CFAS REVIEWER

MULTIPLE CHOICE
1. The full disclosure principle, as adopted by the accounting profession, is best described
by which of the following?

a. All information related to an entity's business and operating objectives is required

to be disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is to
be included in the notes to the financial statements.
c. Enough information should be disclosed in the financial statements so a person
wishing to invest in the shares of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an
informed reader.

2. An example of an inventory accounting policy that should be disclosed in a Summary of

Significant Accounting Policies is the
a. composition of inventory into raw materials, work-in-process, and finished goods.
b. major backlogs of inventory orders.
c. method used for pricing inventory.
d. All of the above should be disclosed.

3. Which of the following are defined as intentional distortions of financial statement.

Errors Fraud
a. Yes Yes
b. Yes No
c. No Yes
d. No No

4. A change in accounting policy is a change that occurs as the result of new information or
additional experience.
a. True
b. False
c. Maybe

5. Errors in financial statements result from mathematical mistakes or oversight or misuse

of facts that existed when preparing the financial statements.
a. True
b. False
c. Maybe

6. Accounting changes are often made and the monetary impact is reflected in the
financial statements of a company even though, in theory, this may be a violation of the
accounting concept of
a. materiality.
b. consistency.
c. prudence.
d. objectivity.

7. Which of the following is not a retrospective-type accounting change?

a. Cost-recovery method to the percentage-of-completion method for long-term
contracts
b. Weighed average to the FIFO method for inventory valuation
c. Change in the useful life of the PPE
d. "Full cost" method to another method in the extractive industry

8. Which of the following is accounted for as a change in accounting policy?

a. A change in the estimated useful life of plant assets.
 b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing
them as they become material.
d. A change in inventory valuation from average cost to FIFO.

9. Which type of accounting change should always be accounted for in current and future
periods?
a. Change in accounting policy
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error

10. Which of the following is (are) the proper time period(s) to record the effects of a change
in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only

11. The income statement is useful for helping to assess the risk or uncertainty of achieving
future cash flows.
a. True
b. False
c. Maybe

12. Information in the income statement helps users to

a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. All of these.

13. Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.

14 . Which of the following would represent the least likely use of an income statement
prepared for a business enterprise?
a. Use by customers to determine a company's ability to provide needed goods and
services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.

15. The income statement reveals

a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time

16. Which of the following is not a selling expense?

a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.
 Income Statement and Related Information 4-3

17.Which of the following is a current asset?

a. Cash surrender value of a life insurance policy of which the company is the bene-
ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 12 months.

18.Equity or debt securities held to finance future construction of additional plants should be
classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.

19.Which of the following is not a long-term investment?

a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund

20.Which item below is not a current liability?

a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable

21. Non-current liabilities include

a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.

22. Which of the following should be excluded from long-term liabilities?

a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Non-current liabilities that mature within the operating cycle and will be paid from
a sinking fund
d. None of these

23. For Grimmett Company, the following information is available:

Capitalized leases P200,000
Trademarks 65,000
Long-term receivables 75,000
In Grimmett’s statement of financial position, intangible assets should be reported at
a. P 65,000.
b. P 75,000.
c. P265,000.
d. P275,000.

24. Stine Corp.'s trial balance reflected the following account balances at December 31,
2020:
Accounts receivable (net) P24,000
Trading securities 6,000
 Accumulated depreciation on equipment and furniture 15,000
Cash 11,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2021 statement of financial position, the current assets total is
a.P90,000.
b.P82,000.
c.P77,000.
d.P73,000..

25. Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.

26. In preparing a statement of cash flows, which of the following transactions would be
considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount

27.In a statement of cash flows, receipts from sales of property, plant, and equipment and
other productive assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.

28. Lohmeyer Corporation reports:

Cash provided by operating activities P250,000
Cash used by investing activities 110,000
Cash provided by financing activities 140,000
Beginning cash balance 70,000
What is Lohmeyer’s ending cash balance?
a. P280,000.
b. P350,000.
c. P500,000.
d. P570,000.

29.Keisler Corporation reports:

Cash provided by operating activities P200,000
Cash used by investing activities 110,000
Cash provided by financing activities 140,000
Beginning cash balance 70,000
What is Keisler’s ending cash balance?
a. P230,000.
b. P300,000.
c. P450,000.
d. P520,000.
 Income Statement and Related Information 4-5

30.Caroline, Inc. had the following transactions during 2021:

Exchanged land for a P382,00

building 0
Purchased treasury 80,000
shares
Paid cash dividend 190,00
0
Purchased equipment 106,00
0
Issued ordinary shares 294,00
0

What is Caroline, Inc.’s net cash provided (used) by investing activities?

a. P106,000 used by investing activities.
b. P276,000 provided by investing activities.
c. P186,000 used by investing activities.
d. P196,000 provided by investing activities.

31. Caroline, Inc. had the following transactions during 2021:

Exchanged land for a P

building 382,000
Purchased treasury 80,000
shares
Paid cash dividend 190,000
Purchased equipment 106,000
Issued ordinary shares 294,000

What is Caroline, Inc.’s net cash provided (used) by financing activities?

a. P300,000 provided by financing activities.
b. P24,000 provided by financing activities.
c. P24,000 used by financing activities.
d. P214,000 used by financing activities.

32. Which of the following inventories carried by a manufacturer is similar to the

merchandise inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

33. Where should raw materials be classified on the statement of financial position?
a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

34. Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.
 35. Tang, Inc. sells collectible jewelry on consignment from various manufacturers.
Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On
December 31, 2011, during Tang, Inc 's annual inventory count, an inexperienced new
staff member included in Tang’s ending inventory $350,000 worth of inventory held on
consignment from Metcalf Associates. Which of the following is correct regarding the
impact of this error on Tang’s income statement and statement of financial position at
December 31, 2011?
a. Ending inventory is understated by $350,000.
b. Retained earnings is overstated by $350,000.
c. Cost of goods sold is overstated by $350,000.
d. The financial statements are correctly stated.

36. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

37. Where should goods in transit that were recently purchased f.o.b. destination be
included on the statement of financial position?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

38. Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

39. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of
business of the buyer.
b. costs that are directly connected with the converting of goods to a salable
condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.

40. Accounting information is considered to be relevant when it

a. can be depended on to represent the economic conditions and events that it is
intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

41.The quality of information that gives assurance that it is reasonably free of error and bias
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.

42. Financial information does not demonstrate consistency when

a. firms in the same industry use different accounting methods to account for the
same type of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
 Income Statement and Related Information 4-7

c. a company fails to adjust its financial statements for changes in the value of the
measuring unit.
d. none of these.

43. When information about two different enterprises has been prepared and presented in
a similar manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency.
d. none of these

44.The assumption that a business enterprise will not be sold or liquidated in the near future
is known as the
a. economic entity assumption.
b. monetary unit assumption.
c. materiality assumption.
d. none of these.

45.Which basic assumption is illustrated when a firm reports financial results on an annual
basis?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Monetary unit assumption

46.Which of the following basic elements of financial statements is not associated with the
statement of financial position?
a. Income.
b. Equity.
c. Liability.
d. Asset.

49. Assets classified as property, plant, and equipment can be either acquired for use in
operations, or acquired for resale.
a. True
b. False
c. Either True or False
d. Neither True nor False

50. Assets classified as property, plant, and equipment must be both long-term in nature
and possess physical substance.
a. True
b. False
c. Either True or False
d. Neither True nor False

51. When land with an old building is purchased as a future building site, the cost of
removing the old building is part of the cost of the new building.
a. True
b. False
c. Either True or False
d. Neither True nor False
52. Insurance on equipment purchased, while the equipment is in transit, is part of the
cost of the equipment.
a. True
b. False
c. Either True or False
d. Neither True nor False

53. The cost of land does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.

54. The cost of land typically includes the purchase price and all of the following costs
except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.

55. When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds not needed to pay for construction may be
temporarily invested in interest-bearing securities. Interest earned on these temporary
investments should be
a. offset against interest cost incurred during construction.
b. used to increase the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of interest to be
capitalized.
d. recognized as revenue of the period.

56. Interest cost that is capitalized should

a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off equally over
a 40-year period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of these.

57. Fogelberg Company purchased equipment for P12,000. Sales tax on the purchase was
P600. Other costs incurred were freight charges of P240, repairs of P420 for damage
during installation, and installation costs of P270. What is the cost of the equipment?
a. P12,000.
b. P12,600.
c. P13,110.
d. P13,530.

58. Interest revenue earned on specific borrowings for qualifying assets

a. reduces the cost of the qualifying asset.
b. reduces interest expense reported on the income statement.
c. increases equity in the period earned.
d. none of these.

59. Which of the following is not true with regard to the accounting for government
grants?
a. Assets may be recorded at fair value or nominal cost.
b. Companies may use either the capital or income approach to account for the asset
and the grant.
 Income Statement and Related Information 4-9

c. Companies may apply the income approach either by recording the grant as
deferred revenue or as an adjustment to the asset.
d. Both a and c.

60. The account Deferred Grant Revenue is classified as

a. a separate component of shareholders' equity.
b. a non-current liability.
c. Other income and expense.
d. Revenue.

61. When an asset acquired through government grants is recorded using the capital
approach,
a. assets and equity increase by the fair value of the asset.
b. assets and liabilities increase by the fair value of the asset.
c. assets and equity increase by the cost of the asset.
d. assets and liabilities increase by the cost of the asset.

62. . If the cost of the asset is recorded net of the government grant,
a. equity will likely be overstated.
b. liabilities will likely be overstated.
c. assets will likely be understated.
d. revenues will likely be understated.

63. All dividends received by an investor from the investee decrease the investment’s
carrying value under the equity method.
a. True
b. False
c. Either True or False
d. Neither True nor False

64. Under the fair value method, the investor reports as revenue its share of the net
income reported by the investee.
a. True
b. False
c. Either True or False
d. Neither True nor False.

65. An impairment loss is the difference between an investments cost and the expected
future cash flows.
a. True
b. False
c. Either True or False
d. Neither True nor False.

66. If a company determines that an investment is impaired, it writes down the amortized
cost basis of the individual security to reflect this loss in value.
a. True
b. False
c. Either True or False
d. Neither True nor False

67. Biological assets and agricultural produce are recognized when all of the following are
present except
a. control
b. probable future economic benefits
c. probable future event
d. fair value or cost can be measured reliably

68. Which of the following is considered a biological asset?

a. Carcass
b. Ham
c. Pig
d. Piggy bank

69. Which of the following is considered an agricultural produce?

a. eggs to be hatched into chicks
b. condensed milk
c. dairy cow
d. felled trees

70. Which of the following is considered an inventory rather than agricultural produce at
the point of harvest?
a. Harvested cotton
b. Harvested cane
c. Tea
d. Picked leaves

71. Which of the following is considered an agricultural activity?

a. fishing in the open seas
b. illegal logging
c. floriculture
d. farming in the computer or cellphone

72. Which of the following is considered a bearer plant?

a. Palm oil
b. Corn oil
c. Baby oil
d. Oil palm

73. Which of the following qualifies for classification as an investment property?

a. Property that is currently being developed for future use as investment property
b. Investment property that is currently being developed for future use as owner-
occupied property
c. Property that is leased out to another entity under a finance lease
d. Building being rented from another entity under an operating lease and leased out
under various operating leases.

74. Select the correct statement.

a. A leasing company should treat all assets used in providing lease services as
investment property.
b. Investment properties that are to be disposed of without further development are
treated as investment property until they are derecognized.
c. All investment properties held for capital appreciation will be classified as held for sale
in the long run.
d. Investment properties being redeveloped as investment properties on behalf of third
parties are investment properties.

75. Select the incorrect statement regarding impairments of investment properties.

a. Investment properties are subject to impairment.
b. Impairments of investment properties of government entities are recognized in surplus
or deficit.
 Income Statement and Related Information 4 - 11

c. Compensation from third parties for investment property that was impaired or lost
shall be recognized in surplus or deficit when the compensation becomes receivable
and not offset with the amount of loss.
d. Impairment losses on investment properties measured under the cost model are never
reversed.

76. Derecognition of investment property is not required when

a. it becomes the subject of an operating lease.
b. it is sold.
c. the property is assessed to have no future economic benefits.
d. it becomes the subject of a finance lease.

77. Which of the following assets may be classified as investment property?

a. Land held for long-term capital appreciation
b. Equipment held for lease
c. Intangible asset held for lease
d. Building held for lease
e. a and d only

78. Which of the following properties falls under the definition of investment property?
I. Land held for long-term capital appreciation
II. Property occupied by an employee paying market rent
III. Property being constructed on behalf of third parties
IV. A building owned by an entity and leased out under an operating lease
a. I, II
b. II, IV
c. I, IV
d. II, III, IV

79. The distinguishing characteristic that identifies an investment property from the other
assets of an entity is?
a. Changes in fair value of the asset is recognized in surplus or deficit.
b. The property does not derive cash flows separate from the other assets of the entity.
c. Generates separately identifiable cash flows from the other assets of the entity.
d. Earns rental as part of the ordinary operations of the entity.

80. Which of the following statements is correct regarding investment property?

a. An entity may classify assets other than land and/or building as investment property.
b. During the period, Entity A, reclassifies a building that was previously used as office
space to investment property. Entity A will recognize a gain if the fair value of the
asset exceeds its carrying amount on the date of transfer.
c. When a government entity applies the fair value model to account for its investment
properties subsequent to initial recognition, changes in fair values are recognized in
surplus or deficit rather than a direct adjustment to equity.
d. Transfers to or from investment property shall be made when, and only when, there is
a change in use.

81. An active market is a market in which all the following conditions exist, except
a. the items traded in the market are homogeneous
b. willing buyers and sellers can normally be found at any time
c. prices are available to the public
d. the price is most advantageous
 82. It is the systematic allocation of the depreciable amount of an intangible asset over its
useful life.
a. Cost allocation concept
b. Impairment
c. Depreciation
d. Amortization

83. It refers to the application of research findings or other knowledge to a plan or design
for the production of new or substantially improved materials, devices, products,
processes, systems, or services before the start of commercial production or use.
a. Research
b. Development
c. R & D activities
d. Internal generation

84. An entity acquires an intangible asset with finite useful life for ₱100,000 on October
20, 20x1. The intangible asset is estimated to have a useful life of 5 years. The
accumulated amortization on December 31, 20x1 is
a. 3,333
b. 5,000
c. 20,000
d. 0

85. Goodwill is considered an unidentifiable asset because

a. it cannot be sold separately and therefore not separable.
b. it does not arise from contractual rights.
c. it has physical substance.
d. a and b

86. At the beginning of Year 1, an entity acquires an intangible asset for ₱100,000. The
intangible asset has a useful life of 10 years. At the end of Year 3, the entity
determines an indication of impairment and makes the following estimates:
Fair value less costs to sell 60,000
Value in use 50,000

How much is the impairment loss?

a. 10,000
b. 20,000
c. 30,000
d. 0

87. Which of the following should be disclosed in a Summary of Significant

Accounting Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in accounting policy
c. Claims of equity holders
d. Depreciation method followed

88. Which of the following are defined as intentional distortions of financial

statement.
Errors Fraud
a. Yes Yes
b. Yes No
 Income Statement and Related Information 4 - 13

c. No Yes
d. No No

89. The disclosure of accounting policies, is important to financial statement

readers in determining
a. net income for the year.
b. whether accounting policies are consistently applied from year to year.
c. the value of obsolete items included in ending inventory.
d. whether the working capital position is adequate for future operations.

90. If a business entity entered into certain related party transactions, it

would be required to disclose all of the following information except the
a. nature of the relationship between the parties to the transactions.
b. nature of any future transactions planned between the parties and the terms involved.
c. dollar amount of the transactions for each of the periods for which an income state-
ment is presented.
d. amounts due from or to related parties as of the date of each statement of financial
position presented.

91. Events that occur after the December 31, 2021 statement of financial position
date (but before the statement of financial position is issued) and provide additional
evidence about conditions that existed at the statement of financial position date and
affect the realizability of accounts receivable should be
a. discussed only in the Management commentary section of the annual report.
b. disclosed only in the Notes to the Financial Statements.
c. used to record an adjustment to Bad Debt Expense for the year ending December
31, 2021.
d. used to record an adjustment directly to the Retained Earnings account

92. Which of the following subsequent events would generally require disclosure,
but no adjustment of the financial statements?
a. Retirement of the company president
b. Settlement of litigation when the event that gave rise to the litigation occurred
prior to the statement of financial position date.
c. Employee strikes
d. Issue of a large amount of ordinary shares.

93. Which of the following will lead to finance lease classification?

a. Transfer of ownership

b. Bargain purchase option

c. Lease term is at least 75% of the leased asset’s useful life

d. Present value of minimum lease payments is at least 90% of the fair value of the
leased asset

e. any of these

94. A lessee under a finance lease recognizes the leased asset and the corresponding
finance lease liability at the
a. Fair value of leased property
b. Present value of minimum lease payments
c. lower of a and b
d. higher of a and b
95. Minimum lease payments (MLP) exclude which of the following?
a. Rentals
b. Bargain purchase option
c. Executory costs and contingent rents
d. Guaranteed residual value

96. The discount rate used in accounting for finance leases is the (assume all of the
following are determinable)
a. interest rate implicit in the lease

b. lessee’s incremental borrowing rate of interest

c. lease contract stated interest rate

d. interest rate on government bonds

97. Initial direct costs incurred on leases are

a. expensed immediately.
b. capitalized.

c. generally expensed immediately except those incurred by lessors under sales type
leases which are capitalized.

d. generally capitalized except those incurred by lessors under sales type leases which
are expensed immediately.

98. When the lease qualifies as a finance lease under the “major part of the economic life”
criterion, the leased asset is depreciated
a. over its useful life
b. over the lease term
c. over the shorter of a and b
d. not depreciated

99. A lessor’s gross investment in a finance lease is computed as

a. minimum lease payments plus unguaranteed residual value

b. present value of (a)

c. difference between (a) and (b)

d. sum of (a) and (b)

100. Farr, Inc. is a multidivisional corporation which has both intersegment sales and
sales to unaffiliated customers. Farr should report segment financial information for
each division meeting which of the following criteria?
a. Segment profit or loss is 10% or more of consolidated profit or loss.
b. Segment profit or loss is 10% or more of combined profit or loss of all company
segments.
c. Segment revenue is 10% or more of combined revenue of all the company
segments.
d. Segment revenue is 10% or more of consolidated revenue.
101. The following information pertains to Nixon Corp. and its divisions for the year
ended December 31, 2021.
Sales to unaffiliated customers $2,500,000
 Income Statement and Related Information 4 - 15

Intersegment sales of products similar to those sold to

unaffiliated customers 750,000
Interest earned on loans to other operating segments 50,000
Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon
has a reportable segment if that segment's revenue exceeds
a. $330,000.
b. $325,000.
c. $255,000.
d. $250,000

102. The date on which to measure the compensation element in a share option
granted to a corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.

103. Compensation expense resulting from a compensatory share option plan is

generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.

104. The date on which total compensation expense is computed in a share option plan
is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
d. that the market price exceeds the option price.

105. How should earned but unbilled revenues at the financial statement date on a
long-term construction contract be disclosed if the percentage-of-completion method
of revenue recognition is used?
a. As construction in process in the current asset section of the statement of financial
position.
b. As construction in process in the noncurrent asset section of the statement of
financial position.
c. As a receivable in the noncurrent asset section of the statement of financial
position.
d. In a note to the financial statements until the customer is formally billed for the
portion of work completed.

106. Which of the following are temporary differences that are normally classified as
expenses or losses that are deductible after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.

107. Which of the following is a temporary difference classified as a revenue or gain

that is taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
 c. Sales accounted for on the accrual basis for financial reporting purposes and on the
installment (cash) basis for tax purposes.
d. Interest received on government obligations.

108. In January 2012, Finley Corporation, a newly formed company, issued 10,000
shares of its $10 par ordinary shares for $15 per share. On July 1, 2012, Finley
Corporation reacquired 1,000 shares of its outstanding shares for $12 per share. The
acquisition of these treasury shares
a. decreased total shareholders' equity.
b. increased total shareholders' equity.
c. did not change total shareholders' equity.
d. decreased the number of issued shares

109. Treasury shares are

a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.

110. Hiro Corp. issues shares which bear the ultimate risks of loss and receive the
benefit of success. These shares are not guaranteed dividends nor assets upon
dissolution. These shares are considered
Ordinary Preference
a. Yes Yes
b. Yes No
c. No Yes
d. No No

111. Categories of equity include all of the following except

a. Non-controlling interest.
b. Accumulated other comprehensive income.
c. Liquidating dividends.
d. Treasury shares.

112. It is group of assets to be disposed of by sale or otherwise, together as a group

in a single transaction, and liabilities directly associated with those assets that will be
transferred in the transaction.
a. Disposal group
b. Discontinued operation
c. Noncurrent asset
d. Cash generating unit

113. Which criterion does not have to be met in order for an operation to be
classified as discontinued?
a. The operation shall represent a separate major line of business or geographical area.
b. The operation is part of a single plan to dispose of a separate major line of business or
geographical area.
c. The operation is a subsidiary acquired exclusively with a view to resale.
d. The operation must be sold within three months after the end of reporting period.

114. What is the presentation of the results from discontinued operation in the
income statement?
 Income Statement and Related Information 4 - 17

a. The entity shall disclose a single amount on the face of the income statement below the
income from continuing operations.
b. The amounts from discontinued operations shall be broken down over each category of
revenue and expense.
c. Discontinued operations shall be shown as a movement on retained earnings.
d. Discontinued operations shall be shown as a line item after gross income with the related
tax being shown as part of income tax expense.

115. Exploration and evaluation expenditures are incurred

a. When searching for an area that may warrant detailed exploration even though the entity
has not yet obtained the legal rights to explore a specific area.
b. When the legal right to explore a specific area has been obtained but the technical
feasibility and commercial viability of extracting a mineral resource are not yet demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are
being made.
d. In extracting mineral resource and processing the resource to make it marketable or
transportable.

116. The residual interest in a corporation belongs to the

a. management.
b. creditors.
c. ordinary shareholders.
d. preference shareholders.

117. The pre-emptive right of an ordinary shareholder is the right to

a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preference shareholders.
d. exclude preference shareholders from voting rights.

118. The pre-emptive right enables a shareholder to

a. share proportionately in any new issues of shares of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell ordinary shares back to the corporation at the option of the shareholder.
d. receive the same amount of dividends on a percentage basis as the preference
shareholders.

119. Special characteristics of the corporate form that affect accounting include the
a. influence of corporate law.
b. use of the share system.
c. development of a variety of ownership interests.
d. All of the above are correct.

120. Which dividends do not reduce equity?

a. Cash dividends
b. Share dividends
c. Property dividends
d. Liquidating dividends

A. Listed below are several qualitative characteristics, accounting principles

and assumptions. Match the letter of each with the appropriate phrase that states
its application. (Items a through k may be used more than once or not at all.)
 a. Economic entity assumption g. Expense recognition principle
b. Going concern assumption h. Full disclosure principle
c. Monetary unit assumption i. Relevance
d. Periodicity assumption j. Faithful representation
e. Cost principle k. Comparability
f. Revenue recognition principle
C 1.Stable-dollar assumption (do not use historical cost principle).
F 2.It is probable that future economic benefits will flow to the company and it is possible to
reliably measure the amount.
J 3.Presentation of error-free information.
D 4.Yearly financial reports.
G 5.Recording annual depreciation.
C 6.Useful standard measuring unit for business transactions.
H 7.Notes as part of necessary information to a fair presentation.
A 8.Affairs of the business distinguished from those of its owners.
B 9.Business enterprise assumed to have a long life.
E 10.Valuing assets at amounts originally paid for them.
K 11. Application of the same accounting principles as in the preceding year.
H 12. Summarizing significant accounting policies.
I 13. Presentation of timely information with predictive and feedback value.

B. Below is a list of items. Classify each into one of the following statement of
financial position categories:
a. Cash c. Short-term Investments
b. Receivables d. Other

d 1.Compensating balances held in long-term borrowing arrangements

a 2.Savings account
c 3. Money market funds
a 4. Checking account
_d 5. Postage stamps
_c 6. Treasury bills maturing in six months
_b 7. Post-dated checks from customers
d 8. Certificate of deposit maturing in five years
_c 9. Ordinary shares of another company (to be sold by December 31, this year)
_a 10. Change fund

C. Consider each of the items below. Place the proper letter in the blank space
provided to indicate the nature of the account or accounts to be debited when
recording each transaction using the preferred accounting treatment. Prepayments
should be recorded in balance sheet accounts. Disregard income tax considerations
unless instructed otherwise.

a. asset(s) only
b. accumulated depreciation only
c. expense only
d. asset(s) and expense
e. some other account or combination of accounts

A 1. A motor in one of North Company’s trucks was overhauled at a cost of $600. It is

expected that this will extend the life of the truck for two years.

A 2. Machinery which had originally cost $130,000 was rearranged at a cost of $450,
including installation, in order to improve production.
 Income Statement and Related Information 4 - 19

A 3. Orlando Company recently purchased land and two buildings for a total cost of
$35,000, and entered the purchase on the books. The $1,200 cost of razing the smaller
building, which has an appraisal value of $6,200, is recorded.

E 4. Jantzen Company traded its old machine with a carrying amount of $3,000 plus cash
of $7,000 for a new one which had a fair value of $9,000.

A 5. Jim Parra and Mary Lawson, maintenance repair workers, spent five days in unloading
and setting up a new $6,000 precision machine in the plant. The wages earned in
this five-day period, $480, are recorded.

A 6. On June 1, the Milton Hotel installed a sprinkler system throughout the building at a
cost of $13,000. As a result the insurance rate was decreased by 40%.

_A 7. An improvement, which extended the life but not the usefulness of the asset, cost
$6,000.

A 8. The attic of the administration building was finished at a cost of $3,000 to provide an
additional office.

E 9. In March, the Lyon Theatre bought projection equipment on the installment basis. The
contract price was $23,610, payable $5,610 down, and $2,250 a month for the
next eight months. The cash price for this equipment was $22,530.

D 10. Lambert Company recorded the first year’s interest on 6% $100,000 ten-year
bonds sold a year ago at 94. The bonds were sold in order to finance the
construction of a hydroelectric plant. Six months after the sale of the bonds, the
construction of the hydroelectric plant was completed and operations were begun.
(Only cash interest, and not discount amortization, is to be considered.

D. Listed below is a selection of accounts found in the general ledger of

Marshall Corporation as of December 31, 2021:List those accounts that should be
classified as intangible assets.

Accounts receivable Research & development costs

Goodwill Internet domain name
Organization costs Initial operating loss
Prepaid insurance Non-competition agreement
Radio broadcasting rights Customer list
Notes receivable Video copyrights
Trade name

E. Terms related to long-term debt.

Place the letter of the best matching phrase before each word.

K 1. Indenture L 6.Times Interest Earned Ratio

G 2.Serial Bonds O 7.Mortgage

C 3.Bonds Issued at Par F 8.Premium on Bonds

I 4.Carrying Value H 9.Reacquisition Price

 B 5.Nominal Rate D 10. Market Rate

F. Permanent and temporary differences.

Listed below are items that are treated differently for accounting purposes than they are for
tax purposes. Indicate whether the items are permanent differences or temporary differences.
For temporary differences, indicate whether they will create deferred tax assets or deferred
tax liabilities.
1. Investments accounted for under the equity method. temporary difference – deferred
tax liabilities
2. Advance rental receipts. temporary difference – deferred tax asset
3. Fine for polluting. Permanent difference
4. Estimated future warranty costs. . temporary difference – deferred tax asset
5. Excess of contributions over pension expense. temporary difference – deferred tax
liabilities
6. Expenses incurred in obtaining tax-exempt income. Permanent difference
7. Litigation accruals. Permanent difference
8. Excess tax depreciation over accounting depreciation. temporary difference – deferred
tax liabilities
9. Long-term construction contracts. temporary difference – deferred tax liabilities
10. Percentage depletion of natural resources in excess of their cost. Permanent difference

G. Matching disclosures to situations.

In the blank to the left of each question, fill in the letter from the following list which best
describes the presentation of the item on the financial statements of Helton Corporation for
2021.
a. Change in estimate
b. Prior period adjustment (not due to change in principle)
c. Retrospective type accounting change with note disclosure
d. None of the above

c 1. In 2021, the company changed its method of recognizing income from the cost-
recovery method to the percentage-of-completion method.

a 2. At the end of 2021, an audit revealed that the corporation's allowance for doubtful
accounts was too large and should be reduced to 2%. When the audit was made
in 2020, the allowance seemed appropriate.

b 3. Depreciation on a truck, acquired in 2018, was understated because the useful life had
been overestimated. The understatement had been made in order to show higher
net income in 2019 and 2020.

c 4. The company switched from an average-cost to a FIFO inventory valuation method

during the current year.

a 5. In the current year, the company decides to change from expensing certain costs to
capitalizing these costs, due to a change in the period benefited.

d 6. During 2021, a long-term bond with a carrying value of P3,600,000 was retired at a
cost of P4,100,000.
 Income Statement and Related Information 4 - 21

a 7. After negotiations with the taxing authority, income taxes for 2019 were established at
P42,900. They were originally estimated to be P28,600.

d 8. In 2021, the company incurred interest expense of P29,000 on a 20-year bond issue.

b 9. In computing the depreciation in 2019 for equipment, an error was made which
overstated income in that year P75,000. The error was discovered in 2021.

c 10. In 2021, the company changed its method of depreciating plant assets from the
double-declining balance method to the straight-line method.