Chapter 7- Problem 2: MC Theories

PFRS 18 Presentation and Disclosure in Financial Statements | PAS 8 Basis of Preparation of Financial Statements

The PFRS Accounting Standards apply to which of the following?

a. A management's review of the entity's financial performance during the period vis-a-vis its targets for that period contained in the entity's annual report, which also includes the entity's financial statements.

b. Schedules, reconciliations and returns required by the Bureau of Internal Revenue (BIR) to be filed together with the financial statements.

c. Environmental reports acquired by the Department of Environment and Natural Resources (DENR) that are included in the entity’s annual report.

d. Explanatory material and other information that are disclosed in the notes to the financial statements

D

Which of the following is a correct sequence of information presented in the notes?

I. Disaggregation of line items

II. General information on the reporting entity

III. Statement of compliance with the PFRS Accounting Standards and Basis of preparation of financial statements

IV. Other disclosures

V. Summary of material accounting policy information

A. I, II, IV, and IV

B. I, V, II, III, and IV

C. II, III, I, V and IV

D. II, III, V, I and IV

D

Which of the following will most likely appear on the summary of material accounting policy information section and the notes?

a. Definition of cash equivalents

b. breakdown of the composition of inventories

c. disclosures not required by the PFRS Accounting Standards but are deemed relevant to the understanding of the financial statements

d. explanation on how the unrealized gains on investment property in the periods presented are calculated

A

Which of the following will most likely meet the definition of a management-defined performance measure?

a. Gross profit

b. Operating profit or loss before depreciation, amortization and impairments within the scope of PAS 36

c. Profit from continuing operations adjusted for non-recurring income and expenses.

d. Return on equity

C

PAS 8 Basis of Preparation of Financial Statements
Which of the following is not included among the general matters in preparation of financial statements?

a. Growing concern

b. Accrual basis

c. Fair presentation and compliance with PFRS Accounting Standards

d. Proper selection and application of accounting policies

A

State the correct order of the hierarchy of financial reporting standards under PAS 8.

I. PFRS Accounting Standards

II. Other accounting literature and industry practices

III. Reuquirements in other PFRS Accounting Standards dealing with similar transactions

IV. Management’s judgment

V. Standards issued by other standard-setting bodies that use a similar conceptual framework

VI. Conceptual Framework

a. I, III, VI, V, IV, and II

b. I, III, VI, V, II and IV

c. I, IV, III, VI, V and II

d. I, III, VI, IV, V and II

C

ABC Co.’s depreciation expense for the period is overstated. Which of the following statements is incorrect?

a. ABC Co.’s financial statements provide relevant information but that information is not faithfully represented.

b. ABC Co. cannot rectify the error by simply making appropriate disclosures in the notes.

c. ABC Co. can rectify the error by simply making appropriate disclosures in the notes.

d. ABC Co.’s financial statements do not comply with the general feature of fair presentation.

C

Comprehensive income excludes which of the following?

a. Gains and losses arising from translation of foreign operation.

b. Gains and losses from investments measured at fair value through other comprehensive income.

c. Correction of prior period error.

d. Share in the profit or loss of an associate that is accounted for using the equity method.

C

It results from changes in the realization (or incurrence) of expected inflow (or outflow) of economic benefits from asset (or liabilities).

a. Change in accounting policy

b. Change in accounting estimate

c. Error

d. Any of these

B

When an entity changes from the straight-line method of depreciation to the double-declining-balance method, which of the following should be reported?

Cumulative effect of a retrospective application | Cumulative effect of a retrospective statement
a. Yes | Yes
b. Yes | No

c. No | Yes

d. No | No

D

When it is difficult to determine whether a change is a change in accounting policy or a change in accounting estimate, the change is treated as a(n)

a. change in accounting estimate

b. change in accounting policy

c. error

d. any of these, as a matter of an accounting policy choice.

A

The effect of which of the following events is not recognized in profit or loss?

a. Change in the useful life of an intangible asset.

b. Change in depreciation method.

c. Change in the percentage used to determine the allowance for bad debts.

d. Failure to accrue warranty obligation in the prior period

D

A voluntary change in accounting policy is accounted for

a. by retrospective restatement

b. by prospective application

c. by retrospective application

d. not accounted for

C

The effect of a change in accounting estimate is reflected in profit or loss in the

a. current period or current and future periods

b. current period and prior periods

c. current period only

d. none of these. The effect is recognized in retained earnings.

A

Which of the following statements is the least accurate statement?

a. Management motivations can influence the accounting policy choices made.

b. Performance evaluation is an objective of financial reporting

c. Profit for the period provides a good measure of an entity’s debt-paying ability

d. PFRS 18 requires that the components of total comprehensive income should be presented prominently in the financial statements rather than in the notes.

C

Which of the following concepts or principles relates most directly to reporting accounting changes and errors?

a. Conservatism

b. Consistency

c. Objectivity

d. Materiality

B

The effect of a change from one accepted accounting principle to another is reflected in the financial statements by reporting the cumulative effect of the change in the

a. Income statement for the current period

b. Income statement for future periods, if they are affected

c. opening balance of retained earnings.

d. notes only, as a note disclosure

C

PAS 18 Events after the Reporting Period

These refer to those that occur between the end of the reporting period and the date of the financial statements are authorized for issue by an entity’s management.

a. Events after the income statement

b. Events after the reporting period

c. External events

d. Intervening events

B

Mahogany Co. uses a calendar year period for its financial reporting. Its current financial statements are authorized for issue on March 1, 20×1. Mahogany Co.’s events after the reporting period are those events that occur

a. From January 1, 20×1 to March 1, 20×1

b. From December 31, 20×1 to March 1, 20×1

c. From January 1, 20×2 to March 1, 20×2

d. From January 1, 20×0 to March 1, 20×1.

A

These are events that provide conditions that existed at the end of reporting period.

a. Adjusting events

b. Non-adjusting events

c. Nonreciprocal transfers

d. Events other than transfers

A

Which of the following events after the reporting period is accounted for as a non-adjusting event?

a. Debtor of the entity files for bankruptcy. The entity has an outstanding account receivable from the debtor.

b. Declaration of dividends for which the entity incurs a legal obligation to pay.

c. Sale of inventory which provides information that the estimate of net realizable value as at the end of the reporting period is understated.

d. Discovery of an error in the comparative information to the current-year financial statements.

B

Which of the following events after the reporting period is treated as an adjusting event?

a. A warranty obligation recognized in the year-end financial statements at P 260,000 was settled for P 290,000.

b. The entity, a lessee, entered into a binding agreement with the lessor for the purchase of the leased asset.

c. The entity adopted a formal plan to discontinue one of its operations and announced the plan publicly.

d. The entity acquired 90% of the voting interest in another company.

A

ABC Ltd. decided to operate a new amusement park that will cost P1 million to build in the year 2005. Its financial year-end is December 31,2005. ABC Ltd. has applied for a letter of guarantee of P700,000. The letter of guarantee was issued on March 31,2006. The audited financial statements have been authorized to be issued on April 18, 2006. The adjustment required to be made to the financial statement for the year ended December 31, 2005 should be

a. Booking a P700,000 long-term payable.

b. Disclosing P700,000 as a contingent liability in 2005 financial statement.

c. Increasing the contingency reserve by P700,000

d. Do nothing

D

International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign currency transactions. Subsequent to the balance sheet date, and before the “date of authorization” of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. International Inc. should

a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in foreign exchange rates.

b. Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in foreign-exchange rates (and not just adverse movements).

c. Disclose the post-balance sheet event in footnotes as a non-adjusting event.

d. Ignore the post-balance sheet event

C

At the balance sheet date, December 31, 2005, ABC Inc. carried a receivable from XYZ, a major customer, at P10 million. The “authorization date” of the financial statements is on February 16, 2006. XYZ declared bankruptcy on Valentine’s Day (February 14, 2006). ABC Inc. will

a. Disclose the fact that XYZ has declared bankruptcy in the footnotes.

b. Make a provision for this post-balance sheet event in its financial statements (as opposed to disclosure in footnotes_.

c. Ignore the event and wait for the outcome of the bankruptcy because the event took place after the year-end.

d. Reverse the sale pertaining to this receivable in the comparatives for the prior period and treat this as an “error“ under AIS 8.

B