenue; the correct
balances for Accounts Receivable and Service Revenue are PHP 27,500.00 and PHP 66,900.00
respectively.
(d) A debit posting to Advertising Expense of PHP 3,000.00 was omitted.
 (e) PHP 15,000.00 cash drawing by the owner was debited to My Dearest, Capital and credited to
Cash.

What is the correct total of the trial balance at April 30, 2017?
a. PHP 228,500.00 c. PHP 243,500.00
b. PHP 231,500.00 d. None of the above

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