Overview of Accounting

Definition of Accounting
1. Accounting has been given various definitions, which of the following is not one of those definitions
a. Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions.
b. Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part of at least, of a financial character and interpreting the
results thereof.
c. Accounting is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these assertions
and established criteria and communicating the results to interested users.
d. Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgment and decisions by users of information.

2. The following statements correctly refer to the accounting process.

I. Measuring is the accounting process of analyzing business activities as to whether or not they will be
recognized in the books.
II. Recognition refers to the process of including the effects of an event in the totals of the statement of
financial position or the statement of profit or loss and other comprehensive income through memo
entries.
III. Disclosure of events in the notes to financial statement without including in the totals of the statement of
financial position or statement of profit or loss and other comprehensive income is not an application of
the recognition principle.
IV. An accountable event is an event that has an effect on the assets, liabilities or equity of an entity and its
effect can be measured reliably.
V. Sociological and psychological matters are within the scope of accounting.
a. I, II, III, IV, V b. I, II, III, IV c. IV d. III, IV

Types of Events
3. Which of the following statements is true?
I. Loss from theft should be classified as a nonreciprocal transfer
II. Internal events are changes in economic resources by actions of other entities that do not involve
transfers of enterprise resources and obligations
III. Nonreciprocal transfers involve the transfer of resources in only one direction, either from an entity to
other entities or from other entities to the entity.
IV. Internal events are sudden, substantial, unanticipated reductions in enterprise resources not caused by
other entities V. Fire, earthquake and flood are examples of accountable events classified as internal
events.
a. I, II, III, V b. I, III, V c. II, III, IV, V d. I, III, IV, V

4. All of the following are events considered as exchange or reciprocal transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription on the entity’s own equity instrument
d. exchange of a note payable for an account payable
e. borrowing of money from a bank

5. Which of the following correctly relates to accountable events?

I. An obsolete asset which has no use was received in exchange of an existing asset. This transaction may
be classified as an exchange.
II. An entity exchanges a non-cash asset for another non-cash asset in an exchange transaction with
commercial substance. This is a reciprocal transfer.
III. An entity issues its shares of stocks in exchange for a non-cash asset. This is a reciprocal transfer.
a. I b. II c. II, III d. I, II, III

Measuring
6. Financial statements are said to be a mixture of fact and opinion. Which of the following items is factual?
a. cost of goods sold c. discount on capital stock
b. retained earnings d. patent amortization expense
1
 (Adapted)

Communicating
7. These are the principal means through which an entity communicates its financial information to those outside it.
a. managerial reports c. segment reports
b. financial statements d. directors’ statements

Basic purpose
8. The basic purpose of accounting is
a. to provide information useful in making economic decisions
b. to provide information useful only for investors
c. to provide information regarding the economic resources controlled by an entity
d. to provide business owners, politicians, and other government officials an opportunity to evade taxes.

9. One objective of financial reporting is to provide information useful in assessing the amounts, timing, and
uncertainty of future cash flows. In regards to this objective, which of the following is (are) correct?
I. The emphasis on “assessing cash flow prospects” means that the cash basis is preferred over the accrual basis
of accounting.
II. Information based on accrual accounting generally better indicates an entity’s present and continuing ability to
generate favorable cash flows than does information limited to the financial effects of cash receipts and
payments.
a. I only b. II only c. I and II d. neither I nor II

10. The following relate to financial reporting. Choose the correct statement(s).
I. Since financial statements are historical, they are of little use in making decisions about the future.
II. Financial accounting is based on the presumption that all statement users need the same information.
III. Financial accounting is expressly designed to measure directly the value of a business enterprise.
a. I, III b. II, III c. II only d. None (RPCPA)

11. Financial reporting should provide all of the following information, except
a. Information that is useful to present and potential investors and creditors and other users in making rational
investment, credit, and similar decisions.
b. Information that helps present and potential investors, creditors, and other users assess the amounts, timing,
and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale,
redemption, or maturity of securities or loans.
c. Information that is comprehensible only to accountants and auditors who have reasonable understanding of
business and economic activities and are willing to study the information with reasonable diligence.
d. Information that clearly portrays the economic resources of an enterprise, the claims to those resources and
the effects of transactions, events, and circumstances that change its resources and claims to those resources.

Accounting information
12. Which of the following statements is correct?
I. Accounting provides qualitative information, financial information, and quantitative information.
II. Qualitative information is found in the notes to the financial statements only.
III. Accounting is considered an art because it is supported by an organized body of knowledge.
IV. Accounting is considered a science because it involves the exercise of skill and judgment.
V. Measurement is the process of assigning numbers to objects such inventories or plant assets and to
events such as purchases or sales.
VI. All quantitative information are also financial in nature.
VII. The accounting process of assigning peso amounts or numbers to relevant objects and events is known
as Identification.
a. I, V b. I, II, VI, V c. I, II, III, IV, V d. II, VI, V

13. Which of the following statements is incorrect?

I. The information contained in the financial statements is obtained exclusively from the firm’s accounting
records.
II. Financial accounting is a science rather than an art while management accounting is an art rather than a
science.
III. Management decisions are oriented to the future whereas the decisions of external users are oriented to
the past.
2
 IV. Financial accounting is a branch of accounting which deals primarily with the common needs of users
while management accounting is a branch of accounting which deals primarily with the specific needs of
users.
V. Quantitative information is always more useful than non-quantitative information for the purpose of
making economic decisions.
VI. Financial statements are only one source of information needed by users to make rational economic
decisions.
VII. Financial statements have the same basic purpose as financial accounting.
VIII. Financial statements are the only source of information needed by users to make rational economic
decisions.

a. IV, VII, VIII b. I, II, III, V, VIII c. IV, VI, VII d. I, II, III, V, VI, VII
(RPCPA)

14. Accounting as an art involves the considerable use of judgment. Accountants should exercise creative and critical
thinking in solving accounting problems. In solving accounting problems, this involves the use of imagination and
insight by finding new relationships (ideas) among items of information. It is most important in identifying
alternative solutions.
a. Creative thinking c. Professional Skepticism
b. Critical thinking d. Wishful thinking

Basic Accounting Concepts

15. Which of the following statements is incorrect regarding accounting concepts?
a. Under the Accrual Basis of accounting, revenues are recognized when earned and expenses are recognized
when incurred, not when cash is received and disbursed.
b. Under the Going concern concept, the business entity is assumed to carry on its operations for an indefinite
period of time.
c. Under the Business entity/ Separate entity/ Entity/ Accounting entity Concept, the business is treated
separately from its owners.
d. Under the Time Period/ Periodicity/ Accounting Period concept, the life of the business is divided into series of
reporting periods.
e. Under the Cost-benefit concept, the cost of processing and communicating information should exceed the
benefits derived from it.

16. Which of the following statements is incorrect regarding accounting concepts?

a. Under the Materiality concept, items deemed material and affect decision making should be separately
disclosed.
b. Underlying assumptions are those that are mentioned in the Conceptual Framework; Implicit assumptions are
those that are not mentioned in the Conceptual Framework; Pervasive concepts are those that affect virtually all
financial statement elements and all aspects of accounting.
c. Under the Cost/ Historical cost concept, the value of an asset is to be determined on the basis of acquisition
cost.
d. The Concept of Articulation states that all the components of a complete set of financial statement are
interrelated.
e. Under the Matching concept, revenues are matched with expenses in order to properly determine the profit for
a period.

17. Accrual accounting techniques are used to:

a. assign revenues and expenses to the appropriate accounting period.
b. record the anticipated effects of actions that may occur at a future date.
c. report the results of actions whose monetary effects are difficult to estimate.
d. allocate nonoperating revenues and expenses to the appropriate business unit.
(Adapted)

18. Accrual accounting is used because

a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.
(Adapted)
3
19. The valuation of an assurance to receive cash in the future at present value on a business entity’s financial
statements is well-founded because of the accounting concept of:
a. Entity b. Going concern c. Materiality d. Neutrality
(RPCPA)

20. Business entity produces financial statements at arbitrary points in time in accordance with which basic
accounting concept?
a. objectivity b. periodicity c. conservatism d. matching
(RPCPA)

21. Treating partners’ salaries as an expense rather than as a means of allocating partnership profits is an application
of what theory?
a. proprietary theory c. residual equity theory
b. entity theory d. funds theory
(RPCPA)

22. Mr. Van owns a butcher shop, a restaurant, and a catering business. Separate financial statements are prepared
for each business independent of the other businesses. What accounting principle or assumption is being applied
in this situation?
a. Time period assumption c. Full-disclosure principle
b. Separate entity assumption d. Unit-of-measure assumption
(CGA)

23. Which of the following correctly relate to the Monetary/ Stable monetary/ Monetary Unit concept?
I. Assets, liabilities, equity, revenues and expenses should be stated in terms of a unit of measure which is
the peso in the Philippines
II. The purchasing power of the peso is stable or constant and that its instability is insignificant and
therefore ignored.
a. I b. II c. I and II d. None

24. An accounting (financial reporting) period may be

a. One month b. One quarter c. One year d. a, b or c

25. Which of the following statements best reflects the accounting assumption of periodicity or time period?
I. A fiscal year begins in any month and ends in any month but covers a period of 12 months
II. A calendar year begins on any month and ends on any month but covers a period of 12 months
III. Technically, an accounting year is synonymous with an accounting period.
IV. Accounting periods are usually equal in length.
a. I, II, III, IV b. I, IV c. I, III, IV d. II, III, IV

26. Which of the following best reflect(s) the reason(s) why companies select accounting periods other than a
calendar year?
a. to avoid closing books during peak sales period
b. to close the books at a time when inventories and business activity are lowest
c. to conform to auditors’ request in order to reduce audit efforts and cost of counting inventories
d. a and b

27. For a fiscal year ending April 30, 20x2, the period covered by the statement of profit or loss and other
comprehensive income is
a. April 1, 20x2 to April 30, 20x2 c. May 1, 20x1 to April 30, 20x2
b. April 1, 20x1 to April 30, 20x2 d. April 30, 20x1 to April 30, 20x2

28. An entity uses calendar year as its accounting period. The statement of financial position prepared on December
31, 20x2 covers the period
a. December 31, 20x1 to December 31, 20x2
b. January 1, 20x1 to December 31, 20x2
c. January 1, 20x2 to December 31, 20x2
d. From business’ inception up to December 31, 20x2

4
29. Which of the following statements is incorrect regarding the basic accounting concepts?
a. Under the Consistency concept, the financial statements should be prepared on the basis of accounting
principles which are followed consistently.
b. Under the Entity theory, the accounting objective is geared toward proper income determination. Proper
matching of cost against revenue is the ultimate end. Entity theory emphasizes the income statement. This is
explained by the equation Assets = Liabilities + Capital.
c. Under the Proprietary theory the accounting objective is directed toward proper valuation of assets. This theory
emphasizes the importance of the balance sheet. It is exemplified by the equation Assets – Liabilities = Capital.
d. Under the Fund theory, the accounting objective is neither proper income determination nor proper valuation of
assets but the custody and administration of funds. The objective is directed toward cash flows exemplified by the
formula “cash inflows minus cash outflows equals fund.” Government accounting and fiduciary accounting are
examples of the application of this concept.
e. Under the Residual equity theory, the accounting objective is proper valuation of assets. This is applicable
when there are two classes of stockholders, common and preferred. Thus, the equation is Assets – Liabilities +
Preference Shareholders’ Equity = Ordinary Shareholders’ Equity.

30. Which of the following statements correctly relate to the basic features of financial accounting?
I. The going concern assumption is necessary for asset valuation at historical cost to have meaning.
II. Inexact information always makes financial statements useless for decision making.
III. Under the residual equity theory, preference share equity is deducted from total equity to arrive at
ordinary share equity.
IV. Materiality is always a quantitative as opposed to a qualitative concept.
a. I, III, IV b. I, II, IV c. I, III d. I, II

31. Application of the full disclosure principle

a. Is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b. Is violated when important financial information is buried in the notes to the financial statements.
c. Is demonstrated by providing additional information whenever this information is deemed relevant to the
understanding of the financial statements.
d. Requires that the financial statements be consistent and comparable.

32. The process of converting non-cash resources and rights into cash or equivalent claims to cash is called a.
Realization b. Allocation c. Recognition d. Disposition
(RPCPA)

33. The body of rules that dictates that the entire profit must be recognized at the moment and in the period of sale
is called:
a. cost convention c. realization convention
b. going concern convent d. conservatism
(RPCPA)

34. Which statements correctly refer to the basic principles used in accounting?
a. The personal assets of the owner of a company will not appear on the company's balance sheet because of the
principle of conservatism.
b. The growing concern principle/guideline is associated with the assumption that the company will continue on
long enough to carry out its objectives.
c. An instance of application of the conservatism principle is when a very large corporation's financial statements
have the peso amounts rounded to the nearest P1,000.
d. In applying the matching principle, income is not recognized if the related expense cannot be determined
reliably.

35. Under what principle when revenue is generally recognized and when the earning process is virtually complete
and an exchange has taken place
a. consistency b. maturing c. realization d. conservatism
(RPCPA)
36. It is the exercise of care and caution in dealing with uncertainties in measurement so as not to overstate assets
and income and not understate liabilities and expenses.
a. Completeness b. Prudence c. Faithful representation d. Neutrality

5
 37. The general tendency toward early recognition of unfavorable events and minimization of the amount of net
assets and net income is called:
a. conservatism b. consistency c. neutrality d. verifiability

International Standards
38. The International Accounting Standards Board (IASB)
a. Directly influences governmental legislation regarding accounting standards.
b. Develops binding pronouncements for its members.
c. Is composed of members from national standard setting bodies.
d. Establishes uniform accounting standards to eliminate reporting differences among nations. (Adapted)

39. Approval of International Financial Reporting Standards (IFRSs) and related documents, such as the Conceptual
Framework for Financial Reporting, exposure drafts, and other discussion documents, is the responsibility of the
a. International Accounting Standards Board
b. International Accounting Standards Committee
c. International Accounting Standards Council
d. Financial Reporting Standards Council

40. Are the following statements true or false concerning the IFRSs?
I. IFRSs set out recognition, measurement, presentation and disclosure requirements dealing with
transactions and events that are important in general and special purpose financial statements. They may
also set out such requirements for transactions and events that arise mainly in specific industries.
II. IFRSs are based on the Conceptual Framework, which addresses the concepts underlying the information
presented in general purpose financial statements. The objective of the Conceptual Framework is to
facilitate the consistent and logical formulation of IFRSs. The Conceptual Framework should, however, not
be used as a basis for the use of judgment in resolving accounting issues.
a. True, true b. True, false c. False, true d. False, false

41. Which of the following statements correctly refer(s) to the IFRSs?

I. IFRSs are designed to apply to the general purpose financial statements and other financial reporting of
all profit-oriented entities.
II. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities,
whether organized in corporate or in other forms. They include organizations such as mutual insurance
companies and other mutual cooperative entities that provide dividends or other economic benefits
directly and proportionately to their owners, members or participants.
III. Although IFRSs are not designed to apply to not-for-profit activities in the private sector, public sector or
government, entities with such activities may find them appropriate.
IV. The Public Sector Committee of the International Federation of Accountants (PSC) has issued a Guideline
stating that IFRSs are applicable to government business entities. The PSC prepares accounting standards
for governments and other public sector entities, other than government business entities, based on
IFRSs.
a. I, II b. II, III, IV c. I, II, III d. I, II, III, IV

42. The objectives of the International Accounting Standards Board are (choose the incorrect statement)
a. To develop, in the public interest, a single set of high quality, understandable and enforceable global
accounting standards that require high quality, transparent and comparable information in financial statements
and other financial reporting to help participants in the various capital markets of the world and other users of the
information to make economic decisions;
b. To promote the use and rigorous application of those standards
c. To eliminate differences between standards used by various countries
d. To work actively with national standard-setters to bring about convergence of national accounting standards
and IFRSs to high quality solutions

43. In the event of conflict between the International Financial Reporting Standards and the local standards, which
among the following will prevail?
a. The provisions of the Corporation Code and Tax Code will prevail
b. The rule of the Philippine Securities and Exchange Commission prevails
c. The rule of the International Accounting Standards prevails
d. The rule of local standards, laws and regulations shall prevail (Adapted)

6
 44. Which of the following bodies is responsible for reviewing accounting issues that are likely to receive divergent or
unacceptable treatment in the absence of authoritative guidance, with a view to reaching consensus as to the
appropriate accounting treatment?
a. International Financial Reporting Interpretations Committee (IFRIC)
b. Standards Advisory Council (SAC)
c. International Accounting Standards Board (IASB)
d. International Accounting Standards Committee Foundation (IASC Foundation) (ACCA)

45. The International Financial Reporting Interpretations Committee (IFRIC) issues interpretations as authoritative
guidance. For which of the following should IFRIC consider issuing an Interpretation?
I. Narrow, industry-specific issues
II. Newly identified financial reporting issues not specifically addressed in IFRSs
III. Issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop IV. Areas
where members of the IASB cannot reach unanimous agreement
a. I, II, III b. II, III c. III, IV d. II, III, IV
(ACCA)

Conceptual Framework

Purpose and status

1. What is the authoritative status of the Conceptual Framework?
a. It has the highest level of authority. In case of a conflict between the Conceptual Framework and a
Standard or Interpretation, the Conceptual Framework overrides the Standard or Interpretation.
b. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the
Conceptual Framework. In the absence of a Standard or an Interpretation that specifically applies, the
Conceptual Framework should be followed.
c. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides 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 will result in information that is relevant and reliable.
d. The Conceptual Framework applies only when IASB develops new or revised Standards. An entity is never
required to consider the Conceptual Framework.
(Adapted)

2. The purpose of the Philippine Conceptual Framework is to:

I. Assist the Financial Reporting Standards Council (FRSC) in developing accounting standards that
represent generally accepted accounting principles in the Philippines
II. Assist the Board of IASC in the development of future International Accounting Standards and in its
review of existing International Accounting Standards
III. Assist the Board of IASC in promoting harmonization of regulations, accounting standards and procedures
relating to the presentation of financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by International Accounting Standards;
IV. Assist the FRSC in its review and adoption of existing International Accounting Standards
V. Assist preparers of financial statements in applying FRSC financial reporting standards and in dealing with
topics that have yet to form the subject of an FRSC standard
VI. Assist auditors in forming an opinion as to whether financial statements conform with Philippine generally
accepted accounting principles
VII. Assist users of financial statements in interpreting the information contained in financial statements
prepared in conformity with Philippine generally accepted accounting standards
VIII. Provide those who are interested in the work of FRSC with information about its approach to the
formulation of Financial Reporting Standards.

a. I, II, III, IV c. IV, V, VI, VII, VII

b. I, IV, V, VI, VII, VIII d. all of the above
3. The Scope of the framework includes all of the following except
a. The objective of financial statements
b. The qualitative characteristics that determine the usefulness of information in financial statements
c. The underlying and implicit assumptions governing the preparation and presentation of financial statements
d. The definition, recognition and measurement of the elements from which financial statements are constructed
e. Concepts of capital and capital maintenance
7
 4. The primary users of financial statements under the Conceptual Framework include
I. Existing and potential investors
II. Employees
III. Lenders and other creditors
IV. Suppliers and other trade creditors
V. Customers
VI. Governments and their agencies
VII. Public
VIII. Professional accountants, including auditors

a. I, III c. I, II, III, IV, V, VI, VII

b. I, II, III, IV, V, VI d. all of the above

5. Which of the following statements is correct?

a. All of the information needs of users can be met by financial statements because there are needs which are
common to all users.
b. The accountant/ controller of an entity has the primary responsibility for the preparation and presentation of
the financial statements of the entity.
c. Management is also interested in the information contained in the financial statements even though it has no
access to additional management and financial information that helps it carry out its planning, decision-making
and control responsibilities.
d. Management has the ability to determine the form and content of additional information in order to meet its
own needs. The reporting of such information is within the scope of the framework.
e. Published financial statements are based on the information used by management about the financial position,
performance and changes in financial position of the entity.

Objective of financial statements

6. The foundation of the Conceptual Framework is formed from
a. The qualitative characteristics that makes information useful to users
b. The objective of general purpose financial reporting
c. The concept of reporting entity
d. The various measurement requirements which results to fair presented financial information

7. Which of the following statements correctly relates to the provisions of the Conceptual Framework?
a. Financial statements do not form part of the process of financial reporting.
b. The statement of changes in financial position may be presented in a variety of ways such as classified or
unclassified statement of financial position.
c. All of the information needs of users cannot be met by financial statements.
d. The shareholders of an entity have the primary responsibility for the preparation and presentation of the
financial statements of the entity.

8. All of the following correctly relate to the provisions of the Conceptual Framework, except
a. Financial statements do not provide all the information that users may need to make economic decisions since
they largely portray the financial effects of past events and do not necessarily provide non-financial information.
b. The economic decisions that are taken by users of financial statements require an evaluation of the ability of
an entity to generate cash and cash equivalents and of the timing and certainty of their generation.
c. The income statement provides an incomplete picture of performance unless it is used in conjunction with the
balance sheet and the other financial statements.
d. According to the Conceptual Framework, the underlying assumptions are accrual basis of accounting and going
concern and the implicit assumptions are accounting entity, periodicity and stable monetary concept.

9. The financial position of an entity is affected by all of the following, except

a. the economic resources it controls
b. its performance
c. its liquidity and solvency
d. its capacity to adapt to changes in the environment
e. its financial structure

8
10. Users are better able to evaluate an entity’s ability to generate cash and cash equivalents if they are provided
with information that focuses on the entity’s
a. financial position c. cash flows
b. performance d. a, b and c

11. When the going concern becomes inappropriate such as when liquidation becomes imminent, the assets of an
entity should be shown on the balance sheet at their
a. historical cost c. fair value
b. realizable value d. current cost

12. This information is useful in predicting future borrowing needs and how future profits and cash flows will be
distributed among those with an interest in the entity; it is also useful in predicting how successful the entity is
likely to be in raising further finance.
a. economic resources c. liquidity and solvency
b. financial structure d. performance

13. This information is useful in predicting the ability of the entity to meet its financial commitments as they fall due
a. economic resources c. liquidity and solvency
b. financial structure d. performance

14. This information is required in order to assess potential changes in the economic resources that an entity is likely
to control in the future.
a. economic resources c. liquidity and solvency
b. financial structure d. performance

15. This information is useful in predicting the capacity of the entity to generate cash flows from its existing resource
base. It is also useful in forming judgments about the effectiveness with which the entity might employ additional
resources.
a. economic resources c. liquidity and solvency
b. financial structure d. performance

16. This information is useful in assessing an entity’s its investing, financing and operating activities during the
reporting period.
a. economic resources c. cash flows
b. financial structure d. performance

17. Information about changes in financial position is provided in the financial statements
a. through the statement of cash flows
b. through the statement of changes in equity
c. by means of a separate statement
d. all of the above

18. Measurement is the process of determining the monetary amounts at which the elements of the financial
statements are to be recognized and carried in the balance sheet and income statement. This involves the
selection of the particular basis of measurement. A number of different measurement bases are employed to
different degrees and in varying combinations in financial statements. The measurement bases enumerated in the
Conceptual Framework include all of the following except
a. Historical cost d. Present value
b. Current cost e. Fair Value
c. Realizable value

19. The measurement basis most commonly adopted by entities in preparing their financial statements is
a. Historical cost c. Present Value
b. Fair value d. Current cost

20. According to the framework, certain assets are reported in financial statements at the amount of cash or its
equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name
of the reporting concept?
a. Replacement cost c. Historical cost
b. Current market value d. Net realizable value (AICPA)
9
Underlying assumption
21. Under the Conceptual Framework, the underlying assumption is
a. Relevance and reliability
b. Concepts of capital maintenance
c. Accrual basis and going concern
d. Going concern

22. It is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of
its operations; if such an intention or need exists, the financial statements may have to be prepared on a different
basis and, if so, the basis used is disclosed.
a. Growing Concern c. Cash Basis
b. Accrual Basis d. Going Concern

23. The going concern assumption

a. means the entity will continue to exist forever
b. supports the valuation of assets using historical costs and fair values but do not support valuation in a forced
sale transaction.
c. requires that capital expenditures be immediately recognized as expense
d. is always maintained by all entities

Qualitative characteristics
24. These 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)
a. Relevance and Faithful representation c. Qualitative characteristics
b. Fundamental qualitative characteristics d. Pervasive constraint

25. Under the Conceptual Framework, qualitative characteristics are subclassified into
a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental characteristics and those that enhance the usefulness of financial information
d. not sub-classified

26. Identify the fundamental qualitative characteristics under the Conceptual Framework.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability

a. I, II b. I, III c. I, II, III, IV, V, VI d. IV, V, VI, VII

27. Identify the qualitative characteristics that enhance the usefulness of financial information.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability

a. I, II b. I, III c. II, III, IV, V, VII d. IV, V, VI, VII

28. According to the Conceptual Framework, the predictive value of the income statement is enhanced if
a. unusual, abnormal and infrequent items of income or expense are separately disclosed.
b. the transaction approach is used
c. expenses are presented according to their function
d. the multiple-step method is used
10
29. The relevance of information is affected by its
a. Nature b. Risk c. Materiality d. all of these

30. Comparability is sometimes sacrificed for

a. Reliability b. Conservatism c. Objectivity d. Relevance

31. This concept defines the accountant’s area of interests and determines what information should be included in, or
excluded from the financial statements.
a. Periodicity b. Going concern c. Accrual basis d. Accounting entity

32. To be relevant, information should have which of the following?

a. Verifiability c. Understandability
b. Feedback value d. Costs and benefits
(AICPA)

33. Which of the following accounting concepts states that before a transaction is recorded, sufficient evidence must
exist to allow two or more knowledgeable individuals to reach essentially the same conclusion about the
transaction?
a. Continuity assumption c. Cost principle
b. Materiality constraint d. Verifiability quality

34. One of the fundamental qualitative characteristics of financial statements is

a. Relevance b. Timeliness c. Neutrality d. Completeness

35. If, in Year 1, a company used LIFO; year 2, FIFO; and in year 3, moving average cost for inventory valuation,
which of the following assumptions, constraints, or principles would be violated:
a. consistency b. time period c. matching d. Comparability

36. Technically it is the quality of information that allows comparisons within a single entity through time or from one
accounting period to the next.
a. Comparability b. Consistency c. Reliability d. Uniformity

37. Objectivity is assumed to be achieved when an accounting transaction

a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c. Involves an arms’ length transaction between two independent parties
d. Allocates revenue or expenses in a rational and systematic manner
(Adapted)

38. The Conceptual Framework sets out general recognition principles of financial statement elements which include
all of the following except
a. asset recognition c. equity recognition
b. liability recognition d. gain recognition

39. A condensed report of how the activities of a business have been financed and how the financial resources have
been used is referred to as:
a. income statement c. statement of cash flows
b. balance sheet d. notes

40. The recognition of periodic depreciation expense on company-owned automobiles requires estimating both
salvage or residual value, and the useful life of the vehicles. The use of estimates in this case is an example of
a. conservatism
b. maintaining consistency
c. invoking the materiality constraint rather than the cost benefit constraint
d. providing relevant data at the expense of reliability

—---------------------------------------------END------------------------------------------------------

11