ACCTG + Basic Accounting

PRELIM ACTIVITY 3
Name: Date:
Instructor: Schedule:

General Instructions: Use CAPITAL LETTERS ONLY. Erasure means wrong.

Part 1: TRUE or FALSE
Write TRUE if the statement is correct, FALSE if incorrect.
1. In the present system, the Florentine Method is observed in the Journal Entries with double-entry bookkeeping.
2. In 1449, Luca Pacioli wrote Summa de Arithmetica, the first book that was published containing a detailed
chapter of double-entry bookkeeping which enable others to study and use it.
3. During the industrial revolution the thorough study of accounting and development of accounting theory began.
4. To facilitate accounting work, the development of computer-assisted accounting practice and reporting developed
rapidly and dominant to date.
5. Business is defined as, “habitual engagement in a commercial activity involving the sale of goods or services for
profit”.
6. The purpose of accounting is to help end-users see the true picture of the business in financial terms.
7. General-purpose financial reporting helps users who lack the ability to demand all the financial information they
need from an entity and therefore, must rely, at least partly, on the information provided in the financial
statements.
8. The overall objective of financial reporting is to provide general-purpose financial statements about the reporting
entity that is useful to present potential user groups, especially stockholders and creditors to assist them in
making sound economic decisions as capital providers.
9. All types of businessmen are required to prepare government reports such as income taxes, business taxes, and
social security returns.
10. Audit function is the primary function of accounting.

Part 2: Multiple Choice

Choose the best answer. Write your answers before the number.
1. A soundly developed conceptual framework of concepts and objectives should
a. increase financial statement user's understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly soluble.
d. All of the choices

2. According to the conceptual framework, the needs of primary users that are met by financial statements are
a. all of their needs
b. all of their common needs
c. majority of their common needs only
d. substantially a majority of their common or specific needs only

3. According to the Conceptual Framework, the correct classifications of Relevance and Reliability, respectively,
are
a. fundamental, enhancing
b. enhancing, fundamental
c. fundamental, fundamental
d. fundamental, none

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

a. about an entity's assets, liabilities, and owners' equity.
b. about an entity's financial performance during a period.
c. that is useful in making economic decisions.
d. that allows owners to assess management's performance.

5. The two primary qualities that make accounting information useful for decision making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. faithful representation and relevance.

6. Which of the following is considered a qualitative factor in making materiality judgements?

a. The context of an item in relation to the current economic state of the environment where the entity
operates.
b. 10% of profit or loss, in absolute terms
c. 5% of total revenues
d. 1% of total assets

7. Which of the following statements about materiality is not correct?

 a. An item must make a difference, otherwise, it need not be reported.
b. Materiality is affected by an item's relative size and/or importance.
c. An item is material if its inclusion or omission would influence or change the judgement of a reasonable
person.
d. All of the choices are correct statements about materiality.
8. When information about two different entities has been prepared and presented in a similar manner, the
information exhibits the characteristic of
a. relevance
b. reliability
c. consistency
d. comparability

9. Which concept of accounting holds that, to the maximum extent possible, financial statements shall be based on
arm's length transactions?
a. Revenue realization
b. Verifiability
c. Monetary unit
d. Matching

10. Allowing entities to estimate rather than physically count inventory at an interim period is an example of tradeoff
between
a. Verifiability and comparability
b. Timeliness and comparability
c. Timeliness and verifiability
d. Neutrality and consistency

11. Which of the following is not an element of a partnership?

a. There must be a valid contract.
b. There must be a mutual contribution of money, property, or industry to a common
fund.
c. There must be an intent to engage in lawful business, trade or profession
d. The purpose must be to secure profits and to divide the same among the partners.
e. None of the choices

12. Which of the following statements regarding accounting is incorrect?

a. All business transactions and events are recorded in the accounting books.
b. Although bookkeeping and accounting are interrelated, they are not the same.
c. The purpose of accounting is to provide information that is useful in making economic decisions.
d. A transaction or event is recorded in the accounting records only if it has an effect on the assets,
liabilities, equity, income or expenses of the business.

13. Which of the following is not one of the necessary processes performed in accounting in order to provide
information that is useful to interested users?
a. Identifying
b. Summarizing
c. Recording
d. Counting

14. Accounting is described in various ways. Which of the following is not one of those descriptions?
a. Accounting is a process and a service activity.
b. Accounting is a social science and a practical art.
c. Accounting is the “language of business” because it is fundamental to the communication of financial
information.
d. Accounting is the art of professionally stealing money and other evil purposes.
15. Accounting has a long history. Which of the following is incorrect regarding the history of accounting?
a. Accounting can be traced as far back as the prehistoric times.
b. Accounting is as old as civilization and has evolved in response to economic and social needs of men.
c. Fra Luca Pacioli is the mama of modern accounting.
d. All of these are correct.

16. The main purpose of accounting is

a. to account for money so it will not be lost.
b. to provide information that is useful in making economic decisions.
c. to safeguard the assets of a company.
d. to provide a clear view of the state of the industry’s economy.

17. This process refers to the reporting of the information processed in the accounting system to interested users.
a. Measuring
 b. Identifying
c. Communicating
d. Classifying

18. Which of the following statements is correct?

a. Financial accounting is the branch of accounting that deals with the specific needs of an entity’s
management.
b. The internal users of accounting information include management, owners and creditors.
c. The external users of accounting information include potential and existing investors and lenders and
other creditors.
d. Government accounting is the branch of accounting that deals with the analysis of the costs of products
and services.

19. Which of the following statements is incorrect?

a. Erroneous financial statements can lead to bad financial decisions.
b. Internal users of financial information refer to the entity’s management personnel.
c. Tax accounting refers to the branch of accounting that deals with tax computations, filing of tax returns,
and tax planning.
d. Accounting education is the branch of accounting that deals with the teaching of accounting and related
subjects in order to produce competent and responsible business professionals.

20. The most common form of business organization is

a. corporation.
b. sole proprietorship.
c. partnership.
d. cell phone stand.

21. These users need accounting information in order to regulate businesses that are within the scope of their legal
authority.
a. Employees
b. Creditors
c. Auditors
d. Government regulatory bodies or agencies

22. These users need accounting information in evaluating the stability of the business in so far as their job security,
future remuneration, and career growth and opportunities are concerned.
a. Employees
b. Creditors
c. Auditors
d. Regulatory authorities

23. The following are decisions made by external users except

a. whether to hold or sell investments in stocks.
b. whether or not to extend a loan to the business.
c. whether to sell goods on credit to the business.
d. whether to obtain additional capital from outside creditors or to generate it internally.

24. Which of the following users of financial information is not considered a creditor of the business?
a. A loan provider, such as a bank
b. A supplier that sells goods to the entity on credit
c. A customer that buys goods from the entity on credit
d. A financing company that provides the entity with machineries on a “rent-to-own” basis

25. An advantage of a sole proprietorship over the other forms of a business organization is
a. you are the only boss and you keep all the profits.
b. although it is easier to form, it may be more difficult to raise financing.
c. it has unlimited life.
d. it has limited liability.

26. Which of the following is not an advantage of a partnership over the other forms of business organization?
a. Compared to a sole proprietorship, risks are spread out over more than one owner.
b. Compared to a cooperative, the business organization is driven more towards the earning of profit.
c. Compared to a corporation, it is easier to form because of fewer legal requirements.
d. Compared to a corporation, it has an unlimited life and an unlimited liability.

27. Statement 1: A corporation is created by mere agreement of the contracting parties while partnership is created
by operation of law.
Statement 2: A corporation has the right of succession while a partnership has no such right. Statement 3: Each
 person, natural or juridical, is a taxable person for purposes of business taxation.
a. TRUE, TRUE, TRUE
b. TRUE, TRUE, FALSE
c. TRUE, FALSE, FALSE
d. FALSE, FALSE, FALSE
e. FALSE, FALSE, TRUE
f. FALSE, TRUE, TRUE
g. FALSE, TRUE, FALSE

28. Statement 1: Proprietorship is not a juridical entity. Its sales and receipts is subject to tax to the individual
proprietor.
Statement 2: The very purpose of a partnership business is to obtain profits. This is also true for a partnership
formed for the practice of profession.
Statement 3: The debts of the corporation are also the debts of its stockholders and vice versa.
a. TRUE, TRUE, TRUE
b. TRUE, TRUE, FALSE
c. TRUE, FALSE, FALSE
d. FALSE, FALSE, FALSE
e. FALSE, FALSE, TRUE
f. FALSE, TRUE, TRUE
g. FALSE, TRUE, FALSE

29. The Conceptual Framework

a. Includes prudence or conservatism which means when in doubt, choose the solution that will be least
likely to overstate assets and income.
b. Includes prudence or conservatism which means when in doubt, choose the solution that will be least
likely to understate liabilities and expenses.
c. Includes prudence or conservatism as a desirable but not required quality of accounting information.
d. Excludes prudence or conservatism because it is inconsistent with neutrality

30. Which of the following is an example of an external transaction?

a. Production of goods in the factory
b. Loss from fire
c. Borrowing of money from a lending institution
d. All of the choices
31. Which of the following terms may not refer to the logical notions and procedures that guide the
accountant in recording and communicating financial information?
a. Accounting concepts
b. Accounting principles
c. Accounting standards
d. Accounting laws and regulations

32. Under this concept, a business is not expected to end its operations in the near term.
a. Separate entity concept
b. Going concern
c. Stable monetary unit
d. Materiality

33. Transactions and other events are recorded in the periods in which they occur, not when they affect
cash.
a. Going concern
b. Accrual basis
c. Reporting period
d. Consistency

34. The personal transactions of the business owner that do not involve the business are not recorded in the
books of accounts of the business. This relates to the concept of
a. Separate entity concept.
b. Going concern.
c. Stable monetary unit.
d. Materiality.

35. Presenting all amounts in the financial statements in Philippine pesos and disregarding the effects of
inflation on the purchasing power of the Philippine peso relate to the concept of
a. Separate entity concept.
 b. Going concern.
c. Stable monetary unit.
d. Materiality.

36. Under this concept, the life of the business is divided into series of reporting periods.
a. Time period
b. Periodicity
c. Reporting period
d. All of these

37. The banking industry in the Philippines is mainly regulated by the

a. CDA.
b. SEC.
c. BSP.
d. BIR.

38. The Standards used in the Philippines are patterned from

a. U.S. GAAP.
b. Spanish Standards.
c. Japanese Financial Reporting Standards
d. international standards, called the International Financial Reporting Standards (IFRS) issued by
the International Accounting Standards Board (IASB) which is based in the U.K.

39. Recording assets at their acquisition cost (entry value), rather than at their net selling price (exit value),
is in line with the concept of
a. Single entity concept.
b. Historical cost concept.
c. Going concern concept.
d. Matching principle.

40. Which of the following relates to the concept of consistency?

a. Treating the business as a separate entity from its owner.
b. Recording sales revenue when a sale occurs rather than when the sale price is collected.
c. Measuring assets at their acquisition cost.
d. Using the same accounting treatment for similar items from period to period.

41. Which of the following is an application of the concept of prudence or conservatism?

a. Choosing a potentially unfavorable outcome over a potentially favorable one.
b. Choosing a potentially favorable outcome over a potentially unfavorable one.
c. Deliberately understating assets and income and deliberately overstating liabilities and expenses.
d. Doing nothing in cases of uncertainty.

42. The cost of providing or using information should not exceed the information’s usefulness.
a. Materiality
b. Cost-benefit or Cost constraint
c. Going concern
d. Relevance

43. Under this concept, some costs are initially recognized as assets and recognized only as expenses when
the related revenue is recognized.
a. Separate entity concept
b. Historical cost concept
c. Going concern
d. Matching principle

44. Businesses are required by law to file tax returns with this government agency.
a. Security and Exchange Commission
b. Bureau of Internal Revenue
c. Cooperative Development Authority
d. Bangko Sentral ng Pilipinas

45. The accounting standards that are currently used in the Philippines are referred to as the
 a. Philippine Financial Reporting Standards (PFRS).
b. Philippine GAAP.
c. Filipino Accounting Standards (FAS).
d. Juan’s GAAP.

46. The usefulness of information is assessed in terms of its

a. qualitative characteristics.
b. verifiability.
c. timeliness.
d. size.

47. Which of the following is one of the fundamental qualitative characteristics?

a. Comparability
b. Relevance
c. Timeliness
d. Verifiability

48. Which of the following is correct concerning the qualitative characteristics?

a. Free from error means the information contained in the financial statements is perfectly accurate
in all respects.
b. Neutrality means information is selected or presented with bias to increase the probability that
the information will be received favorably by the users.
c. Information that is not capable of affecting the decisions of users is considered irrelevant.
d. The enhancing qualitative characteristics can convert non-useful information to useful
information.

49. A business purchased equipment for P10,000 but deliberately reported it as

P100,000. Which of the following principles is most likely not violated?
a. Faithful representation
b. Free from error
c. Historical cost
d. Materiality

50. This qualitative characteristic requires at least two items.

a. Comparability
b. Timeliness
c. Verifiability
d. Understandability