Financial reporting

1) Which of the basic financial statements attempts to measure the earnings of the
firm’s operations over a given time period?

A) Balance sheet
B) Income statement
C) Cash flow statement
D) None of the above

2) Which of the basic financial statements is used to explain changes in the owner’s
equity that are not explained by the income statement?

A) Balance sheet
B) Statement of shareholders’ equity
C) Income statement
D) Cash flow statement

3) Which of the following describes a balance sheet?

A) Reports the amount and composition of assets and liabilities at a specified

point in time?
B) Reports cash receipts and cash disbursements for a specific accounting
period.
C) Reports the amount and composition of assets and liabilities at a specific
accounting period.
D) Reports revenues and expenses for a specific accounting period.

4) Which of the following would NOT be included as a liability in a corporate balance

sheet?

A) Accruals
B) Notes payable
C) Accounts payable
D) Depreciation

5) Which of the following is NOT considered a fixed asset?

A) Land
B) Equipment
C) Buildings
D) Patents
6) A firm reports the following balance sheet items; total current liabilities of P535,000;
total assets of P2,500,000; net working capital of P115,000; and long-term debt of
P200,000. What is the amount of the firm’s current assets?

A) P 1,315,000
B) P 1,965,000
C) P 650,000
D) P 735,000

7) A firm reports the following balance sheet items: total current liabilities of P535,000;
total assets of P2,500,000; fixed and other assets of P1,850,000; and long-term debt of
P200,000. What is the amount of the firm’s net working capital?

A) P115,000
B) P450,000
C) P335,000
D) P1,315,000

8) Net value of property and equipment is calculated as:

A) total property and equipment minus long-term debt minus depreciation and
amortization.
B) total property and equipment minus selling, general and administrative
expenses minus depreciation and amortization.
C) total property and equipment minus depreciation and amortization.
D) None of the above.

9) All of the following statements are true EXCEPT:

A) retained earnings is common stock minus paid in capital.

B) retained earnings are generated when a firm has excess cash.
C) retained earnings are the accumulated profits not paid out in dividends.
D) All of the above.

10) All of the following statements are true EXCEPT:

A) under current accounting rules, plant and equipment appear on a company’s

balance sheet valued at replacement value.
B) plant and equipment are generally reported net of depreciation.
C) depreciation reflects the reduction in the value of fixed assets over time.
D) land is assume to remain useful indefinitely
11) The type of financing (whether with debt or equity) does not affect which stream of
income?

A) Net profit after tax but before dividends.

B) Net working capital
C) Operating income
D) Income before tax

12) Which of the following is NOT included as operating income?

A) Cost of goods sold

B) Sales
C) Operating expenses
D) Taxes

13) In financial analysis, ratios are used to help us learn about the firm’s :

A) profitability
B) growth and potential for growth
C) resource needs
D) all of the above

14) Gross profit is calculated as:

A) total sales – cost of sales – selling, general, and administrative expenses –

depreciation and amortization.
B) total sales – cost of sales – selling, general, and administrative expenses.
C) total sales – cost of sales.
D) None of the above

15) Which of the following best represents the stream of income that is available to
stockholders?

A) Net profit after tax

B) Earnings before interest, taxes, and dividends
C) Gross profit
D) Operating profit

16) Cost of sales is calculated by:

 A) adding the cost of inventory on hand at the start of the period minus the cost
of any purchases of materials during the year and then subtract the cost of
ending inventory.
B) adding the cost of the inventory at the start of the period plus the cost of any
purchases of materials during the year and then subtract the cost of the ending
inventory.
C) adding the cost of the inventory on hand at the start of the period plus the cost
of any purchases of materials during the year and then add the cost of the ending
inventory.
D) adding the cost of the inventory on hand at the end of the period plus the cost
of any purchases of materials during the year and then subtract the costs of the
beginning inventory.

17) Earnings before interest and taxes:

A) is the same as EBITDA.

B) refers to the gross profit minus operating expenses minus interest.
C) refers to gross profit minus operating expenses.
D) Both A and C.

18) A firm reports the following income statement items: sales of P60,550,000; income
tax of P1,744,000; operating expenses of P10,115,000; cost of goods sold
P34,025,000; and interest expense of P750,000. What is the amount of the firm’s gross
profit?

A) P23,910,000
B) P26,525,000
C) P15,660,000
D) P16,410,000

19) A firm reports the following income statement items: sales of P60,550,000; income
tax of P1,744,000; operating expenses of P10,115,000; cost of goods sold
P34,025,000; and interest expense of P750,000. What is the amount of the firm’s
EBITDA?

A) P18,154,000
B) P14,935,000
C) P16,410,000
D) P7,775,000

20) The following statements are all true EXCEPT:

A) dividends are paid from net income.

 B) dividends represent a use of cash and do not have to be paid if a firm has a
net loss.
C) dividends are paid to a firm’s stockholders, both preferred and common
stockholders, are tax-deductible to the paying company.
D) preferred stockholders, who are primarily investors seeking current income,
usually receive dividends.

21) The date by which a stockholder must be registered on the firm’s roll as having
share ownership in order to received a declared dividend is called the:

A) declaration date
B) ex dividend date
C) date of record
D) date of payment

22.) Lakeview Industries had sales of P40 million and net income of P2 million in 2019.
Lakeview paid a dividend of P1.5 million. Assuming that their beginning balance for
retained earnings was P4 million, calculate their ending balance for retained earnings.

A) P4.5 million
B) P2.5 million
C) P3 million
D) P4 million

23.) The electricity account of Velvet Company for the year ended June 30 2019 was as
follows

Opening balance for electricity accrual of July 1, 2018 P30,000

Payments made during the year:
08/01/18 – for three months to July 31, 2018 60,000
11/01/18 – for three months to October 31, 2018 72,000
02/01/19 – for three months to January 31, 2019 90,000
06/30/19 – for three months to April 30, 2019 84,000

What amount of electricity expense should Velvet Company reports in its June 30, 2019
Income Statement?

A.) P306,000
B.) P324,000
C.) P332,000
D.) P342,000

24.) Tiffin Company had retained earnings of P2,403,950 at the end of last year. For
the current year, income was P961,580 and dividends P721,185. What is the balance of
retained earnings at the end of the current year?
 A.) P4,086,715
B.) P 2,163,555
C.) P 2,644,345
D.) P 2,884,740

25.) A ratio that is used to evaluate a firm’s operating margin percentage is classified
as:

A.) a specialty ratio

B.) an investment ratio
C.) a credit ratio
D.) an operating ratio

26.) A company receives P100,000 of cash as an additional investment in the company

by its owner, Mary Pauleen. The company's cash account is increased and Mary
Pauleen, Capital is increased.

Should the P100,000 entry to the cash account be a debit?

Yes No

Should the P100,000 entry to Mary Pauleen, Capital be a debit?

Yes No

27.) To increase the balance in the following accounts, would you debit the account or
would you credit the account?

Accounts Payable Debit Credit

Cash Debit Credit
Land Debit Credit
Notes Payable Debit Credit
Accounts Receivable Debit Credit
Supplies Debit Credit
Supplies Expense Debit Credit
Prepaid Insurance Debit Credit
Unearned Revenue Debit Credit
Equipment Debit Credit

28.) To decrease the balance in the following accounts, would you debit the account or
would you credit the account?

Accounts Payable Debit Credit

Cash Debit Credit
Land Debit Credit
Notes Payable Debit Credit
Accounts Receivable Debit Credit
Supplies Debit Credit
Supplies Expense Debit Credit
Prepaid Insurance Debit Credit
Unearned Revenue Debit Credit
Equipment Debit Credit

29.) Generally when an expense is involved in a transaction, an expense will be

Debited Credited

30.) Generally when revenues are involved in a transaction, a revenue account will be

Debited Credited

31.) The accountant's word to indicate that an entry will be recorded on the left-side of
an account is

Debit Credit

32.) A contra-asset account such as Accumulated Depreciation will likely have which
balance?

Debit Credit

33.) A contra-liability account such as Discount on Notes Payable will likely have which
balance?

Debit Credit

A company using the accrual method of accounting performed services on account in

August. The services were for P50,000 and the company gave the customer credit
terms that state the amount is to be paid to the company in September.

34.) Assuming that the company prepares monthly income statements, what will be the
account debited for P50,000 in August?

Cash Accounts Receivable Service revenue

35.) Which account should the company credit for P50,000 in August?

Cash Accounts Receivable Service revenue

TRUE/FALSE

1.) Financial statements of legally separate entities may be issued to show financial
position, income, and cash flow as they would appear if the companies were a
single entity.
2.) A disclaimer of opinion is necessary when the exceptions to fair presentation are
so material that a qualified opinion is not justified.
3.) The responsibility for the preparation and integrity of financial statements rests
with management
4.) The assets for the balance sheet must equal the liabilities and stockholders'
equity.
5.) The retained earnings account is the link between the balance sheet and the
statement of cash flows
6.) A summary annual report is a condensed annual report that omits much of the
financial information included in a typical annual report.
7.) A review has substantially less scope than an examination in accordance with
generally accepted auditing standards.
8.) The accountant's report expresses an opinion on reviewed financial statements.
A corporation is considered to be a legal entity separate and distinct from the
stockholders.
9.) The principal financial statements of a corporation are the balance sheet, income
statement, and statement of cash flows.
10.) A balance sheet shows the financial condition of an accounting entity for a
particular period of time.
11.) At any point in time, assets must equal the contribution of the creditors only
12.) The income statement is a summary of revenues and expenses and gains and
losses, ending with net income, for a particular period of time.
13.) The financial statements of the parent and the subsidiary are consolidated for all
subsidiaries unless control is temporary or does not rest with the majority.
14.) When a subsidiary is not consolidated, it is accounted for as an investment on
the parent's balance sheet.
15.) The statement of cash flows consists of two sections: cash flows from operating
activities and cash flows from financing activities.
16.) Contingent liabilities are recorded as a liability only if the loss is considered
substantial and the amount is reasonably determinable
17.) The sequence of accounting procedures completed during each accounting
period is called the accounting cycle.
18.) Most companies consolidate the parent's and subsidiary's accounts summed.
19.) For consolidated statements, all transactions between entities being consolidated
(i.e., intercompany transactions) must be eliminated.
20.) Most companies consolidate the parent's and subsidiary's accounts summed.
21.)