Multiple-Choice Questions

Chapter 1: Accountancy Profession

1. According to the American Accounting Association (AAA), accounting is:

a) A service activity
b) The process of identifying, measuring, and communicating economic information
c) The art of classifying and summarizing transactions
d) A business activity

2. Which of the following is not a component of accounting?

a) Identifying
b) Measuring
c) Advertising
d) Communicating

3. What is the most common measurement basis used in accounting?

a) Fair value
b) Current cost
c) Historical cost
d) Replacement cost

4. The law regulating the practice of accountancy in the Philippines is:

a) RA No. 9298
b) RA No. 9184
c) RA No. 8282
d) RA No. 7722

5. Which of the following organizations is responsible for preparing and grading the
CPA Examination in the Philippines?
a) Securities and Exchange Commission (SEC)
b) Board of Accountancy (BOA)
c) Bureau of Internal Revenue (BIR)
d) Financial Reporting Standards Council (FRSC)

Chapter 2: Objective of Financial Reporting

6. The primary purpose of financial reporting is to provide information that is:

a) Helpful for taxation
b) Useful in making economic decisions
c) Required by government agencies
d) Used only by accountants
 7. Who are considered the primary users of financial reports?
a) Government and agencies
b) Employees and customers
c) Investors, lenders, and creditors
d) The general public

8. Financial reports do not provide:

a) All possible information needed by every user
b) Information about financial performance
c) Details on economic resources and claims
d) Changes in financial position

9. What does accrual accounting recognize?

a) Transactions only when cash is received
b) Transactions only when cash is paid
c) Transactions when they occur, regardless of cash movement
d) Transactions when invoices are created

10. What does “liquidity” refer to in financial reporting?

a) The ability to generate profit
b) The availability of cash to meet short-term obligations
c) The total assets owned by a business
d) The value of an entity’s brand name

Chapter 3: Qualitative Characteristics of Financial Information

11. The two fundamental qualitative characteristics of financial information are:

a) Relevance and faithful representation
b) Consistency and timeliness
c) Verifiability and understandability
d) Comparability and completeness

12. Predictive value and confirmatory value are aspects of which qualitative
characteristic?
a) Faithful representation
b) Relevance
c) Comparability
d) Verifiability

13. An information that is free from bias satisfies the characteristic of:
a) Prudence
b) Neutrality
 c) Completeness
d) Verifiability

14. The ability to compare financial statements across different companies and time
periods refers to:
a) Faithful representation
b) Consistency
c) Comparability
d) Timeliness

15. Which characteristic ensures that financial information is clear and understandable
to users?
a) Relevance
b) Timeliness
c) Understandability
d) Verifiability

Chapter 4: Financial Statements & Reporting Entity

16. The assumption that a business will continue to operate indefinitely is called:
a) Time period assumption
b) Going concern assumption
c) Monetary unit assumption
d) Accrual basis assumption

17. The monetary unit assumption assumes that financial statements:

a) Are prepared using the most stable currency
b) Include non-monetary assets
c) Should consider inflation adjustments
d) Exclude cash transactions

18. A business is considered separate from its owner under which assumption?
a) Accrual accounting
b) Entity assumption
c) Consistency assumption
d) Going concern assumption

19. The assumption that financial reports cover specific time periods, such as one year,
is known as:
a) Time period assumption
b) Economic entity assumption
c) Cost principle
d) Verifiability assumption
 20. Which of the following is not a financial statement?
a) Income Statement
b) Balance Sheet
c) Statement of Comprehensive Income
d) Tax Return Report

Chapter 5: Recognition and Measurement

21. Which of the following is an element of financial statements?

a) Liabilities
b) Sales
c) Budget
d) Transactions

22. Assets are defined as:

a) Present obligations of the entity
b) Residual interest in the assets of an entity
c) Resources controlled by an entity as a result of past events
d) Inflows of economic benefits

23. Liabilities are classified as:

a) The result of transactions only
b) Present obligations arising from past events
c) Possible future obligations
d) Expenses incurred by a business

24. What is the correct accounting treatment for contingent liabilities?

a) Always recognized
b) Never recognized
c) Recognized only when they are probable and measurable
d) Recognized at the company’s discretion

25. What is the correct formula for calculating equity?

a) Assets + Liabilities
b) Assets - Liabilities
c) Revenue - Expenses
d) Revenue + Liabilities

Chapter 5: Recognition and Measurement (Continued)

26. Which of the following is not a characteristic of an asset?

a) It must generate revenue immediately
b) It is controlled by the entity
 c) It has the potential to produce economic benefits
d) It is the result of past transactions

27. Which financial statement shows the financial position of an entity at a specific
point in time?
a) Income Statement
b) Statement of Cash Flows
c) Statement of Financial Position (Balance Sheet)
d) Statement of Comprehensive Income

28. The matching principle states that:

a) Expenses should be recorded when they are paid
b) Expenses should be recognized in the same period as the related revenues
c) Revenues should be recorded when cash is received
d) Assets should be measured at their original cost

29. What type of income arises from the ordinary course of business?
a) Gains
b) Revenues
c) Other comprehensive income
d) Dividend income

30. What is the definition of liabilities?

a) Residual interest in assets after deducting expenses
b) Future resources to be acquired by an entity
c) Present obligations to transfer economic resources due to past events
d) Expected future profits of an entity

31. Which of the following is not considered an income?

a) Rent revenue
b) Interest income
c) Dividend declared
d) Gain on disposal of assets

32. Which of the following is not a major financial statement?

a) Statement of Financial Position
b) Statement of Changes in Equity
c) Statement of Depreciation
d) Statement of Cash Flows

33. Which type of measurement basis is based on the price paid at the time of
acquisition?
a) Fair value
 b) Historical cost
c) Current cost
d) Value in use

34. The financial statement that reports an entity’s financial performance over a period
of time is the:
a) Balance Sheet
b) Statement of Financial Position
c) Income Statement
d) Statement of Cash Flows

35. When an entity receives cash before providing goods or services, it should record:
a) Unearned revenue (liability)
b) Earned revenue (income)
c) Prepaid expense (asset)
d) Accounts receivable

Conceptual Framework and Accounting Standards (General Questions)

36. Which of the following is not a function of the Financial Reporting Standards
Council (FRSC)?
a) Replacing the Board of Accountancy
b) Setting accounting standards in the Philippines
c) Assisting the Board of Accountancy in its functions
d) Ensuring compliance with international accounting standards

37. The Philippine Financial Reporting Standards (PFRS) are equivalent to:
a) Generally Accepted Accounting Principles (GAAP)
b) International Financial Reporting Standards (IFRS)
c) International Accounting Standards (IAS)
d) US GAAP

38. The International Accounting Standards Board (IASB) replaced which

organization?
a) International Accounting Standards Committee (IASC)
b) Board of Accountancy (BOA)
c) Philippine Financial Reporting Council (PFRC)
d) Financial Reporting Standards Council (FRSC)

39. Which of the following statements about GAAP (Generally Accepted Accounting
Principles) is true?
a) GAAP applies only to private businesses
b) GAAP principles are the same across all countries
 c) GAAP ensures consistency in financial reporting
d) GAAP is set by the Board of Accountancy

40. Which body is responsible for issuing interpretations of PFRS in the Philippines?
a) Board of Accountancy
b) Philippine Interpretation Committee (PIC)
c) Financial Reporting Standards Council (FRSC)
d) International Accounting Standards Board (IASB)

41. Which of the following enhancing qualitative characteristics ensures financial

statements are comparable across different companies?
a) Verifiability
b) Timeliness
c) Comparability
d) Understandability

42. Which of the following statements about faithful representation is correct?

a) It ensures that financial reports are free from all errors
b) It means that reports must be prepared quickly
c) It requires completeness, neutrality, and freedom from error
d) It focuses only on historical cost

43. Which of the following is not part of the elements of financial statements?
a) Income
b) Equity
c) Profitability
d) Liabilities

44. A business that closes down and sells all its assets would violate which assumption?
a) Time period
b) Going concern
c) Monetary unit
d) Historical cost

45. What does the cost-benefit principle state?

a) The benefits of financial reporting should exceed the costs of providing the
information
b) Financial information should always be as detailed as possible
c) Every financial transaction must be recorded
d) The cost of an asset should always be adjusted for inflation

46. A financial statement that shows changes in owners' investment is called:

a) Statement of Financial Position
 b) Statement of Changes in Equity
c) Statement of Comprehensive Income
d) Income Statement

47. Which of the following best describes the prudence principle?

a) Anticipate all gains but defer all losses
b) Anticipate all losses but defer all gains
c) Record gains and losses equally
d) Do not record estimates in financial reports

48. Which of the following situations best demonstrates the principle of neutrality in
financial reporting?
a) A company exaggerates its earnings to attract investors
b) A company prepares financial statements without bias
c) A company reports lower income to reduce tax liabilities
d) A company delays expense recognition to improve financial ratios

49. Which of the following is an example of a contingent liability?

a) Accounts payable
b) Bank loan
c) A lawsuit that may result in payment
d) Unearned revenue

50. What is the purpose of the Conceptual Framework for Financial Reporting?
a) To replace all existing accounting standards
b) To serve as a guide in the preparation and presentation of financial statements
c) To regulate tax computations
d) To define the role of auditors