1.

If ending inventory is understated, the effect is to

A. Overstate the net purchases
B. Overstate the gross margin
C. Overstate the cost of goods available for sale
D. Overstate the cost of the goods sold
2. If beginning inventory is overstated, the effect is to
A. Overstate net purchases
B. Overstate gross margin
C. Overstate cost of goods available for sale
D. Understate cost of goods sold
3. The overstatement of ending inventory in the current year will cause
A. Retained earnings to be understated in the current year-end statement of financial
position
B. Cost of goods sold to be understated in the income statement of next year
C. Cost of goods sold to be overstated in the income statement of the current year
D. Statement of financial position not to be misstated in the next year-end, the omission
4. At the middle of the year, an entity paid for insurance premium for the current year and
debited the amount to prepaid insurance. At year-end, the bookkeeper forgot to record
the amount expired. In the financial statements prepared at year-end, the omission
A. Overstates owners’ equity
B. Understates assets
C. Understates net income
D. Overstates liabilities
5. When the current year’s ending inventory is overstated
A. The current year’s cost of goods sold is overstated
B. The current year’s total assets are understated
C. The current year’s net income is overstated
D. The next year’s net income is overstated
6. An overstatement of ending inventory in the current period would result in income of the
next period being
A. Overstated
B. Understated
C. Correctly stated
D. The answer cannot be determined from the information
7. Which of the following would result if the current year’s ending inventory in understated
in the cost of goods sold calculation?
A. Cost of goods sold would be overstated
B. Total assets would be overstated
C. Net income would be overstated
D. Retained earnings would be overstated
8. If the beginning inventory in the current year was overstate, and that is the only error in
the current year the income for the current year would be
A. Understated and assets are correctly stated
B. Understated and assets are overstated
C. Overstated and assets are overstated
D. Understated and assets are understated
9. Which of the following would cause income to be overstated in the period of occurance?
 Ans.
1. D
2. C
3. D
4. A
5. C
6. B
7. A
8. A
9. B
Statement of Cash Flow
1. The primary purpose of a statement of cash flows is to provide relevant information
about
A. Differences between net income and associated cash receipts and disbursements
B. An entity’s ability to generate positive net cash flows
C. The cash receipts and cash disbursements of an entity during a period
D. An entity’s ability to meet cash operating needs
2. Cash receipts from royalties and commissions are
A. Cash outflows for operating activities
B. Cash inflows from operating activities
C. Cash inflows from investing activities
D. Cash outflows for financing activities
3. Cash flows arising from trading securities are
A. Classified as operating activities
B. Classified as investing activities
C. Classified as financing activities
D. Not reported in the cash flow statement
4. Cash payments to acquire equity instruments are
A. Cash outflows for financing activities
B. Cash inflows from investing activities
C. Cash outflows for investing activities
D. Cash inflows from financing activities
5. Cash receipts from issuing share are
A. Cash inflows from investing activities
B. Cash outflows for investing activities
C. Cash inflows from financing activities
D. Cash outflows for financing activities
6. Interest payments to lenders are classified as
A. Operating activities
B. Borrowing activities
C. Lending activities
D. Financing activities
7. Dividend payments to shareholders are classified as
A. Cash outflows for investing activities
B. Cash inflows from investing activities
C. Cash inflows from financing activities
 D. Cash outflows for financing activities
8. Interest received and dividend received may be classified alternatively as cash from
A. Operating activities
B. Investing activities
C. Financing activities
D. Revenue activites
9. Bank overdrafts that are repayable on demand and the bank balance often fluctuates
from positive to overdrawn shall be classifies an
A. Operating activities
B. Investing activities
C. Financing activities
D. Component of cash and cash equivalents
10. Cash advances and loans made by a financial institution are usually classified as
A. Operating activities
B. Investing activities
C. Financing activities
D. Component of cash and cash equivalents
Ans
1. C
2. B
3. A
4. C
5. C
6. A
7. D
8. B
9. D
10. A

1. Which of the following shall be presented under cash flows from investing activities
A. Employee costs
B. Property revaluation
C. Redemption of debenture
D. Development costs capitalized in the period
2. All of the following can be classified as cash and cash equivalent, except
A. Redeemable preference shares acquired and due in 60 days
B. Treasury bills due for repayment in 90 days
C. Equity investments
D. A bank overdraft
3. Which classification of the cash flow arising from the proceeds from an earthquake
disaster settlement would be most appropriate?
A. Cash flows from operating activities
B. Cash flows from investing activities
C. Cash flows from financing activities
D. Does not appear in the statement of cash flows
 4. An entity purchased a building and the seller accepted payment partly in equity shares
and partly in debentures of the entity. The transaction shall be treated in the statement of
cash flows as which of the following?
A. The purchase of the building is investing cash outflow and the issuance of shares
and the debentures are financing cash inflows
B. The purchase of the building is investing cash outflow and the issuance of
debentures is financing cash inflow while the issuance of shares is investing cash
inflow.
C. The transaction does not belong in a statement of cash flows and shall be disclosed
only in the notes to financial statements.
D. The transaction should be ignored totally since it is a noncash transaction
5. Under IFRS an entity can report finance costs in the statement of cash flows
A. In operating activities
B. Either in operating activities or financing activities
C. In financing activities
D. In investing activities or financing activities
6. Under IFRS, the dividend received from share investments can be classified as
A. Either an operating activity or a financing activity
B. Either an operating activity or investing activity
C. Only as an investing activity
D. Only an operating activity
7. Cash advances and loans from bank overdraft should reported in the statement of cash
flows as
A. Operating activities
B. Investing activities
C. Financing activities
D. Other significant noncash activities
8. How should repayment of a long-term loan comprising repayment of the principal
amount and interest due to date be treated in a statement of cash flows?
A. The repayment of the principal loan is an investing cash flow and the interest
payment is either an operating cash flow or a financing cash flow
B. The repayment of the principal loan is an financing cash flow and the interest
payment is either an operating cash flow or a financing cash flow.
C. The repayment of the principal loan is a financing cash flow and the interest payment
is either an operating cash flow or investing cash flow.
D. The repayment of the principal loan is a financing cash flow and the interest payment
is netted against interest received on bank deposits and the net amount of interest is
shown as operating cash flow.
Ans
1. D
2. C
3. A
4. C
5. B
6. B
7. A
8. B

1. How would a gain from sale of equipment for cash be reported in a statement of cash
flows using the indirect method?
A. In investing activities as a reduction of the cash inflow from the sale
B. In investing activities as a cash outflow
C. In operating activities as a deduction from income
D. In operating activities as an addition to income
2. How should a loss on sale of machinery be presented in a statement of cash flows using
indirect method?
A. A deduction from net income
B. An addition to net income
C. An inflow and outflow of cash
D. An outflow of cash
3. In a statement of cash flows using indirect approach for operating activities, an increase
in inventory is presented as
A. Outflow of cash
B. Inflow and outflow of cash
C. Addition to net income
D. Deduction from net income
4. Supplemental disclosures required only when the statement of cash flows is prepared
using the indirect method include
A. A schedule reconciling net income with net cash flows from operating activities
B. Amounts paid for interest and taxes
C. Amounts deducted for depreciation and amortization
D. Significant noncash investing and financing activities
5. Which of the following should not be disclosed in the statement of cash flows using the
indirect method?
A. Interest paid
B. Income taxes paid
C. Cash flow per share
D. Dividends paid on preference shares
6. At the beginning of the current year an entity sold used equipment for a cash amount
equaling its carrying amount for both book and tax purposes. During the year, the entity
replaced the equipment by paying cash and signing a note payable for new equipment.
The cash paid for the new equipment. The cash paid for the new equipment exceeded
the cash received for the old equipment. How should these equipment transactions be
reported in the entity’s statement of cash flows?
A. Cash outflow equal to the cash paid less the cash received
B. Cash outflow equal to the cash paid not payable less the cash received
C. Cash inflow equal to the cash received and a cash outflow equal to the cash paid
and note payable
D. Cash inflow equal to the cash received and a cash outflow equal to the cash paid
7. In a statement of cash flows, which of the following should be reported as a cash flow
from financing activities?
A. Payment to retire mortgage note
 B. Interest payment on mortgage note
C. Dividend payment
D. Payment to retire mortgage note and dividend payment
8. At the beginning of the current year, an entity signed a building lease that it reported as
a finance lease. The entity paid the monthly lease payment when due. How should the
entity report the effect of the lease payment in the financing activities section of the
statement of cash flows?
A. An inflow equal to the present value of future lease payment at the beginning of the
year less principal and interest payment
B. An outflow equal to the principal and interest payment on the lease
C. An outflow equal to the principal payment only
D. The lease payment should not be reported in the financing activities section
Ans
1. C
2. B
3. D
4. B
5. C
6. D
7. D
8. C

1. When an entity purchased a three-month Treasury bill, how would the purchase be
treated in preparing the statement of cash flows?
A. Not reported
B. An outflow for financing activities
C. An outflow for lending activities
D. An outflow for investing activities
2. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a
cash flow from investing activities equals the carrying amount of the equipment
A. Plus the gain
B. Plus the gain and less the amount of tax attributable to the gain
C. Plus both the gain and the amount of tax attributable to the gain
D. With no addition or subtraction
3. In a statement of cash flows, if used equipment is sold at a loss, the amount shown as a
cash inflow from investing activities equals the carrying amount of the equipment
A. Less the loss and the amount of tax attributable to the loss
B. Less both the loss and the amount of tax attributable to the loss
C. Less the loss
D. With no addition or subtraction
4. In a statement of cash flows, which of the following would increase reported cash flows
from operating activities using the direct method?
A. Dividends received from investments
 B. Gain on sale of equipment
C. Gain on early retirement of bonds
D. Change from straight line to accelerated depreciation
5. Dividends received from an equity investee shall be presented in the statement of cash
flows as
A. Deduction from cash flows from operating activities
B. Addition to cash flows from investing activities
C. Addition to cash flows from operating activities
D. Deduction from cash flows from investing activities
6. An entity’s wages payable increased from the beginning to the end of the year. In the
statement of cash flows in which the operating activities section is prepared under the
direct method, the cash paid for wages would be
A. Salary expense plus wages payable at the beginning of the year
B. Salary expense plus the increase in wages payable
C. Salary expense less the increase in wages payable
D. The same as salary expense
7. An entity accounts receivable decrease from the beginning to the end of the year. In the
statement of cash flows, the cash collected from customers would be
A. Sales revenue plus accounts receivable at the beginning of the year
B. Sales revenue plus the decrease in accounts receivable
C. Sales revenue less the decrease in accounts receivable
D. The same as sales revenue
8. In a statement of cash flows using indirect method, a decrease in prepaid expenses is
A. Reported as an outflow and inflow of cash
B. Reported as an outflow of cash
C. Deducted from net income
D. Added to net income
9. In a statement of cash flows, depreciation is treated as an adjustment to reported net
earnings because depreciation
A. Is a direct source of cash
B. Reduces reported net earnings but does not involve an outflow of cash
C. Reduces reported net earnings and involves an inflow of cash
D. Is an inflow of cash to a reserve account for replacement of assets.
10. The preparation of the statement of cash flows using the indirect method involves all of
the following, except determining
A. Cash provided by operations
B. Cash flows in investing and financing activities
C. Change in cash and cash equivalents during the period
D. Cash collections from customers during the period
Ans
1. A
2. A
3. C
4. A
5. C
6. C
7. B
8. D
9. B
10. D

1. When preparing a statement of ash flows using the indirect method, the amortization of
patent is reported as
A. Increase in cash flows from investing activities
B. Reduction in cash flows from investing activities
C. Increase in cash flows from operating activities
D. Reduction in cash flows from operating activities
2. When preparing a statement of cash flows using the direct method, amortization of
goodwill is
A. Shown as an increase in cash flows from operating activities
B. Shown as a reduction in cash flows from operating activities
C. Included with supplemental disclosure of noncash transactions
D. Not reported in the statement of cash flows or related disclosure
3. The amortization of bond discount related to long term debt is presented in a statement
of cash flows prepared using the indirect method as
A. Inflow and outflow of cash
B. Outflow of cash
C. Deduction from net income
D. Addition to net income
4. The amortization of a bond premium related to long-term debt is presented in the
statement of cash flows as
A. A positive adjustment to net income in determining cash flows from operating
activities
B. A use of cash in determining cash flows from investing activities
C. A source of cash in determining cash flows from financing activities
D. A negative adjustment to net income in determining cash flows from operating
activities.
5. Which statement about the method of preparing the statement of cash flows is true?
A. The indirect method starts with income before income tax
B. The direct method is known as the reconciliation method
C. The direct method is more consistent with the primary purpose of the statement of
cash flows.
D. All of these statements are true
6. Which of the following is not disclosed in the statement of cash flows prepared under the
direct method?
A. The major classes of gross cash receipts and gross cash payments
B. The amount of income taxes paid
C. A reconciliation of net income to net cash flow from operations
D. A reconciliation of ending retained earnings to net cash flow from operations.
7. The statement of cash flows reports all of the following except
A. The net change in cash for the period
B. The cash flows from operations during the period
 C. The free cash flow generated during the period
D. Investing transactions
8. Free cash flow is calculated as net cash provided by operating activities less
A. Capital expenditures
B. Dividends and depreciation
C. Capital expenditures and dividends
D. Capital expenditures and depreciation
Ans
1. C
2. D
3. D
4. D
5. C
6. D
7. C
8. C

1. Cash equivalents are

A. Treasury bill and money market fuds
B. Investments with original maturities of three months or less
C. Readily convertible to known amount of cash
D. All of these are features of cash equivalents.
2. All of the following could potentially be classified as either operating or investing cash
flow, except
A. Interest received
B. Dividend received
C. Taxes paid specifically identified with investing
D. Dividend paid
3. Making and collecting loans are
A. Operating activities
B. Investing activities
C. Financing activities
D. Liquidity activities
4. The statement of cash flows typically would not disclose the effects of
A. Ordinary shares issued for cash
B. Share dividends declared
C. Cash dividends paid
D. The purchase for cash and immediate retirement of treasury shares
5. A cash dividend that is declared during an accounting period to be paid in the next
accounting period, is presented in the statement of cash flows for the current period as
A. A use of cash from operating activities
B. A noncash transaction presented in a separate schedule
C. A use of cash from financing activities
D. A use of cash from investing activities
6. Sale of treasury shares would be classified as
 A. Transfer activity
B. Operating activity
C. Investing activity
D. Financing activity
7. Which is not added to net income under the indirect method of preparing the statement
of cash flows?
A. Increase in an accrued liability
B. Amortization of discount on bond payable
C. Loss on sale of operational asset
D. Increase in deferred tax asset
8. A change in unearned revenue would be classified into which of the following in the
statement of cash flows?
A. Operating cash flow
B. Investing cash flow
C. Financing cash flow
D. As an item reconciling earning and operating cash flow
9. Deferred tax expensed should be presented in a statement of cash flows using indirect
approach as
A. Financing activity
B. Deduction from net increase
C. Noncash financing and investing activity reported in separate schedule
D. Addition to net income
10. Noncash investing and financing activities are
A. Reported in the statement of cash flows only if the direct method is used.
B. Reported in the statement of cash flows only if the indirect method is used
C. Disclosed in a note or separate schedule accompanying the statement of cash flows
D. Not reported.
Ans
1. D
2. D
3. B
4. B
5. B
6. D
7. D
8. D
9. D
10. C
Problem Solving (Error of Correction)
Timm Company started operations at the beginning of current year. The entity failed to
recognize accruals and prepayments at the end of reporting period.
The income before tax accrual and prepayments at the end of the current year are:
Income before tax 1,400,000
Prepaid Insurance 20,000
Accrued wages 25,000
Rent revenue collected in advance 30,000
Interest receivable 50,000
What amount should be reported as corrected income before tax?

Astor Company sold merchandise for P750,000 to Day Company. The terms of the sale were
net 30, FOB Shipping point.
The merchandise was shipped on December 31, 2021, and arrived at Day on January 5, 2022.
Due to a clerical error, the sale was not recorded until January 2022 and the merchandise sold
at a 25% markup on cost was included in inventory on December 31, 2021.
What was the effect of the errors on cost of goods sold for 2021?

Bren Company’s beginning inventory on January 1 was understated by P200,000 and the
ending inventory was overstated by 600,000.
What was the effect of the errors on the cost of goods sold for the current year?

During 2022, Paul Company discovered that the ending inventories reported on the financial
statements were incorrected by the following amounts:
2020 60,000 understated
2021 75,000 overstated
The entity used the periodic inventory system to ascertain year-end quantities that are
converted to peso amounts using FIFO.
Prior to any adjustments for these errors, what was the pretax effect on retained earnings on
January 1, 2022?
Victoria Company revealed the following:
Ending Inventory Depreciation
2020 200,000 understated 50,000 understated
2021 300,000 understated 100,000 overstated
At what amount should retained earnings be retroactively adjusted on January 1, 2022?

Glory Company reported the following error in the financial statements:

2020 2021
Ending inventory 200,000 under 300,000 over
Depreciation 50,000 under
An insurance premium of 150,000 was prepaid in 2020 to cover 2020, 2021 and 2022. The
entire amount was charged to expense in 2020.
On December 31, 2021, fully depreciated machinery was sold for 250,000 cash but sale was not
recorded until 2022
There were no other errors during 2020 and 2021, and no corrections have been made for of
the errors.
What amount should be reported as pretax net effect of the errors on retained earnings on
December on December 31, 2021?

Crescendo Company reported the following errors

2020 2021
Ending inventory 150,000 overstated 200,000 understated
Rend expense 50,000 understated 100,000 overstated

If none of the errors were detected or corrected, by what amount would 2021 net income be
overstated or understated?

What amount should be reported as net effect of the errors on retained earnings on December
31, 2021?
Saturn Company reported the following errors
2020 2021
Ending inventory 50,000 understated 100,000 overstated
Depreciation expense 150,000 overstated 200,000 overstated
None of the errors were detected or corrected and that no additional errors were made in 2022.
What amount should be reported as net effect of the errors on retained earnings on December
31, 2021?
What amount would current assets on December 31,2022 be overstated or understated?

In 2022, Cremas Company discovered that equipment purchased on January 1, 2020 for
1,000,000 was expense at that time.
The equipment should have been depreciated over 5 years with no residual value. The tax rate
is 30%.
What is included in the journal entry in 2022 to correct the error?

On January 1, 2021, Conn Company reported retained earnings of 4,000,000

In 2021, the entity determined that insurance premiums of 900,000 for the three-year period
beginning January 1, 2020 had been paid fully expensed in 2020. The income tax rate is 30%
What amount should be reported as corrected retained earnings on January 1, 2021?

On January 1, 2021, Raft Company discovered that it had incorrectly expensed a P210,000
machine purchased on January 1, 2018. The entity estimated the machine’s original useful life
to be 10 years and the residual value at 10,000. The entity used the straight line method of
depreciation and is subject to a 30% tax rate.
In the 2021 financial statements what amount should be reported as a prior period error?

After the issuance of the 2021 financial statements, Terry Company discovered a computation
error of 150,000 in the calculation of the December 31, 2021 inventory. The error resulted in a
150,000 overstatement in the cost of goods sold for the year ended December 31, 2021.
In October 2022, the entity paid 500,000 in settlement of litigation instituted against it during
2021.
In the 2022 financial statements, the December 31, 2021 retained earnings balance as
previously reported should be adjusted by what amount before tax?
Comprehensive Problem
During the course of an audit of the financial statements of Julie Company for the year ended
December 31, 2021, the following date are discovered:

• Inventory on January 1, 2021 had been overstated by 300,000

• Inventory on December 31, 2021 was understated by 500,000
• An insurance policy covering three years had been purchased on January 1, 2020 for
150,000. The entire amount was charged as an expense in 2020.
During 2021, the entity received a 100,000 cash advance from a customer for merchandise to
be shipped during 2022. The amount had been credited to sales revenue. The gross profit on
sales is 50%
Net income per book was 2,000,000
What amount should be reported as corrected net income for the current year?

Malampaya Company showed income before income tax of 6,500,000 on December 31, 2021.
The year-end verification of the transactions revealed the following errors:

• P1,000,000 worth of merchandise was purchased in 2021 and included in the ending
inventory. However, the purchase was recorded only in 2022.
• A merchandise shipment valued at 1,500,000 was properly recorded as purchase at
year-end
Since the merchandise was still the port area, it was inadvertently omitted from the
inventory balance on December 31, 2021.
• Advertising for December 2021 amounting to 500,000 was recorded when payment was
made in January 2022
• Rental of 300,000 applicable for six months was received on November 1, 2021. The
entire amount was reported as income in 2021.
• Insurance premium covering the period from July 1, 2021 to June 30, 2022 amounting to
200,000 was paid and recorded as expense on July 1, 2021. The entity did not make
any adjustment at the end of the year.
What amount should be reported as corrected pretax income for 2021?

Bexley Company is in the process of adjusting the books at the end of 2021. The accounting
records revealed the following information:

• The entity failed to acrrue sales commissions at the end of 2019 and 2020
2019 220,000
2020 140,000
 In each case, the sales commissions were paid and expensed in January of the
following year
• Errors in ending inventory for the last three years:
2019 400,000 understated
2020 540,000 overstated
2021 150,000 understated
The unadjusted retained earnings balance on January 1, 2021 is 12,600,000 and the adjusted
net income for 2021 was 3,000,000
Dividends of 1,750,000 were declared during 2021
What amount should be reported as adjusted net income for 2021?
What amount should be reported as adjusted retained earnings on December 31, 2021?

Shannon Company began operations on January 1, 2020. Financial statements for the years
ended December 31, 2020 and 2021 contained the following errors:
2020 2021
Ending inventory 160,000 understated 150,000 overstated
Depreciation Expense 60,000 understated
Insurance expense 100,000 overstated 100,000 understated
Prepaid insurance 100,000 understated
In addition on December 31, 2021, fully depreciated machinery was sold for 110,000 cash but
the sale was not recorded until 2022.
No corrections have been made for any of the errors. Ignore income tax.
What amount should be reported as net effect of the errors on 2021 net income?
What amount should be reported as net effect of the errors on retained earnings on December
31, 2021?
What amount should be reported as net effect of the errors on working capital on December 31,
2021?

Holder Company reported the following errors:

2021 2022
Over(under)statement of ending inventory (100,000) 40,000
Depreciation understatement 40,000 60,000
Failure to accrue salaries at year-end 80,000 120,000
What amount should be reported as net effect of the errors on net income for 2022?
What amount should be reported as net effect of the errors on retained earning on December
31, 2022?

Galaxy Company provided the following information

2022 2021
Revenue 1,350,000 1,000,000
Expenses 980,000 650,000
Net Income 370,000 350,000
Total Asset 1,570,000 1,050,000
Total Liabilities 500,000 350,000
Total owners’ equity 1,070,000 700,000
The entity failed to record 120,000 of accrued wages at the end of 2021. The wages were
recorded paid in January 2022. The correct accruals were made on December 31, 2022.
What amount should be reported as net income for 2021?
What amount should be reported as net income for 2022?

Problem Solving (Statement of Cash flow)

Seawall Company provided the following data for the preparation of the statement of cash flows
for the current year
Dividends declared and paid 800,000
Net cash used in investing activities (2,500,000)
Net cash used in financing activities (800,000)
December 31 January 1
Cash 3,100,000 1,200,000
Other assets 21,000,000 22,700,000
Liabilities 10,500,000 11,700,000
Share capital 2,000,000 2,000,000
Retained Earnings 10,000,000 10,200,000
What amount should be reported as net cash provided by operating activities?

Sun Company provided the following data for the preparation of the