wrvictv of Accounting 27

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Accounting involves the activities of identifying, measuring, and
communicating information that is useful in making economic
decisions.
Recognition refers to the process of incorporating the effects of an
accountable event in the financial statements through a
journal entry,
External events are events that involve an entity and another
external party. It includes (a) exchanges, (b) non-reciprocal
transfers, and (c) external events other than transfers.
Internal events are events that do not involve an external party. It
includes (a) production and (b) casualties.
Measuring is the accounting process of assigning numbers,
commonly in monetary terms, to the economic transactions and
events. Several measurement bases are used in preparing financial
statements.
Financial accounting is the branch of accounting that focuses on
the general purpose financial statements.
General purpose financial statements are those that cater to
the

common needs of a wide range of external users.

External tisers are those who do not have the authority to
demand financial reports tailored to their specific needs, i.e.,
those who are not involved in managing the entity.
The four sectors in the practice of accountancy are: (a) public
practice, (b) commerce and industry, (c) academe, and (d)
government.
The accounting standards used in the Philippines are the
PFRSs, which are based on the IFRSs. The PFRSs comprise
the

following: (1) PFRSs, (2) PASS, and (3) Interpretations.

 28
The Financial Reporting Standards Council (FRSC) is the
official accounting standard setting body in the Philippines.
Financial reporting standards continuously change primarily in
res onse to users' needs.
PROBLEMS
PROBLEM 1: TRUE RFALSE
1. Only •the events and transactions that
affect an entity's assets liabilities,
equity, income or expense' are
recognized in the books of accounts.
2. Identifying is the process in accounting
that involves assigning values to the
economic transactions or events.
3. The focus of financial accounting is the
preparation of general
purpose financial statements.
4. General purpose financial statements are
those statements that cater to all the
needs of all users.
5. Financial statements are only one of the
many sources of information users need when
making economic decisions.
6. All information presented in the financial
statements is sourced from the entity's
accounting records.
7! A fiscal year period that starts on May 1
should end on May 31 of the following year.
8. Bookkeeping and accounting are the same.
9. Once promulgated, accounting standards are
continually changed in response to changes
in users' needs.
10. The responsibility of selecting
appropriate accounting policies mainly
rests with the entity's accountant.

PROBLEM 2: MULTIPLE CHOICE

 Accounting
1. It is the process of identifying, measuring,
and communicating economic information to,
permit informed judgments and decisions by
users of the information.
a. Accounting c. Taxation
b. Auditing d. Finance

2. 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 of the entity's own equity
instrument.
Overview of
29

exchange of a note payable for an account payable.

borrowing money from a bank.

3. Il of the following are events considered as nonreciprocal ansfer,

except
a. declaration of cash dividends
declaration of stock
dividends payment of
accounts payable
'd. imposition of fines
I. theft
4. side from historical cost, which of the following
{measurement bases is also currently used in financial
reporting?
' Fair value Current cost Replacement
cost
a. Yes No Yes
b. Yes Yes Yes
c. Yes No No
 30
d. No Yes Yes
(Al A - Adapted)
5. Which of the following statements conforms to the realization
concept?
a. Equipment depreciation was assigned to a production •
department and then to product unit costs.
b. Depreciated equipment was sold in exchange for a note

receivable.
c. Cash was collected on accounts receivable.
d. Product unit costs were assigned to cost of goods sold
when the units were sold.
(NCPA)

Which of the following is an application of the principle of systematic and

rational allocation?
a. Amortization of intangible assets
b. Sales commissions

c. Research and development costs

d. Officers' salaries
(AICPA)

7. Reporting inventory at the lower of cost or net realizable

is a departure from the accounting c. principle
Conservatism.of a. Historical cost.
d. Full disclosure,
b. Consistency.
(AICPA)

8. The usefulness of providing information in financial

statements is subject to the constraint of a. Consistency. c.
Reliability.
b. Cost-benefit. d. Representational faithfulness.
 Accounting
(AICPA)

9. The primary objective of financial reporting is based on

a. reporting on management's stewardship.
b. the need for conservatism.
c. the needs of the users of the information.
d. generally accepted accounting principles.

10. During a period when an entity is under the direction of a

particular management, its financial statements
will directly provide information about
a. both entity performance and management performance,
b. management performance but not directly entity performance.
c. entity performance but not directly management performance.
d. neither entity performance nor management
performance
(AICPA -Adapted)
 32
Opehiew of

PROBLEM 3: MULTIPLE CHOICE

1. *The basic purpose of accounting is
a. to provide direct information about an entity's
management stewardship during a certain period.
b. to provide information about economic activities intended to
be useful in making economic decisions.
c. to report on 'the. entity's«ompliance with relevant laws
and regulations.
d. All of these

2. Which of the following Statements is correct?

a. Accounting provides quantitative information only.
e
b. The only acceptable measurement basis in accounting is
historical cost.
c. Qualitative information can be found only in the notes to
the financial statements.
d. Accounting is cohÉideréd an art because it requires the
use of creative skills and judgment.

Which of the following is considered an internal user of

Entity A's financial reports?
a. Mr. X, a member of Entity A's board of directors, uses
financial reports to make decisions regarding the
financial and operational affairs:of Entity A.
b. Entity B, a bank, Entity A to submit audited financial
statements in conjunction to a loan being applied for by
Entity A.
c. Mr. I is deciding whether to invest in Entity A. Mr. I uses
Entity A's financial statements in making its investment
analysis.
d. Ms. S, a shareholder of Entity A, is deciding whether to
hold or sell her shareholdings in Entity A. Ms. S uses
Entity A's financial statements in making its "hold or sell"
analysis.
 Accounting 33

4. The following relate to financial

reporting. Choose the statement(s).

1. The only indicator for an entity's ability

to generate
favorable cash flows is information
based on previous cash receipts and
payments,
Il. Since financial statements are
historical, they are of little use in
making decisions about the future.
Ill. Investment and credit decisions are
often based, at least in
part, on evaluations of the past

performance of an entity. The primary

focus of financial reporting is the
information about an entity's economic
resources.
V. Financial accounting is based on the
presumption that all statement users
need the same information.
VI, Financial accounting is expressly
designed to measure directly the
value of a business enterprise.

VII. Financial statements are the only

source of information users need when
making economic decisions.

a. 1, 111, V and Vll c. 111, V and Vll

b. 111, IV, V and Vll d. 111 and V
(RPCPA - Adapted)

5. All the components of a complete set of

financial statement are
 34

interrelated. This concept most closely

relates to
a. Concept of Articulation. c. Glowing
concern.
b. Entity concept. c. Time period.

6. Which of the following statements is

correct?
a. All quantitative information is also
financial in nature.
b. The economic activity that involves
using current inputs to increase the
stock of resources available for output
is called savings.
c. The accounting process of assigning peso
amounts. to economic transactions and
events is measuring.
d. The economic activity of using the final
output of the production process is
called income distribution.
Ovcrview of

7. Which of the following statements is incorrect regarding

accounting concepts?
a. Under the Cost-benefit concept, the cost of processing and
communicating information should exceed the benefits
derived from it.
Under the Accrual Basis of accounting, income is
recognized when earned and expenses are recognized when
incurred, not when cash is received and disbursed.
c. Under the Going concern concept, the entity is assumed to
carry on its operations for an indefinite period of time.
d. Under the Separate entity Concept, the business is treated
separately from its owners.
 Accounting 35
e. Under the Periodicity concept, the life of the business is
divided into series of reporting periods.

8. Which of the followifig statements is incorrect?

a. Financial reporting standards may at times be influenced by
legal, political, business and social environments.

b. General purpose financial statements are prepared primarily

for the use of external users.
c. The PFRSs are issued by the Financial Reporting Standards
Council.
d. General-purpose financial statements must be prepared by a
certified public accountant.

Mr. John Doe, CPA, is a professor in a university where he

teaches mainly home economics, music and physical education.
Those subjects .require that the teacher must be awesome. Mr.
Doe IS also frequently invited as a judge in beauty pageants and
singing contests and as a referee in mixed martial arts
competitions. Mr. Doe is considered to be

practicing accountancy in which of the following sectors?

a. Academe c. Commerce and industry
b. Public accounting d. None of these

of accounting principles is most

10. The proper application dependent upon the c.
auditor.
a. accountant. d. chief executive officer.
b. management.

PROBLEM 4: FOR CLASSROOM DISCUSSION

Events
 36
1. Entity A buys bananas and converts them into banana chips.
O The conversion of bananas into banana chips is a (an)
t
a. non-accountable event c. non-reciprocal transfer d.
internal event
5 b. external event
.
Valuation by fact or opinion
2. Which of the following is considered valued by fact rather than
by opinion?
e. Depreciation c. Discount on share capital
f. Cost of goods sold d. Retained earnings
Measurement Bases
3. Which of the following is not one of the several measurement
6
bases used in accounting?

a. historical cost c. present value

b. fair value d. all of these are used

Accounting Concepts
4. Entity A is owned by Mr. X and Ms. Y. Which of the following
transactions does not violate the separate entity concept and
therefore is appropriately recorded in the accounting records of
Entity A?
a. Mr. X purchases groceries for his home consumption.

b. Mr. X gives Ms. Y chocolate and flowers on Valentine's Day,

c. Ms. Y provides capital to Entity A.
d. Ms. Y provides capital to Entity B, another business entity.
erview of

Mr. A is assessing the ability of Entity A to generate future cash and

cash equivalents. In making the assessment, Mr. A uses not only the
statement of cash flows but also the other components of a complete
set of financial statements. This is because of which of the following
9.
concepts?
a. Going concernc. Intercalation
b. Time period d. Articulation
 Accounting 37
Entity A acqUires a stapler. Instead of recognizing the Cost of the
stapler as an asset to be subsequently depreciated, Entity A
immediately charges it as expense. This is an application of which
of the following concepts?
a. Prudence c. Cost-benefit
b. Materiality d. b and c

Fommon branches of accounting

What type of users' needs is catered by general purpose financial
statements?
a. common needs c. a and b
b. specific needs d. neither a nor b

our sectors in the practice of accountancy

Which of the following is not among the Four Sectors in the practice
of accountancy as enumerated in R.A. 9298 also known as the
"Philippine Accountancy Act of 2004"?
a. Practice in Commerce and Industry
b. Practice in the Government
c. Practice in Education/Academe
d. Practice of Private Accountancy

Accounting standards
' The Philippine Financial Reporting Standards (PFRSs)
comprise:
I. Philippine Financial Reporting Standards
VI. Philippine Accounting Standards
Ill. Interpretations

IV. ' Accounting Practice Statements and Implementation

Guidance
a. 1, 11 and111 c. 1 and 11

b. 1, 11, 111 and1V d. 1 and 111

10. Which of the following statements is incorrect regarding the

PFRSs?
 38
a. The PFRSs are based on the IFRSs.
b. The financial reporting standards used in the Philippines are
the same as those used globally.

c. The PFRSs have higher authority than the PASS and

Interpretations.
d. The PFRSs are accompanied by guidance. The use of such
guidance is sometimes mandatory and sometimes optional.