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Financial Statement Presentation & Income Statement: MCQs, Study notes of Accounting

Far Eastern University (FEU)Accounting

A comprehensive set of multiple-choice questions and answers covering key concepts in financial statement presentation and income statement analysis. It provides a valuable resource for students and professionals seeking to test their understanding of fundamental accounting principles and practices. The questions cover a wide range of topics, including materiality, qualitative characteristics, measurement bases, and the components of financial statements. The answers are provided with explanations, enhancing the learning experience.

Typology: Study notes

2023/2024

Uploaded on 04/02/2025

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CFAS

SUMMATIVE: Financial Statement presentation

Question 1

Which statement about materiality is NOT true?

- The relevance of information is NOT affected by its

nature and materiality

Question 2

The consistency standard requires that...

- The effect of the accounting changes upon income should

be property disclosed.

Question 3

The economic substance of a transaction shall prevail over the

legal form...

- Substance over form

Question 4

What are qualitative characteristics of financial statements?

- They are attributes that make the information provided

in the financial statements useful to users.

Question 5

The overriding qualitative characteristic of an accounting

information is...

- Decision usefulness

Question 6

Verifiability implies...

- Consensus

Question 7

When an entity started placing its quarterly financial statements

on its web page, thereby reducing by ten days the time to get

information to investors and creditors, the qualitative concept

involved is...

- Timeliness

Question 8

When an entity changed the inventory valuation method, which

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SUMMATIVE: Financial Statement presentation Question 1 Which statement about materiality is NOT true?

The relevance of information is NOT affected by its nature and materiality Question 2 The consistency standard requires that...
The effect of the accounting changes upon income should be property disclosed. Question 3 The economic substance of a transaction shall prevail over the legal form...
Substance over form Question 4 What are qualitative characteristics of financial statements?
They are attributes that make the information provided in the financial statements useful to users. Question 5 The overriding qualitative characteristic of an accounting information is...
Decision usefulness Question 6 Verifiability implies...
Consensus Question 7 When an entity started placing its quarterly financial statements on its web page, thereby reducing by ten days the time to get information to investors and creditors, the qualitative concept involved is...
Timeliness Question 8 When an entity changed the inventory valuation method, which

characteristic is jeopardizes by this change?

Consistency Question 9 Recognizing expected loss immediately but deferring expected gain is an example of:
Conservatism Question 10 A reporting entity is...
Necessarily an economic entity. (Accdg. To Ms. Carmela)
Entity that is required or chooses to prepare financial statements (Accdg. To Video PPT) Question 11 These contain information in addition to those presented in the statement of financial position, statement of comprehensive income, separate income statement, statement of changes in equity and statement of cash flows. They provide narrative description and disaggregation of items presented in those statements.
Notes Question 12 This comprises items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by IFRS.
Other Comprehensive Income Question 13 The components of other comprehensive income include: I. changes in revaluation surplus II. Actuarial gains and losses on defined benefit plans III. gains and losses arising from translating the financial statements of a foreign operation IV. gains and losses on remeasuring available-for-sale financial assets V. the effective portion of gains and losses on hedging instruments in a cash flow hedge.
I to V Question 14 Total income less expenses, excluding the components of other

SUMMATIVE: Introduction and Overview Question 1 All of the following describe accounting:

A universal language of business.
A service entity.
An information system.
EXCEPT: an exact science Question 2 Which defines the overall objective of accounting?
To provide quantitative financial information about an entity that is useful in making economic decision. Question 3 What is the body authorized by law to promulgate rules and regulations affecting the practice of accountancy profession in the Philippines?
Board of Accountancy Question 4 CPAs are licensed by…
National government Question 5 What is the accounting standard setting body in the Philippines at the present time?
Financial Reporting Standards Council Question 6 What is the primary service of CPAs in public practice?
Financial Audit Question 7 Accountants employed entities in various capacity as accounting staff, chief accountant or controller are said to be engaged in
Private accounting Question 8 The Continuing Professional Development is required for
Both renewal of CPA license and accreditation to practice the accountancy profession Question 9 The standards published by IASB are called...
International Financial Reporting Standards

Question 10 Financial Accounting is concerned with...

General purpose reports on financial position and financial performance of an entity. Question 11 What is the authoritative status of the Conceptual Framework?
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. Question 12 The FRSC recognizes that in a limited number of cases there may be a conflict between the Conceptual Framework and a Philippine Financial Reporting Standard. In those cases where there is a conflict,
the requirements of the Philippine Financial Reporting Standard prevail over those of the Conceptual Framework Question 13 The primary users of financial statements under the Conceptual Framework include
I. Existing and potential investors
III. Lenders and other creditors Question 14 They are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
Lenders Question 15 They are interested in information that enables them to determine whether amounts owing to them will be paid when due. They are likely to be interested in an entity over a shorter period than lenders unless they are dependent upon the continuation of the entity as a major customer.

Question 22 The major financial statements include all:

Statement of Comprehensive Income/Income Statement
Statement of Financial Position
Statement of Cash Flow
Statement of Changes in Owner’s Equity
Notes to the Financial Statement
EXCEPT: Statement of changes in financial position Question 23 Financial statements must be prepared at least…
annually Question 24 The framework sets out the concepts that underlie the preparation and presentation of financial statements for…
external users Question 25 The Conceptual Framework deals with: I. the objectives of the financial statements II. the qualitative characteristics that determine the usefulness of the information in the financial statements III. the standards for definition, recognition and measurement of the elements from which the financial statements are created. IV. the concepts of capital and capital maintenance Question 26 The Accounting Framework is concerned with special purpose financial statements including the consolidated financial statements.
This statement is false (should be general purpose financial statements) Question 27 The underlying assumptions in the PFRS are: I. Accrual II. Going concern V. Monetary Unit Question 28 Under this underlying assumption, the effects of transactions and other events are recognized when they occur regardless of cash inflow or outflow and are recorded in the financial

statements on specific periods in which they relate to.

Accrual basis Question 29 The qualitative characteristics are the attributes that make the information provided in the financial statements useful to users. The principal qualitative characteristics are: II. Relevance III. Reliability Question 30 Under this underlying assumption, financial statements are normally prepared on the assumption that an entity will continue in operation with no intention to stop its operation nor the need to liquidate.
Going concern Question 31 The qualitative characteristic that describes that users are assumed to have a reasonable knowledge of business and economic activities and accounting and the willingness to study the information with reasonable diligence is…
Understandability Question 32 The qualitative characteristic that describes that information has confirmative and predictive value is…
Relevance Question 33 Which of the following is not a qualitative characteristic?
Completeness Question 34 Which of the following are underlying assumptions of the financial statements.
accrual basis and going concern Question 35 These broad classes are termed the elements of the financial statements. The elements directly related to the measurement of the financial position are: V. assets II. liabilities

predictive and confirmatory value. Question 43 If an SME that uses the PFRS for SME in the current year breaches the ceiling of the size criteria at the end of the current year, the entity is …
required to transition to full PFRS in the next year if the event that caused the change is significant and continuing. Question 44 Which is a purpose of the conceptual framework?
To assist IASB in the standard setting process.
To provide definition of terms and concepts.
To assist CPA’s in selecting among alternative accounting standards.
NOT a purpose: to provide specific guidelines Question 45 The objective of financial reporting in the conceptual framework for financial reporting:
is the foundation for the framework. SUMMATIVE: The Financial Statements Question 1 Which is not within the definition of an asset?
The entity has the right to the economic resource that has the potential to produce economic benefit. Question 2 Which of the following criteria need not be satisfied for a liability to exist?
The settlement is expected to result in an outflow of economic benefit. Question 3 The primary measurement basis in recording is ...
Historical cost Question 4 Gains on unsold assets are referred to as...

unrealized Question 5 When should an expenditure be recorded as an asset rather than an expense?
When there is a right that has a potential to produce economic benefit. Question 6 Which is not a component of other comprehensive income?
Treasury shares at cost Question 7 How should the exchange gain or loss resulting from foreign currency transaction be accounted for?
Component of income from continuing operations Question 8 The accounting equation must remain in balance...
Throughout each step in the accounting cycle. Question 9 A simple journal entry...
Consists of one debit and one credit. Question 10 Debits...
Increase assets and expenses and decrease liabilities, revenue and equity. Question 11 All of the following are considered appropriate classification, except...
Offsetting asset and liability Question 12 The operating cycle of an entity...
Is the time between the acquisition of materials entering into a process and their realization in cash. Question 13 The income statement reveals...
Net earnings for a period of time

Domicile and legal form of the entity, the country of incorporation and address of the registered office.
A description of the nature of the entity's operations and the principal activities.
EXCEPT: Names and addresses of directors and officers Question 21 Disclosure of information about judgments...
Is mandatory. Question 22 The statement of financial position is useful for analyzing all of the following...
Solvency
Liquidity
Financial flexibility
EXCEPT: Profitability Question 23 The amount of time that is expected to elapse until an asset is realized into cash is referred to as...
Liquidity Question 24 The term net assets represent...
Total assets less total liabilities Question 25 When classifying assets as current and non-current...
Assets are classified as current if reasonably expected to be realized in cash or consumed during the normal operating cycle. Question 26 Assets to be consumed or realized as part of the normal operating cycle are...
Current assets Question 27 Liabilities that an entity expects to settle within the normal operating cycle are classified as...
Current liabilities

Question 28 The primary purpose of a statement of cash flows is to provide information about...

The cash receipts and cash disbursement of an entity during a period. Question 29 Under IFRS, the dividends received from share investments can be classified as...
Either an operating activity or investing activity. Question 30 Which of the following should be disclosed in the statement of cash flows using indirect method?
Interest paid
Income taxes paid
Dividends paid on preferred shares.
NOT: Cash flow per share SUMMATIVE: Financial statement presentation and Income Statement Question 1 The measurement bases include...
Historical cost and current value Question 2 Which measurement attribute is currently used?
Fair value
Historical Cost
Current Value
Realizable Value
Present value
NOT currently used: Inflation adjusted cost Question 3 Which term best describes the amount that represents the immediate purchase cost of an asset?
Current cost Question 4 This is used as a measure of performance or as the basis for other measures, such as return on investment or earnings per share.

The total of income less expenses, excluding the components of other comprehensive income is called...

net income or loss Question 12 An entity shall retain the presentation and classification of items in the financial statements from one period to the next. This is referred to as ...
Consistency Question 13 Financial statements shall presented at least..
annually Question 14 As a minimum, the face of the income statement shall include line items that present the following amounts for the period...
finance cost
share in the profit or loss of associates and joint venture accounted for as costing method
revenue
EXCEPT: director’s subscription Question 15 The elements directly related to the measurement of financial performance are...
Revenue and expense Question 16 Which statement in relation to income is true?
Income encompasses both revenue and gain. Question 17 Revenue may result from...
A decrease in liability from primary operations. Question 18 What is the primary distinction between revenue and gain?
The nature of the activity that gives rise to the transaction. Question 19 It is the process of including an item in the financial statements

if it meets the definition of the elements of the financial statements.

Recognition Question 20 An item is recognized in the financial statements if...
It meets the definition of assets, liabilities, equity, revenue and expense. Question 21 Generally, revenue is recognized...
at the point of sale Question 22 Which of the following is the basis for recognizing revenue?
Performance of service
Passage of time
Completion of percentage of a project
LEAST basis: upon signing of contract Question 23 Revenue is recognized when...
If the transaction will create an accounts receivable. Question 24 The term recognized is synonymous with the term...
Recorded Question 25 When should an expenditure be recorded as an asset rather than an expense?
When there is a right that has the potential to produce economic benefit. Question 26 Financial capital is defined as...
Net assets in monetary terms. Question 27 Which concept is applied to net income and other comprehensive income?
financial capital

10, the company sells two Shelby four-barrel carburetors. Immediately prior to this sale, the perpetual inventory records indicate three of these carburetors on hand, as follows: Date Quantity Purchased Unit Cost Units on Hand Total Cost Feb 4 1 P 220 1 P 220 Mar 2 2 235 3 690 With respect to the sale on March 10, What is the cost of goods sold using average-cost-method?

460
Perpetual Inventory System – updates inventory for each purchase
220 (1 unit from Feb 4) + 690 ( 2 units from Mar 2) = 690/ = 230 per unit. Hence, 460 of COGS
Average-cost-method = (Cost x Unit) + (Cost x Unit) = Total/ Total Unit Question 3 Ace Auto Supply uses a perpetual inventory system. On March 10, the company sells two Shelby four-barrel carburetors. Immediately prior to this sale, the perpetual inventory records indicate three of these carburetors on hand, as follows: Date Quantity Purchased Unit Cost Units on Hand Total Cost Feb 4 1 P 220 1 P 220 Mar 2 2 235 3 690 With respect to the sale on March 10, What is the cost of goods sold using FIFO method?
455
220 (1 unit from Feb 4) + 235 (1 unit from Mar 2) = 455
FIFO (First In, First Out) – Feb 4 units will be the first to go (Note: LIFO is not allowed in PFRS) Question 4 T-shirt City uses a periodic inventory system. During the first year of operations, the company made four purchases of a particular product. Each purchase was for 500 units and the prices paid were P 9 per unit in the first purchase, P 10 per unit in the second purchase, P 12 per unit in the third purchase and P 13 per unit in the fourth purchase. At year-end, 650 of these units remain unsold. Compute for the cost of goods sold under the FIFO and LIFO method respectively.
P 13,700 (FIFO) and P 16,000 (LIFO)
Total Units: 2,000, Units Sold: 1,350, Remaining: 650
FIFO Solution: (500xP9)+(500xP10)+(350xP12) = 13,

LIFO Solution: (500xP13)+(500xP12)+(350xP10) = 16, Question 5 Trent Department Store uses a perpetual inventory system but adjusts its inventory records at year-end to reflect the results of a complete physical inventory. In the physical inventory taken at the ends of 2006 and 2007, Trent's employees failed to count the merchandise in the store's window displays. The cost of this merchandise amounted to P 13,000 at the end of 2006 and P 19,000 at the end of 2007. As a result of these errors, the cost of goods sold for 2007 will be:
Overstated by P 6,
13,000 (2006 year-end) – 19,000 (2007 year-end) = -6, hence, overstated in 2007 Question 6 In July 2007, the accountant of LBJ Imports is in the process of preparing financial statements for the quarter ended June 30,

The physical inventory, however, was last taken on June 5, and the accountant must establish the approximate cost at June 30 from the following data: Physical inventory, June 5, 2007 P 900, Transactions for the period June 5 to June 30: Sales 700, Purchases 400, The gross profit on sales has consistently averaged 40 percent of sales. Using the gross profit method, compute the approximate inventory cost at June 30, 2007:

880,
June 5 Inventory = 900,000. Sales = 700,000. Purchases = 400,000. Gross Profit = 700,000x0.4 = 280,
COGS = Sales – Gross Profit = 700,000-280,
Ending Inventory = Beginning Inventory + Purchases – COGS = 900,000 + 400,000 + 420 ,000 = 880, Question 7 Allied Products maintains a large inventory. The company had used the LIFO inventory method for many years, during which the purchase costs of its products have risen substantially.
If Allied were to let its inventory fall below normal levels, the company gross profit rate would decline. (will result in lower COGS = increases gross profit)
Allied would have paid less income taxes in the past years if

Financial Statement Presentation & Income Statement: MCQs, Study notes of Accounting

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