UNIVERSITY OF SAN CARLOS

CEL 1 REVIEW 2014

CONCEPTUAL FRAMEWOK AND PAS 1 MJL

Conceptual Framework is a summary of the terms and concepts that underlie the preparation and presentation of
financial statements for external users. It is concerned with general purpose financial statements, including
consolidated financial statements. Special purpose financial reports are outside the scope of the Conceptual
Framework.

Purposes:

1. To assist the FRSC in developing accounting standards that will represent Philippine GAAP.
2. To assist preparers of financial statements in applying accounting standards and in dealing with issues not
yet covered by GAAP.
3. To assist the FRSC in its review and adoption of IFRS.
4. To assist users of financial statements in interpreting the information contained in the financial statements.
5. To assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP.
6. To provide information to those interested in the work of the FRSC in the formulation of PFRS.

Authoritative Status: The Conceptual Framework is only a guide. Specific provisions of PAS or PFRS override the
Framework. In the absence of a standard or an interpretation thereof, management may consider the applicability of
the Conceptual Framework in developing and applying an accounting policy that result in information that is
relevant and reliable.

Underlying Assumptions - the basic notions of fundamental premises on which the accounting process is base; also
known as postulates. The only one assumption in the new Conceptual Framework is the Going Concern
assumption. Implicit are the basic assumptions of Accounting Entity, Time Period and Monetary Unit.

Going Concern - in the absence of evidence to the contrary, the accounting entity is viewed as continuing in
operation indefinitely.

Accounting Entity - the entity is separate from the owners, managers and employees who constitute the entity.

Time Period - the indefinite life of an entity should be subdivided into time periods or accounting periods which are
usually of equal length for the purpose of preparing financial reports on financial position, performance and cash
flows.Also known as periodicity.

Monetary Unit - assumes the quantifiability and the stability of the peso.

Scope:
1. Objective of Financial Reporting
2. Qualitative Characteristics of useful financial information
3. Definition, recognition and measurement of the elements from which financial statements are constructed
4. Concepts of capital and capital maintenance

Objective of Financial Reporting

Overall: To provide financial information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity.

Specific:
1. To provide information useful in making decisions about providing resources to the entity
2. To provide information useful in assessing the prospects of future net cash flows to the entity.
3. To provide information about entity resources, claims and changes in resources and claims.

Qualitative Characteristics

Fundamental:

1. Relevance - the capacity of the information to influence a decision.

Ingredients:

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 a) Predictive Value - financial information can be used as an input to processes employed by users to
predict future outcome.
b) Confirmatory Value - financial information can provide feedback about previous evaluations.

2. Faithful Representation- financial reports represent economic phenomena or transactions in words and
numbers.
Ingredients:
a) Completeness - requires that relevant information should be presented in a way that facilitates
understanding and avoids erroneous implication. Adequate/full disclosures.
b) Neutrality - without bias in the preparation and presentation of financial information.
c) Free from error- no errors or omissions in the description of the phenomenon or transaction and the
process used to produce the reported information has been selected and applied with no errors in the
process.

Enhancing:

1. Comparability - the ability to bring together for the purpose of noting points of likeness and difference.
Implicit in comparability is consistency, which requires that the accounting methods and practices should
be applied on a uniform basis from period to period.
2. Understandability - requires that financial information must be comprehensible or intelligible if it is to be
most useful.
3. Verifiability - means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
4. Timeliness - means that financial information must be available or communicated early enough when a
decision is to be made.

Implicit:

1. Materiality - a quantity threshold linked very closely to the qualitative characteristic of relevance. It
dictates that strict adherence to GAAP is not required when the items are not significant enough to affect
the evaluation, decision and fairness of the financial statements. Also known as the doctrine of
convenience.
2. Substance over form - transactions should be accounted for in accordance with their substance and reality
and not merely their legal form.
3. Conservatism/Prudence - when alternatives exist, the alternative which has the least effect on equity
should be chosen.
4. Cost Constraint - the benefit derived from the information should exceed the cost incurred in obtaining the
information.

Elements of Financial Statements

Assets - the resources controlled by the entity as a result of past transactions or events and from which future
economic benefits are expected to flow to the entity.

Essential Characteristics:

1. The asset is controlled by the entity.

2. The asset is the result of a past transaction or event.
3. The asset provides future economic benefits.
4. The cost of the asset can be measured reliably.

Recognition Principle: An asset is recognized when it is probable that future economic benefits will flow to the
entity and the asset can be measured reliably.

Classification:

1. Current when:
a) The asset is a cash or cash equivalent unless the asset is restricted from being exchanged or used
to settle a liability for at least 12 months after the reporting period.
b) The entity holds the asset primarily for the purpose of trading.
c) The entity expects to realize the asset within 12 months after the reporting period.

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 d) The entity expects to realize the asset or intends to sell or consume it within the entity’s normal
operating cycle (the time between the acquisition of assets for processing and their realization in
cash or cash equivalents).
2. Non-current if it does not satisfy the above criteria.

Liabilities - present obligations of the entity arising from past transactions or events the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.

Essential Characteristics:

1. The liability is the present obligation of a particular entity.

2. The liability arises from past transaction or event.
3. The settlement of the liability requires an outflow of resources embodying economic benefits.

Recognition Principle: A liability is recognized when it is probable that an outflow of resources embodying
economic benefits will be required for the settlement of a present obligation and the amount of the obligation can be
measured reliably.

Classification:

1. Current when:
a) The entity expects to settle the liability within the entity’s normal operating cycle.
b) The entity holds the liability primarily for the purpose of trading.
c) The liability is due to be settled within 12 months after the reporting period.
d) The entity does not have an unconditional right to defer settlement of the liability for at least 12
months after the reporting period.
2. Non-current if it does not satisfy the above criteria.

Equity - the residual interest in the assets of the entity after deducting all of its liabilities.Also known as net assets.

Income - increase in economic benefits during the accounting period in the form of inflow or increase in asset or
decrease in liability that results in increase in equity, other than contribution from equity participants.

Recognition Principle: Income is recognized when it is probable that an increase in future economic benefit related
to an increase in an asset or decrease in a liability has arisen and that increase in economic benefits can be measured
reliably.

Income encompasses both revenue and gain. Revenues arise in the course of the ordinary regular activities.Gains
represent other items that meet the definition of income and do not arise in the course of the ordinary regular
activities.

General Rule: Income is recognized at the point of sale.

Expense - decrease in economic benefits during the accounting period in the form of outflow or decrease in asset or
increase in liability that results in decrease in equity, other than contribution from equity participants.

Recognition Principle: Expense is recognized when it is probable that a decrease in future economic benefit related
to a decrease in an asset or increase in a liability has arisen and that decrease in economic benefits can be measured
reliably.

Expense includes losses as well expenses arising from the course of ordinary regular activities. Losses represent
other items that meet the definition of expenses and do not arise in the course of the ordinary regular activities.

The matching principle is used. It means that costs and expenses incurred in earning a revenue shall be reported in
the same period. Three applications of the principle:

1. Cause and effect association - expense is recognized when the revenue is already recognized. Examples:
cost of sales, doubtful accounts, warranty expense and sales commission
2. Systematic and rational allocation - some costs are expensed by simply allocating them over the period
benefited. Examples: depreciation of PPE, amortization of intangibles
3. Immediate recognition - cost incurred is expensed outright because of uncertainty of future economic
benefits or difficulty of reliably associating certain costs with future revenue. Examples: salaries,
advertising and selling expenses

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Measurement of Elements:

1. Historical cost - the amount of cash or cash equivalent paid or the fair value of the consideration given to
acquire an asset at the time of acquisition. Also known as past purchase exchange price.
2. Current cost - the amount of cash or cash equivalent that would have to be paid if the same or equivalent
asset was acquired currently. Also known as current purchase exchange price.
3. Realizable value - the amount of cash or cash equivalent that could currently be obtained by selling the
asset in an orderly disposal. Also known as current sale exchange price.
4. Present value - the discounted value of the future net cash inflows that the item is expected to generate in
the normal course of business. Also known as future exchange price.

Concepts of Capital and Capital Maintenance

Financial Capital – is the absolute monetary amount of the net assets contributed by shareholders and the amount
of the increase in net assets resulting from earnings retained by the entity. Based on historical cost. Net income
occurs when the nominal amount of the net assets at the end of the period exceeds the nominal amount of the net
assets at the beginning of the period, after excluding distributions to and contributions by owners during the period.

Physical Capital - is the quantitative measure of the physical productive capacity to produce goods and services.
Based on current cost. Net income occurs when the physical productive capital at the end of the period exceeds the
physical productive capital at the beginning of the period, after excluding distributions to and contributions by
owners during the period.

Financial Statements

FS - are the means by which the information accumulated and processed in financial accounting is periodically
communicated to the users. Its objective is to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. It
should be presented at least annually.

Components of FS:

1. Statement of financial position - a formal statement showing the three elements comprising financial
position - assets, liabilities and equity. Can be used to evaluate liquidity, solvency and the need for
additional financing. Can be presented in either the report form or account form. Also known as the
balance sheet.
2. Income statement - a formal statement showing the financial performance of an entity for a given period
of time. Presents the profit or loss for the year. Can be presented in either the functional presentation or
natural presentation.
3. Statement of comprehensive income - shows the profit or loss and the other comprehensive income for
the year. Can be presented in two statements or in a single statement of comprehensive income.
Comprehensive income is the change in equity during a period resulting from the transactions and other
events, other than changes resulting from transactions with owners in their capacity as owners. It includes
profit or loss and other comprehensive income.
4. Statement of changes in equity - a basic statement that shows the movements in the elements or
components of shareholder’s equity.
5. Statement of cash flows - a statement that summarizes the operating, investing and financing activities of
the entity.
6. Notes to Financial Statements, comprising a summary of significant accounting policies and other
explanatory notes

Exercises:

TRUE/FALSE

1. All significant post-balance sheet events are reported is an example of completeness.

2. All payments less than P25 are expensed as incurred is an example of prudence.
3. A switch from accelerated depreciation to straight-line depreciation is a violation of consistency.
4. A machine, that cost P140,000, is reported at its current market value of P165,000 is a violation of
relevance.
5. Publishing yearly financial reports is a sample of the periodicity assumption.
6. Business enterprise assumed to have a long life is a violation of conservatism.

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 7. Information that helps users confirm or correct prior expectations has feedback value.
8. In establishing financial accounting standards the FRSC should be responsive to the needs and viewpoints
of the entire economic community, not just the accounting profession.
9. The information contained in the financial statements is faithfully represented when the information is free
from bias or error.
10. Comparability state that it is appropriate for an enterprise to leave its accounting policies unchanged when
more relevant and reliable alternative exist.
11. Information has the quality of relevance when it influences the economic decision of users by serving them
evaluate past, present, and future events.
12. Information about economic resources controlled by the enterprise and its capacity to modify these
resources is useful in predicting the ability of the enterprise to generate cash in the future.
13. Financial statements are prepared and presented at least annually and are directed toward the specific
information needs of a wide range of users.
14. Relevance and faithful representation are qualitative characteristics pertain to the content rather than the
presentation of the financial information.
15. If there is undue delay in the reporting of information, it may lose its relevance and faithful representation.
16. Underlying assumptions embrace the conventions, rules, and procedures necessary to define what are
accepted accounting practice.
17. Going concern serves as the basis for preparing financial statements at regular intervals.
18. An item is material if its inclusion or omission would influence or change the judgment of a reasonable
person.
19. Relevance is the capacity of information to make a difference in a decision by helping users form
predictions about the outcome of past, present, and future events.
20. Accounting information must be both relevant and faithfully represented to be useful to decision makers.
21. The going-concern assumption justifies the valuation of assets on a liquidation basis.
22. The economic entity assumption states that economic activity can be identified with a particular unit of
accountability.
23. The periodicity assumption implies that the economic activities of an enterprise can be divided into
segments.
24. Revenue is generally recognized at point of collection.
25. Financial statements prepared on a cost basis provide business enterprise information having a common,
accepted basis from which each reader can make inferences, comparisons, and analyses.
26. An officer of SEIKO Corp. purchased a new home computer for personal use with company money,
charging miscellaneous expense, is a violation of materiality concept.
27. Notes as part of necessary information to a fair presentation applies the principle of full disclosure.
28. Some costs which give rise to future benefits cannot be directly associated with the revenues they generate.
Such costs are allocated in a rational and systematic manner to the periods expected to benefit from the
cost.
29. Expenses are recognized when the goods or services (efforts) make their contribution to revenue.
30. When no association with revenue is evident and no future benefits are expected, expenses are recognized
immediately.

MULTIPLE CHOICE

1. A complete set of financial statements include all of the following except the
A. Statement of Financial Position. C. Income Statement.
B. Statement of Cash Flows. D. Statement of retained earnings.

2. Which of the following statements is not an objective of financial reporting?

A. Provide information that is useful in investment and credit decisions.
B. Provide information about enterprise resources, claims to those resources, and changes to them.
C. Provide information on the liquidation value of an enterprise.
D. Provide information that is useful in assessing cash flow prospects.

3. The overall objective of financial reporting is to provide information

A. That is useful for decision making.
B. About an enterprise's assets, liabilities, and owners' equity.
C. About an enterprise's financial performance during a period.
D. That allows owners to assess management's performance.

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4. The information provided by financial reporting pertains to
A. Individual business enterprises, rather than to industries or an economy as a whole or to members of
society as consumers.
B. Business industries, rather than to individual enterprises or an economy as a whole or to members of
society as consumers.
C. Individual business enterprises, industries, and an economy as a whole, rather than to members of
society as consumers.
D. An economy as a whole and to members of society as consumers, rather than to individual enterprises or
industries.

5. Proper application of accounting principles is most dependent upon the

A. Existence of specific guidelines. C. Oversight of regulatory bodies.
B. External audit function. D. Professional judgment of the accountant.

6. Conservatism is best described as selecting an accounting alternative that

A. Understates assets and/or net income.
B. Has the least favorable impact on owners' equity.
C. Overstates, as opposed to understates, liabilities.
D. Is least likely to mislead users of financial information.

7. The financial statements that are prepared for the business are separate and distinct from the owners
according to the
A. Going concern principle. C. Matching principle.
B. Economic entity assumption. D. Full disclosure principle.

8. Recording the purchase price of a chalkboard eraser (with an estimated useful life of 10 years) as an
expense of the current period is justified by the
A. Going concern assumption. C. Materiality constraint.
B. Matching principle. D. Comparability principle.

9. According to the conceptual framework, the process of reporting an item in the financial statements of an
entity is
A. Realization. C. Recognition.
B. Matching. D. Allocation.

10. Which of the following elements of financial statements is not a component of profit or loss?
A. Revenues. C. Expenses.
B. Losses. D. Distributions to owners.

11. An item would be considered material and therefore would be disclosed in the financial statements if
A. The expected benefits of disclosure exceed the additional costs.
B. The impact on earnings is greater than 3 percent.
C. The IASB definition of materiality is met.
D. The amount is deemed large enough to make a difference to the users.

12. What accounting concept justifies the use of accruals and deferrals?
A. Going concern assumption. C. Separate entity assumption
B. Timeliness assumption D. Relevance

13. Which of the following is not a purpose of the conceptual framework of accounting?
A. To provide definitions of key terms and fundamental concepts.
B. To provide specific guidelines for resolving situations not covered by existing accounting standards.
C. To assist accountants and others in selecting among alternative accounting and reporting methods.
D. To assist the FRSC in the standard-setting process.

14. Which of the following is not an implication of the going-concern assumption?

A. The historical cost principle is credible.
B. Depreciation and amortization policies are justifiable and appropriate.
C. The current/noncurrent classification of assets and liabilities is justifiable and significant.
D. Amortizing research and development costs over multiple periods is justifiable and appropriate.

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15. The overriding qualitative characteristic of accounting information is
A. Relevance. C. Understandability.
B. Faithful representation. D. Decision usefulness.

16. When financial reports from two different companies have been prepared and presented in a similar
manner, the information exhibits the characteristic of
A. Relevance. C. Faithful representation
B. Comparability. D. Consistency.

17. Accounting for inventories by applying the lower-of-cost-or-NRV is an example of the application of
A. Conservatism. C. Comparability.
B. Consistency. D. Materiality.

18. The Conceptual Framework

A. Sets out the concepts that underlie the preparation and presentation of financial statements for internal
users.
B. Is a Philippine Financial Reporting Standard that defines standards for a particular measurement or
disclosure issue.
C. Is concerned with special purpose reports, for example, prospectuses and computations prepared for
taxation purposes.
D. Applies to the financial statements of all commercial, industrial and business reporting enterprises,
whether in the public or private sector.

19. Which statement is incorrect concerning the recognition principles?

A. An asset is recognized when it is probable that future economic benefits will flow to the enterprise and
the asset has a cost or value that can be measured reliably.
B. A liability is recognized when it is possible that an outflow of resources embodying economic benefits
will result from the settlement of a present obligation that can measured reliably.
C. Income is recognized when an increase in future economic benefits related to an increase in asset or a
decrease in liability has arisen that can be measured reliably.
D. Expenses are recognized when a decrease in future economic benefits related to an decrease in asset or
an increase in liability has arisen that can be measured reliably.

20. Information about economic resources controlled by the enterprise and its capacity to modify these
resources is useful in predicting the
A. Ability of the enterprise to meet its financial commitments in the near term.
B. Ability of the enterprise to generate cash and cash equivalents in the future.
C. Ability of the enterprise to meet its financial commitments over a longer term.
D. Future borrowing needs and how future profits and cash flows will be distributed among interested
users.

21. In respect to information included in financial statements, the accounting concept of ‘prudence’ ensures
that:
A. The financial statements report what they purport to report.
B. A degree of caution in the exercise of judgements about estimates is made.
C. An appropriate balance is achieved between the relevance and the reliability of information that has been
included.
D. Information is provided to users within the time period in which it is most likely to bear on their
decisions.

22. Which statement is incorrect concerning financial statements?

A. Financial statements do not show the results of management’s stewardship of resources entrusted to it.
B. Financial statements are prepared at least annually and are directed toward the common information
needs of a wide range of users.
C. The objective of general-purpose financial statements is to provide information about the financial
position, performance and cash flows of an enterprise that is useful to a wide range of users in making
economic decisions.
D. The management of an enterprise has the primary responsibility for the preparation and presentation of
financial statements.

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23. An item cannot be recognized in the statement of financial position or the income statement unless it meets
the two criteria of:
A. Materiality; Relevance to the users
B. Completeness; Measurement reliability
C. Neutrality; Representational faithfulness
D. Probable economic benefits; Measurement reliability

24. The operating cycle

A. Measure the time elapsed between cash disbursement for inventory and cash collections of the sales
price
B. Refers to the seasonal variations experienced by business enterprise
C. Should be used to classify assets and liabilities as current if it is less than one year
D. Cannot exceed one year

25. In classifying the elements of financial statements, the primary distinction between revenues and gains is
A. The materiality of the amounts involved
B. The likelihood that the transactions involved will recur in the future
C. The nature of the activities that gave rise to the transactions involved
D. The costs versus the benefits of the alternative methods of disclosing the transaction involved

26. Preparation of consolidated financial statements when a parent-subsidiary relationship exist is an example
of the
A. Economic entity assumption C. Comparability characteristic
B. Relevance characteristic D. Neutrality characteristic

27. Which is correct regarding the overall considerations in preparation and presentation of financial
statements?
A. Assets and liabilities, and income and expenses, when material should be offset against each other.
B. Financial statements should be prepared on liquidity concern basis.
C. Each material item should be presented separately in the financial statements. Immaterial amounts of
similar nature and function should be grouped or condensed as one line item in the financial statements.
D. The presentation and classification of financial statement items should not be uniform from one
accounting period to the next.

28. Which statement is incorrect concerning the Conceptual Framework?

A. Nothing in the framework overrides any specific Statement of Financial Accounting Standards.
B. The framework deals with the objectives of the financial statements, the qualitative characteristics that
determine the usefulness of the information in financial statements, the definition, recognition and
measurement of the elements of the financial statements and concepts of capital maintenance.
C. The framework sets out the concepts that underlie the preparation and presentation of financial
statements for internal and external users.
D. The framework is concerned with general purpose financial statements including consolidated financial
statements.

29. Financial information does not demonstrate comparability and consistency when

I. Firms in the same industry use different accounting methods to account for the same type of
transaction
II. A company changes its estimate of the salvage value of a fixed assets
III. A company fails to adjust its financial statements for changes in value of the measuring unit.

A. I only C. I and II only

B. I and III only D. I, II and III

30. What is the primary difference in the treatment between the two concepts of capital maintenance?
A. The treatment of the effects of changes in the prices of assets and liabilities of the entity
B. The treatment of the effects of changes in the prices of expense and revenue of the entity
C. The treatment of the effects of changes in foreign exchange rates
D. The treatment of the effect of changes in foreign subsidiary

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31. Which is incorrect concerning the concept of materiality and aggregation?
A. Materiality depends on the size and nature of the item judged in the particular circumstances of its
omission or misstatement.
B. Materiality provides that the specific disclosure requirements of a PFRS must be met even if the
resulting information is not material.
C. Items of a dissimilar nature or function shall be presented separately unless they are immaterial.
D. Information is material if its nondisclosure could influence the economic decisions of users taken on the
basis of the financial statements.

32. Which of the following statements concerning equity is incorrect?

A. Although equity is defined as a residual, it may be sub-classified in the statement of financial position.
B. The creation of reserves is sometimes required by statute or other laws in order to give the entity and its
creditors an added measure of protection from the effects of losses.
C. The existence and size of legal, statutory and tax reserves are information that can be relevant to the
decision-making needs of users, transfer from reserves are expense rather than appropriation of retained
earnings.
D. The amount at which equity is shown in the balance sheet is dependent on the measurement of assets
and liabilities.

33. According to the conceptual framework, which of the following statements conforms to the realization
concept?
A. Cash was collected on accounts receivable.
B. Product unit costs were assigned to cost of goods sold when the units were sold.
C. An impaired asset was sold for cash.
D. Equipment depreciation was assigned to a production department and then to product unit costs.

34. Per PAS 1, in the absence of a Standard or Interpretation that specifically applies to a transaction or event,
management shall develop and apply accounting policy that results in relevant and faithfully represented
information. Which of following is the least likely source of such alternative?
A. The requirements and guidance on Standards /Interpretations on similar and related issues
B. The definition, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Framework.
C. Most recent pronouncements of other standard setting bodies that use a similar conceptual framework to
develop accounting standards and accepted practice.
D. Textbooks and other accounting literature to the extent that these do not conflict with existing Standards
and Interpretations.

35. Which is not included in the category of comprehensive income of an accounting entity?
A. Net income for the period
B. Revaluation surplus
C. Gain on sale of treasury shares
D. Increase in value of financial instruments classified through fair value

36. Which of the following statements is/are true about equity?

I. Equity is defined as the difference between assets and liabilities

II. Increases and decreases in equity (other than from transactions with owners of the enterprise) represent
income and expenses.

A. I only C. Both I and II

B. II only D. Neither I nor II

37. Decision makers vary widely in the types of decisions they make, the methods of decision making they
employ, the information they already possess or can obtain from other sources, and their ability to process
information. Consequently, for information to be useful there must be a linkage between these users and
the decisions they make. This link is
A. Relevance C. Faithful Representation
B. Understandability D. Materiality

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 38. Under a lease where the lessee acquires the benefits of ownership of an asset, the lessee often recognizes
the present value of future rentals as an asset even though legal title to the property is not acquired. This is
an example of
A. Form over substance C. Verifiability
B. Substance over form D. Conservatism

39. Information about the sources and uses of an enterprise’s cash and cash equivalents is provided in the:
A. Income statement C. Statement of changes in equity
B. Cash flow statement D. Statement of financial position

40. The measurement basis “net realizable value” is best described as:
A. Unamortized historical cost
B. An asset’s selling price or a liability’s settlement amount
C. Unadjusted initial cost
D. Time adjusted cash flow

PROBLEMS

1. Pampanga Company’s December 31, 2014 statement of financial position reported the following current
assets:

Cash 3,000,000
Accounts receivable 5,200,000
Inventory 2,000,000
Prepaid expenses 700,000
Equipment used and held for resale 100,000
11,000,000

An analysis of the accounts receivable disclosed that accounts receivable comprised the following:

Trade accounts receivable 4,000,000

Allowance for doubtful accounts ( 300,000)
Selling price of Pampanga Company’s unsold goods sent to
XYZ Company on consignment at 125% of cost and excluded
from Pampanga’s ending inventory 1,500,000
5,200,000

At December 31, 2014, the total current assets should be

A. P10,600,000 C. P10,700,000
B. P 9,800,000 D. P 9,900,000

2. The trial balance of Arayat Company reflected the following liability account balances on December 31,
2014:

Accounts payable 4,000,000

Bonds payable, due 2015 8,000,000
Discount on bonds payable 1,000,000
Deferred tax liability 1,500,000
Dividends payable 3,000,000
Income tax payable 500,000
Note payable, due 1/15/2016 2,500,000

In its December 31, 2014 statement of financial position, Arayat should report current liabilities at
A. P16,000,000 C. P17,000,000
B. P14,500,000 D. P16,500,000

3. Candaba Company was incorporated on January 1, 2014, with proceeds from the issuance of P15,000,000
in common stock and borrowed funds of P5,000,000. During the first year of operations, revenue from
sales and consulting amounted to P20,000,000, and operating costs and expenses totalled P12,000,000. On
December 15, Candaba declared a P2,000,000 cash dividend payable to stockholders on January 15, 2015.

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 No additional activities affected owners’ equity in 2014. Candaba’s liabilities increased to P7,000,000 by
December 31, 2014. On December 31, 2014 statement of financial position, total assets should be reported
at:
A. P30,000,000 C. P22,000,000
B. P21,000,000 D. P28,000,000

4. The following items were among those that were reported on Bulacan Company’s income statement for the
year ended December 31, 2014:

Legal and audit fees 2,000,000

Rent for office space 6,000,000
Interest on acceptances payable 1,000,000
Loss on abandoned data processing equipment 500,000
Insurance 200,000

The office space is used equally by the sales and accounting departments. What amount should be
classified as general and administrative expenses?
A. P8,200,000 C. P6,200,000
B. P5,200,000 D. P5,000,000

5. The following information pertains to Malolos Company’s 2014 cost of goods sold:

Inventory, January 1 10,000,000

Purchases 40,000,000
Writeoff of obsolete inventory 5,000,000
Inventory, December 31 3,000,000

What amount should Malolos report as cost of goods sold?

A. P42,000,000 C. P47,000,000
B. P45,000,000 D. P50,000,000

6. The following information was taken from Hagonoy Company’s accounting records for the year ended
December 31, 2014:

Decrease in raw materials inventory 1,000,000

Increase in goods in process inventory 3,000,000
Increase in finished goods inventor 2,000,000
Raw materials purchased 40,000,000
Direct labor payroll 10,000,000
Factory overhead 6,000,000
Freight out 4,000,000
Freight in 5,000,000

The cost of goods sold is

A. P59,000,000 C. P61,000,000
B. P57,000,000 D. P63,000,000

7. Clark Co.’s advertising expense account had a balance of P146,000 at December 31, 2014, before any
necessary year-end adjustment relating to the following:

 Included in the P146,000 is the P15,000 cost of printing catalogs for a sales promotional campaign in
January 2015.
 Ratio advertisements broadcast during December 2014 were billed to Clark on January 2, 2015. Clark
paid the P9,000 invoice on January 11, 2015.

What amount should Clark report as advertising expense in its income statement for the year ended
December 31, 2014?
A. P122,000 C. P140,000
B. P131,000 D. P155,000

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8. An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 2014, revealed the
following:

 An opening balance of P1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an annual
premium of P3,000 on July 1, 2013.
 A P3,200 annual insurance premium payment made July 1, 2014.
 A P2,000 advance rental payment for a warehouse thrift leased for one year beginning January 1, 2015.

In its December 31, 2014 statement of financial position, what amount should Thrift report as prepaid
expenses?
A. P5,200 C. P2,000
B. P3,600 D. P1,600

9. On October 1, 2014, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at P3 per gallon. Fifty
thousand gallons were delivered on December 15, 2014, and the remaining 50,000 gallons were delivered
on January 15, 2015. Payment terms were: 50% due on October 1, 2014, 25% due on first delivery, and the
remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale
during 2014?
A. P 75,000 C. P225,000
B. P150,000 D. P300,000

10. The beginning of the year total equity for a firm was P40,000. During the year, the firm issued ordinary
shares for a total proceeds of P20,000, earned P20,000 net income, and paid P5,000 in cash dividends. If
ending total liabilities are P100,000, what is the ending total assets?
A. P165,000 C. P45,000
B. P175,000 D. P25,000

END

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