Introduction to Accounting

Part 1: Fundamentals of Accounting

1. What is the main purpose of accounting?

a) To record only financial transactions
b) To provide quantitative financial information for decision-making
c) To manage business operations
d) To ensure compliance with government regulations

2. Which of the following is NOT a fundamental activity of accounting?

a) Identifying
b) Measuring
c) Communicating
d) Selling

3. Accounting is considered a service activity because it:

a) Focuses on helping businesses sell more products
b) Provides financial information useful for decision-making
c) Records all types of business activities
d) Controls business operations

4. According to the American Association of Accountants (AAA), accounting is the process of:
a) Recording financial transactions only
b) Identifying, measuring, and communicating economic information
c) Preparing tax returns
d) Managing financial assets

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Part 2: Accounting Concepts & Principles

5. The assumption that a business will continue operating indefinitely is called:

a) Historical cost
b) Going concern
c) Accrual basis
d) Matching

6. The double-entry system in accounting means that:

a) Each transaction affects only one account
b) Each transaction has equal debit and credit entries
c) Financial statements are prepared twice a year
d) A company must record revenue before expenses
7. Which principle states that financial statements should reflect only business activities and not
personal transactions of owners?
a) Matching principle
b) Going concern
c) Separate entity concept
d) Prudence

8. Which accounting principle requires expenses to be recognized in the same period as the
related revenues?
a) Accrual basis
b) Matching principle
c) Materiality concept
d) Cost-benefit principle

9. The concept that financial information should be reported in a way that does not mislead
users is known as:
a) Conservatism
b) Full disclosure
c) Time period assumption
d) Articulation

10. Which of the following is NOT a measurement basis used in accounting?

a) Historical cost
b) Present value
c) Depreciated cost
d) Realizable value

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Part 3: Branches & Sectors of Accounting

11. Which branch of accounting focuses on preparing financial statements for external users?
a) Financial Accounting
b) Management Accounting
c) Cost Accounting
d) Auditing

12. Tax accounting mainly deals with:

a) The preparation of tax returns and tax planning
b) Managing a company’s financial records
c) Recording payroll transactions
d) Financial statement analysis
13. The practice of accountancy in the government sector primarily involves:
a) Auditing private companies
b) Preparing financial reports for the government and government-owned corporations
c) Managing corporate taxes
d) Preparing financial statements for shareholders

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Part 4: Accounting Standards & Organizations

14. The Financial Reporting Standards Council (FRSC) in the Philippines replaced which
accounting body?
a) International Accounting Standards Board (IASB)
b) International Financial Reporting Standards (IFRS)
c) Accounting Standards Council (ASC)
d) Board of Accountancy (BOA)

15. Which of the following is NOT a component of Philippine Financial Reporting Standards
(PFRS)?
a) Philippine Accounting Standards (PAS)
b) Philippine Financial Reporting Standards (PFRS)
c) Interpretations
d) General Business Policies

16. What is the purpose of Generally Accepted Accounting Principles (GAAP)?

a) To regulate tax payments
b) To standardize financial reporting and ensure comparability
c) To manage business costs
d) To monitor the stock market

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Part 5: Professional & Legal Framework

17. Which law regulates the practice of accountancy in the Philippines?

a) Republic Act No. 10912
b) Republic Act No. 9298
c) Securities Regulation Code
d) Philippine Financial Reporting Standards Act

18. Who is responsible for administering the Philippine CPA licensure exam?
a) Securities and Exchange Commission (SEC)
b) Board of Accountancy (BOA)
c) Philippine Institute of Certified Public Accountants (PICPA)
 d) Department of Finance (DOF)

19. The Continuing Professional Development (CPD) law requires CPAs to:
a) Earn 120 CPD units within a certain period
b) Retake the CPA exam every 5 years
c) Work only in public practice
d) Complete a yearly internship

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Part 6: Financial Reporting & Measurement

20. Which of the following is the most commonly used measurement basis in accounting?
a) Fair value
b) Present value
c) Historical cost
d) Inflation-adjusted cost

21. Valuation that is based on estimates rather than factual costs is known as:
a) Valuation by fact
b) Valuation by opinion
c) Current valuation
d) Present value method

Part 7: International Accounting Standards

22. Which organization replaced the International Accounting Standards Committee (IASC)?
a) Financial Reporting Standards Council (FRSC)
b) International Federation of Accountants (IFAC)
c) International Accounting Standards Board (IASB)
d) International Organization of Securities Commissions (IOSCO)

23. Which international organization is responsible for developing IFRS?

a) Philippine Interpretations Committee (PIC)
b) International Federation of Accountants (IFAC)
c) International Accounting Standards Board (IASB)
d) Financial Executives Institute of the Philippines

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Part 8: Ethics & Professional Development

24. Which law mandates Continuing Professional Development (CPD) for all regulated
professions, including accountancy?
a) Republic Act No. 9298
b) Republic Act No. 10912
c) Securities Regulation Code
d) IFRS Compliance Act

25. CPAs who reach what age are exempted from CPD requirements in the Philippines?
a) 55
b) 60
c) 65
d) 70

Answer Key
1. b | 2. d | 3. b | 4. b | 5. b | 6. b | 7. c | 8. b | 9. b | 10. c
11. a | 12. a | 13. b | 14. c | 15. d | 16. b | 17. b | 18. b | 19. a | 20. c
21. b | 22. c | 23. c | 24. b | 25. c
CONCEPTUAL FRAMEWORK
Part 1: Updates in Accounting Bodies & Sustainability Standards

1. What is the new name of the Financial Reporting Standards Council (FRSC) as per the 2022
resolution?
a) International Reporting Council
b) Financial and Sustainability Reporting Standards Council (FSRSC)
c) Philippine Financial Standards Board
d) International Accounting Standards Board

2. The International Sustainability Standards Board (ISSB) was created to develop:

a) Taxation reporting guidelines
b) Financial reporting standards for government entities
c) A global baseline of sustainability disclosures
d) Legal frameworks for business taxation

3. Which of the following is NOT a key objective of the ISSB?

a) Developing standards for sustainability disclosures
b) Reducing the role of financial reporting
c) Meeting the information needs of investors
d) Facilitating interoperability with jurisdiction-specific disclosures

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Part 2: Conceptual Framework for Financial Reporting

4. Which of the following is NOT a purpose of the Conceptual Framework?

a) Assist the IASB in developing consistent standards
b) Assist preparers in applying consistent accounting policies
c) Override IFRS standards when conflicts arise
d) Help users understand and interpret financial statements

5. Which of the following is NOT included in the scope of the Conceptual Framework?
a) Objective of financial reporting
b) Qualitative characteristics of useful financial information
c) Business taxation policies
d) Measurement and presentation of financial information

6. The Conceptual Framework is considered:

a) A replacement for IFRS
b) A guideline for developing accounting standards
c) A law regulating financial reporting
d) A tax compliance manual
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Part 3: Objective of Financial Reporting & Users of Financial Information

7. The primary objective of financial reporting is to provide financial information useful to:
a) The general public
b) Internal management only
c) Existing and potential investors, lenders, and creditors
d) Only government agencies

8. Which of the following is NOT a primary user of financial reports?

a) Existing and potential investors
b) Lenders and creditors
c) Business managers
d) Government agencies

9. Which of the following is a limitation of financial reporting?

a) Financial statements provide all information investors need
b) Financial reports show the exact value of an entity
c) Financial reports are based on estimates and judgments
d) Every user’s information request can be accommodated

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Part 4: Qualitative Characteristics of Financial Information

10. Which of the following is a fundamental qualitative characteristic of financial information?

a) Comparability
b) Timeliness
c) Relevance
d) Understandability

11. Faithful representation requires financial information to be:

a) Predictable and timely
b) Complete, neutral, and free from error
c) Comparable and well-documented
d) Simple and easy to read

12. Which qualitative characteristic allows different users to reach consensus on what the
financial information represents?
a) Timeliness
b) Comparability
c) Verifiability
 d) Understandability

13. Which characteristic ensures that financial information can be used to compare different
companies or time periods?
a) Prudence
b) Comparability
c) Consistency
d) Neutrality

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Part 5: Elements of Financial Statements

14. Which of the following is NOT an element of financial statements?

a) Assets
b) Liabilities
c) Cash flows
d) Equity

15. Which of the following best defines an asset?

a) An economic benefit that might be received in the future
b) A present economic resource controlled by the entity as a result of past events
c) Any transaction that has the potential to generate income
d) A legal claim on a company’s resources

16. A liability is defined as:

a) An asset held for future economic gain
b) An obligation to transfer an economic resource as a result of past events
c) Any reduction in revenue
d) The portion of profits paid to shareholders

17. Equity is best described as:

a) The difference between assets and liabilities
b) The total amount of company revenue
c) The amount of cash available to a company
d) The value of company property

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Part 6: Recognition, Measurement, and Derecognition

18. Which of the following is a key criterion for recognizing an element in financial statements?
a) The element must be directly observable
b) The element must be legally registered
 c) The element must meet the definition of an asset, liability, equity, income, or expense
d) The element must be approved by the government

19. Measurement bases include all of the following EXCEPT:

a) Historical cost
b) Fair value
c) Accrual value
d) Present value

20. Derecognition occurs when:

a) A financial element no longer meets the definition of an asset or liability
b) An asset is fully depreciated
c) A company purchases a new asset
d) A liability is transferred to another entity

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Part 7: Financial Statements & Reporting Entity

21. The statement of financial position provides information about:

a) The company’s revenue and expenses
b) The company’s cash flow activities
c) The company’s assets, liabilities, and equity at a point in time
d) The company’s profit for the year

22. Which of the following financial statements provides information about income and
expenses?
a) Statement of financial position
b) Statement of financial performance
c) Statement of cash flows
d) Notes to financial statements

23. A reporting entity can be any of the following EXCEPT:

a) A single corporation
b) A group of companies
c) A legal entity that is not required to prepare financial statements
d) A division of a business

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Part 8: Capital & Capital Maintenance

24. Which concept views capital as the entity’s productive capacity?

a) Financial capital maintenance
 b) Physical capital maintenance
c) Fair value accounting
d) Market value approach

25. Under the financial capital maintenance concept, a profit is recognized when:
a) Net assets at the end of a period exceed net assets at the beginning
b) Total cash inflow exceeds total cash outflow
c) The market value of assets increases
d) The company has no liabilities

Answer Key
1. b | 2. c | 3. b | 4. c | 5. c | 6. b | 7. c | 8. c | 9. c | 10. c
11. b | 12. c | 13. b | 14. c | 15. b | 16. b | 17. a | 18. c | 19. c | 20. a
21. c | 22. b | 23. c | 24. b | 25. a
PAS 1: PRESENTATION OF FINANCIAL
STATEMENTS
Part 1: Overview and Purpose of IAS 1

1. What is the primary objective of IAS 1?

a) To provide guidelines for taxation reporting
b) To prescribe the basis for presenting general-purpose financial statements for comparability
c) To regulate accounting policies for specific industries
d) To replace all previous IFRS standards

2. IAS 1 applies to:

a) The structure and content of financial statements for all entities
b) Only financial statements of publicly traded companies
c) Only interim financial reports prepared under IAS 34
d) The preparation of managerial accounting reports

3. Which of the following is NOT a requirement of IAS 1?

a) Guidelines for financial statement structure
b) Recognition and measurement of financial transactions
c) Minimum content requirements for financial statements
d) Rules for classifying liabilities as current or non-current

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Part 2: General Purpose Financial Statements and Components

4. A complete set of financial statements under IAS 1 includes all the following EXCEPT:
a) Statement of financial position
b) Statement of profit or loss and other comprehensive income
c) Statement of retained earnings
d) Statement of cash flows

5. Comparative information is required in the financial statements for:

a) At least one preceding period
b) Five preceding periods
c) Only the current reporting period
d) Entities listed on a stock exchange only

6. Which financial statement provides information about a company’s assets, liabilities, and
equity at a specific point in time?
a) Statement of cash flows
b) Statement of changes in equity
 c) Statement of financial position
d) Statement of profit or loss

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Part 3: Key Principles and Assumptions

7. Which basis of accounting is required for financial statements under IAS 1?

a) Cash basis
b) Accrual basis
c) Hybrid basis
d) Tax basis

8. The going concern assumption states that:

a) A business will continue operating for the foreseeable future
b) Financial statements should be prepared on a liquidation basis
c) Entities must close within five years of inception
d) Profit must be recognized as soon as a sale is made

9. Materiality in financial statements means that:

a) All information, regardless of its size, must be disclosed
b) Only large companies need to consider materiality
c) Information is material if its omission or misstatement could influence users’ decisions
d) Financial statements must contain every transaction detail

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Part 4: Statement of Financial Position (Balance Sheet)

10. IAS 1 requires assets and liabilities to be classified as:

a) Current and non-current
b) Short-term and long-term
c) Fixed and variable
d) Operating and financing

11. Which of the following is NOT considered a current asset?

a) Cash and cash equivalents
b) Inventory
c) Land held for long-term investment
d) Trade receivables

12. Under IAS 1, a liability is classified as current if:

a) It is expected to be settled within 12 months
b) The company has the right to defer payment beyond 12 months
 c) It is related to the company’s operating cycle, even if it extends beyond 12 months
d) It arises from a long-term contract

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Part 5: Statement of Profit or Loss and Other Comprehensive Income

13. Which of the following items is NOT included in Other Comprehensive Income (OCI)?
a) Gains or losses from foreign currency translation
b) Unrealized gains on revalued assets
c) Interest revenue from bank deposits
d) Changes in fair value of certain financial instruments

14. Profit or loss for the period is calculated as:

a) Revenue – Expenses
b) Assets – Liabilities
c) Income + Contributions from owners
d) Cash Inflows – Cash Outflows

15. If an entity presents a separate Statement of Profit or Loss, how should it structure its
financial statements?
a) The separate profit or loss statement must come after the statement of changes in equity
b) The statement of profit or loss must precede the statement of other comprehensive income
c) The statement of financial position must come before profit or loss
d) The statement of cash flows should come before profit or loss

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Part 6: Statement of Changes in Equity and Cash Flows

16. The Statement of Changes in Equity provides information about:

a) Cash movements during a period
b) Contributions by and distributions to owners
c) Total expenses incurred by an entity
d) Adjustments made to current liabilities

17. Which statement is TRUE regarding the Statement of Cash Flows?

a) It is not required under IAS 1
b) It shows cash flows from operating, investing, and financing activities
c) It replaces the income statement for cash-based businesses
d) It includes all cash received, even from loans

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Part 7: Presentation, Disclosures, and Other Requirements

18. IAS 1 requires entities to present information in a manner that is:

a) Based on management’s discretion without guidelines
b) Understandable, relevant, reliable, and comparable
c) Only useful for government regulators
d) Designed specifically for external auditors

19. Offsetting assets and liabilities in financial statements is allowed when:

a) It makes the financial statements appear more favorable
b) It is required or permitted by an IFRS standard
c) It helps management hide unfavorable transactions
d) The entity operates in multiple countries

20. A company that changes its financial statement presentation must:

a) Notify its shareholders but not adjust prior periods
b) Apply the new presentation retrospectively unless impracticable
c) Only disclose the change in a footnote
d) Adopt new formats every reporting period for flexibility

Answer Key
1. b | 2. a | 3. b | 4. c | 5. a | 6. c | 7. b | 8. a | 9. c | 10. a
11. c | 12. a | 13. c | 14. a | 15. b | 16. b | 17. b | 18. b | 19. b | 20. b
IFRS 18: PRESENTATION & DISCLOSURE IN
FINANCIAL STATEMENTS
Part 1: Overview and Purpose of IFRS 18

1. What is the primary objective of IFRS 18?

a) To introduce new financial reporting principles for taxation
b) To improve consistency, comparability, and transparency in financial statement presentation
c) To replace all IFRS Accounting Standards with a new framework
d) To regulate financial reporting for banks and insurers only

2. IFRS 18 replaces which previous accounting standard?

a) IAS 7 – Statement of Cash Flows
b) IFRS 15 – Revenue from Contracts with Customers
c) IAS 1 – Presentation of Financial Statements
d) IFRS 9 – Financial Instruments

3. When is IFRS 18 effective for annual periods?

a) 1 January 2025
b) 1 January 2026
c) 1 January 2027
d) 1 January 2028

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Part 2: Income Statement Structure and Classification of Income & Expenses

4. IFRS 18 introduces a more structured income statement that classifies income and expenses
into which three new categories?
a) Revenue, Gains, and Losses
b) Operating, Investing, and Financing
c) Assets, Liabilities, and Equity
d) Income, Expenses, and Capital

5. Where are results from equity-accounted investees presented in the income statement under
IFRS 18?
a) Under the operating category
b) Under the investing category
c) Under the financing category
d) Under the discontinued operations category

6. Which of the following is classified under the investing category?

a) Depreciation on manufacturing equipment
 b) Rental income from investment properties
c) Interest expense on bonds issued by the company
d) Salaries and wages of employees

7. How are foreign exchange differences classified under IFRS 18?

a) In the financing category only
b) In the same category as the related income or expenses
c) Under other comprehensive income (OCI)
d) As part of the operating category by default

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Part 3: Management-Defined Performance Measures (MPMs)

8. IFRS 18 introduces the concept of Management-Defined Performance Measures (MPMs).

What is the key requirement for MPMs?
a) They must be presented in the statement of profit or loss
b) They must be disclosed in a single note to the financial statements
c) They are not allowed in IFRS-compliant financial statements
d) They must be included in the statement of changes in equity

9. Which of the following is NOT an example of an MPM?

a) Adjusted EBITDA
b) Free Cash Flow
c) Gross Profit
d) Return on Invested Capital (ROIC)

10. What specific disclosure is required for MPMs?

a) A detailed explanation in the management commentary section only
b) A reconciliation to the most directly comparable IFRS-defined measure
c) A summary in the balance sheet
d) A footnote in the financial statements without further explanation

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Part 4: Aggregation and Disaggregation of Information

11. IFRS 18 introduces enhanced principles for aggregation and disaggregation. What is the
primary focus of these principles?
a) To allow companies to combine as many line items as possible
b) To ensure material information is appropriately grouped and disclosed
c) To eliminate the need for comparative information
d) To replace financial statements with summarized reports
12. Which of the following is discouraged under IFRS 18?
a) Using generic labels such as "Other Expenses" without further details
b) Providing additional disclosures for significant line items
c) Separating similar transactions for better clarity
d) Reporting a subtotal for operating profit

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Part 5: Changes to Financial Statements

13. Which major change does IFRS 18 introduce in the statement of cash flows?
a) Elimination of the indirect method
b) Starting with the "Operating Profit" subtotal instead of net income
c) Mandatory direct method for all entities
d) Removal of cash flow classification for dividends and interest

14. How must goodwill be presented in the balance sheet under IFRS 18?
a) As part of intangible assets
b) As a separate line item
c) Included within retained earnings
d) Under non-current liabilities

15. IFRS 18 introduces additional disclosures for which financial metric?

a) Price-to-Earnings (P/E) Ratio
b) Earnings Per Share (EPS)
c) Return on Assets (ROA)
d) Book Value Per Share

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Part 6: Interim Financial Reporting and Transition to IFRS 18

16. How should companies transition to IFRS 18 when preparing interim financial reports?
a) Apply the new standard only to year-end reports
b) Restate previous interim periods for comparability
c) Use an entirely new format with no reference to past standards
d) Continue following IAS 1 for interim periods until full adoption

17. Which of the following is NOT an action recommended for companies preparing for IFRS
18?
a) Assess the impact on financial statement presentation
b) Communicate the changes to investors and stakeholders
c) Disregard changes in classification of financial items
d) Review and update internal reporting systems
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Part 7: Special Considerations for Banks and Insurers

18. How does IFRS 18 impact financial institutions such as banks?

a) Interest income and expenses related to customer financing may be classified in the
operating category
b) Banks must classify all income and expenses under a single category
c) The new standard eliminates the need for interest rate disclosures
d) IFRS 18 does not apply to banks

19. For insurance companies, IFRS 18 requires specific classification rules for:
a) Premium income and insurance finance income
b) Investment properties only
c) Operating lease income
d) All liabilities

Answer Key
1. b | 2. c | 3. c | 4. b | 5. b | 6. b | 7. b | 8. b | 9. c | 10. b
11. b | 12. a | 13. b | 14. b | 15. b | 16. b | 17. c | 18. a | 19. a
PAS 2: INVENTORIES
Part 1: Introduction to Inventories & Merchandising Companies

1. What is the primary objective of PAS 2?

a) To provide tax regulations for inventory transactions
b) To prescribe the accounting treatment for inventories, including cost measurement and
expense recognition
c) To regulate inventory purchases in international trade
d) To introduce a new method for inventory valuation

2. Which of the following is NOT classified as inventory under PAS 2?

a) Finished goods held for sale
b) Raw materials used in production
c) Machinery used for production
d) Work-in-progress items

3. A merchandising company primarily earns revenue by:

a) Manufacturing products and selling them at retail stores
b) Providing services and charging fees
c) Buying and reselling goods for profit
d) Leasing equipment to customers

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Part 2: Inventory Systems – Perpetual vs. Periodic

4. Which inventory system maintains continuous and detailed records of inventory transactions?
a) Perpetual Inventory System
b) Periodic Inventory System
c) FIFO Inventory System
d) Just-in-Time (JIT) Inventory System

5. Under the periodic inventory system, when is the cost of goods sold determined?
a) At the time of each sale
b) Only at the end of an accounting period
c) Continuously throughout the period
d) After each purchase transaction

6. Which of the following types of businesses is most likely to use a perpetual inventory system?
a) A supermarket with thousands of low-value items
b) A jewelry store with high-value items
c) A small convenience store with rapid inventory turnover
d) A food vendor at a local market
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Part 3: Measurement and Valuation of Inventories

7. Under PAS 2, inventories should be measured at:

a) The higher of cost or fair value
b) The lower of cost and net realizable value
c) The price set by management
d) The replacement cost of inventory

8. Which of the following is included in the cost of inventory?

a) Selling expenses
b) Storage costs after production is completed
c) Freight-in costs for purchased goods
d) Marketing and advertising expenses

9. The cost of inventory includes all the following EXCEPT:

a) Purchase price
b) Import duties and transport costs
c) Normal factory overhead costs
d) Sales commissions

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Part 4: Cost Formulas and Inventory Valuation Methods

10. Which inventory costing method assumes that the oldest inventory items are sold first?
a) Weighted Average Cost
b) Specific Identification
c) First-In, First-Out (FIFO)
d) Last-In, First-Out (LIFO)

11. The weighted average cost method:

a) Assigns costs to inventory based on the most recent purchases
b) Determines cost based on the average cost of all units available during the period
c) Matches inventory costs with specific purchase invoices
d) Recognizes the highest cost of inventory first

12. Which inventory valuation method is NOT permitted under PAS 2?

a) FIFO
b) Weighted Average
c) LIFO
d) Specific Identification
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Part 5: Purchase Transactions and Discounts

13. What type of discount is given to encourage buyers to purchase in large quantities?
a) Cash discount
b) Trade discount
c) Seasonal discount
d) Promotional discount

14. Which of the following best describes a cash discount?

a) A reduction in price given for purchasing in bulk
b) A deduction from the invoice price if payment is made early
c) A price adjustment due to defective goods
d) A discount given during holiday sales

15. Under the net method of recording purchases, if a purchase discount is not availed within
the discount period, the discount lost is recorded as:
a) A reduction in inventory cost
b) A finance cost or other expense
c) An increase in retained earnings
d) A revenue item

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Part 6: Freight Costs & Shipping Terms

16. Under FOB Shipping Point, who is responsible for paying the freight cost?
a) The buyer
b) The seller
c) The shipping company
d) The government

17. Under FOB Destination, when does ownership of the goods transfer to the buyer?
a) When the seller ships the goods
b) When the goods arrive at the buyer’s location
c) When the invoice is issued
d) When payment is made

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Part 7: Sales Transactions and Revenue Recognition

18. Under the perpetual inventory system, what is recorded when merchandise is sold?
a) An entry for cash received only
b) An entry for sales revenue and an entry for cost of goods sold
c) Only an entry for accounts receivable
d) An adjustment to inventory at year-end

19. Sales returns and allowances are classified as:

a) Operating expenses
b) Contra-revenue accounts
c) Inventory accounts
d) Liability accounts

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Part 8: Value-Added Tax (VAT) in Inventory Transactions

20. Under VAT accounting, input tax is recorded when:

a) Sales are made
b) Inventory is purchased
c) Income tax is paid
d) Dividends are declared

21. What happens when output VAT exceeds input VAT?

a) The excess is classified as VAT Payable
b) The business receives a tax refund
c) No adjustment is needed
d) The amount is transferred to inventory

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Part 9: Inventory Write-downs & Expense Recognition

22. When must inventory be written down to net realizable value?

a) If market prices increase significantly
b) If inventory is damaged, obsolete, or selling price declines
c) If production costs increase
d) Only if the business is closing down

23. Which of the following inventory costs is expensed in the period incurred?
a) Freight-in costs
b) Abnormal waste of materials
c) Normal factory overhead costs
d) Costs incurred in bringing inventory to its present condition
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Part 10: Disclosure Requirements

24. Which of the following must be disclosed in the financial statements according to PAS 2?
a) Inventory valuation methods used
b) Details of all inventory purchases
c) Name of the supplier
d) The selling price of each product

25. A reversal of an inventory write-down must be recognized when:

a) Economic conditions improve and inventory value increases
b) The inventory is sold at a loss
c) The write-down amount is no longer material
d) The company changes its accounting policy

Answer Key
1. b | 2. c | 3. c | 4. a | 5. b | 6. b | 7. b | 8. c | 9. d | 10. c
11. b | 12. c | 13. b | 14. b | 15. b | 16. a | 17. b | 18. b | 19. b | 20. b
21. a | 22. b | 23. b | 24. a | 25. a
PAS 7: STATEMENT OF CASH FLOWS
Part 1: Introduction and Objectives of PAS 7

1. What is the primary objective of PAS 7?

a) To determine net income for financial reporting
b) To provide information about changes in cash and cash equivalents during a period
c) To replace the income statement as the main financial report
d) To record all revenue and expenses on a cash basis

2. The statement of cash flows helps users assess an entity’s ability to:
a) Generate cash and cash equivalents
b) Calculate total expenses for the period
c) Compute tax liabilities
d) Measure working capital efficiency

3. Historical cash flow information is useful for:

a) Predicting future cash flows
b) Eliminating the need for balance sheets
c) Assessing revenue growth
d) Determining total dividends

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Part 2: Definitions and Components of Cash Flow

4. Which of the following is NOT considered cash under PAS 7?

a) Cash on hand
b) Demand deposits
c) Short-term investments with maturities over 12 months
d) Bank balances

5. Cash equivalents must have which characteristics?

a) Readily convertible to a known amount of cash
b) Long-term investment potential
c) High risk of value fluctuation
d) No maturity period requirement

6. Which of the following is classified as a cash equivalent?

a) Equity shares with no maturity
b) Three-month treasury bills
c) Bonds maturing in five years
d) Land held for resale
---

Part 3: Classification of Cash Flows

7. What are the three main classifications of cash flows in the statement of cash flows?
a) Revenue, Expenses, and Equity
b) Assets, Liabilities, and Equity
c) Operating, Investing, and Financing
d) Income, Expenses, and Retained Earnings

8. Which activity category includes transactions related to the principal revenue-producing

operations of a company?
a) Operating Activities
b) Investing Activities
c) Financing Activities
d) Equity Activities

9. Which of the following is classified as an investing activity?

a) Cash payments for acquiring property, plant, and equipment
b) Cash received from issuing new shares
c) Payment of dividends
d) Receipt of interest on loans

10. Which of the following cash flows is classified under financing activities?
a) Purchase of marketable securities
b) Payment of salaries and wages
c) Issuance of bonds payable
d) Purchase of raw materials

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Part 4: Reporting Methods – Direct vs. Indirect

11. Under PAS 7, cash flows from operating activities can be reported using which methods?
a) Direct and Indirect
b) Cash and Accrual
c) Gross and Net
d) Periodic and Perpetual

12. Which of the following is an advantage of the direct method of reporting cash flows?
a) It is simpler to prepare
b) It provides more detailed information on cash receipts and payments
c) It does not require reconciliation with net income
d) It eliminates the need for a statement of cash flows
13. Under the indirect method, how is net cash flow from operating activities determined?
a) By directly listing major classes of cash receipts and payments
b) By adjusting net income for non-cash transactions and changes in working capital
c) By recognizing only cash transactions
d) By using estimated values instead of actual transactions

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Part 5: Cash Flow Activities in Detail

14. Which of the following is an example of a cash inflow from operating activities?
a) Sale of fixed assets
b) Issuance of company shares
c) Cash receipts from customers
d) Dividends paid to shareholders

15. Which of the following is an example of a financing activity?

a) Selling old machinery
b) Borrowing money from a bank
c) Paying employee wages
d) Purchasing raw materials

16. Cash payments for acquiring patents and trademarks would be classified as:
a) Operating activity
b) Investing activity
c) Financing activity
d) Tax activity

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Part 6: Foreign Currency Transactions and Special Cases

17. How are foreign currency cash flows recorded in the statement of cash flows?
a) At the exchange rate at the end of the reporting period
b) At the exchange rate on the date of the cash flow transaction
c) Using an average exchange rate for the year
d) At historical cost

18. Which of the following is classified under non-cash transactions and should not be included
in the statement of cash flows?
a) Issuing bonds for cash
b) Exchanging property for shares
c) Borrowing money from a bank
 d) Selling an investment for cash

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Part 7: Interest, Dividends, and Taxation in the Statement of Cash Flows

19. Under PAS 7, interest and dividends received may be classified as:
a) Only operating cash flows
b) Operating or investing cash flows
c) Financing cash flows only
d) Always included in net income

20. Under IFRS 18, dividends paid can be classified as:

a) Only as a financing activity
b) Either an operating or financing activity
c) A tax expense
d) A non-cash adjustment

21. Taxes on income are generally classified as:

a) Investing activities
b) Operating activities
c) Financing activities
d) Non-cash activities

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Part 8: Disclosure Requirements under PAS 7

22. What must an entity disclose in the statement of cash flows?

a) All sources of financing, including undisclosed transactions
b) The amount of significant cash and cash equivalent balances not available for use
c) Future projections of cash flow
d) A detailed list of every transaction affecting cash

23. Liabilities arising from financing activities must be disclosed with:

a) Cash and non-cash changes separately identified
b) Only cash-related transactions
c) A summary of previous financing agreements
d) No additional disclosures are required

Answer Key
1. b | 2. a | 3. a | 4. c | 5. a | 6. b | 7. c | 8. a | 9. a | 10. c
11. a | 12. b | 13. b | 14. c | 15. b | 16. b | 17. b | 18. b | 19. b | 20. b
21. b | 22. b | 23. a
PAS 8: ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES & ERRORS
Part 1: Introduction and Scope of PAS 8

1. What is the main purpose of PAS 8?

a) To regulate financial statement disclosures for public entities
b) To prescribe criteria for selecting, applying, and changing accounting policies and for
correcting errors
c) To define taxation policies for corporate accounting
d) To determine profit allocation for stakeholders

2. PAS 8 applies to:

a) Only publicly traded companies
b) All entities preparing financial statements under PFRS
c) Government agencies only
d) Entities involved in financial investments

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Part 2: Accounting Policies

3. Accounting policies are defined as:

a) Guidelines for taxation compliance
b) Specific principles, bases, conventions, rules, and practices applied in preparing financial
statements
c) Legal requirements for preparing financial statements
d) Government-mandated financial statement formats

4. Which of the following is NOT considered a change in accounting policy?

a) Switching from FIFO to Weighted Average method
b) Adopting the cost model instead of the fair value model
c) Changing from the straight-line method to the declining balance method for depreciation
d) Applying an existing policy to a previously immaterial transaction

5. A change in accounting policy is permitted under PAS 8 if:

a) It is required by a PFRS
b) It results in more relevant and reliable financial information
c) Both a and b
d) It is requested by external auditors

6. When an entity voluntarily changes an accounting policy, it must:

a) Apply the new policy prospectively
 b) Apply the change retrospectively unless impracticable
c) Only disclose the change without adjustments to prior periods
d) Seek approval from tax authorities

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Part 3: Retrospective and Prospective Application

7. Retrospective application means:

a) Applying a new accounting policy to future transactions only
b) Adjusting prior periods as if the new policy had always been applied
c) Using an alternative method for financial reporting
d) Recognizing changes in estimates from the date of change onward

8. When is retrospective application NOT required?

a) When a new accounting standard provides specific transitional provisions
b) When retrospective application is impracticable
c) Both a and b
d) When the change results in an increase in net income

9. Retrospective application is considered impracticable when:

a) The prior period effects cannot be determined
b) It requires assumptions that were not available in the prior period
c) Applying the change requires excessive costs and effort
d) All of the above

10. If retrospective application is impracticable for all periods presented, what should an entity
do?
a) Apply the new accounting policy to future transactions only
b) Apply the policy from the beginning of the earliest period where practicable
c) Use the old policy for all future periods
d) Disclose the change but make no adjustments

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Part 4: Accounting Estimates

11. Accounting estimates involve:

a) Determining financial results using mathematical models
b) Monetary amounts subject to measurement uncertainty
c) Setting fixed values for assets and liabilities
d) Using historical cost for all assets

12. Which of the following is NOT an example of an accounting estimate?

 a) Depreciation expense calculation
b) Determining the net realizable value of inventory
c) Recognizing revenue from a sale
d) Estimating bad debts for accounts receivable

13. Changes in accounting estimates are accounted for using:

a) Retrospective application
b) Prospective application
c) A combination of retrospective and prospective application
d) Disclosure without adjustments

14. Prospective application means:

a) Applying changes to future periods only
b) Restating prior periods for comparability
c) Ignoring the change in accounting estimate
d) Using the old method for comparative financial statements

15. Which of the following is an example of a change in accounting estimate?

a) Changing from FIFO to Weighted Average method
b) Adjusting depreciation due to a revised useful life estimate
c) Changing from cost model to fair value model
d) Correcting an accounting error from a previous year

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Part 5: Accounting Errors

16. An accounting error includes all of the following EXCEPT:

a) Misapplication of accounting policies
b) Mathematical mistakes
c) Changes made due to new accounting standards
d) Oversights or misinterpretations of facts

17. What distinguishes an error from a change in accounting estimate?

a) Errors arise from mistakes, while estimates are based on judgments
b) Errors are voluntary, while estimates are required
c) Errors do not impact financial statements, while estimates do
d) Estimates are considered fraud, while errors are not

18. Which of the following is an example of an intentional accounting error?

a) A clerical mistake in calculating depreciation
b) Using an incorrect discount rate due to a misunderstanding
c) Fraudulently overstating revenue to improve financial ratios
d) Misclassifying an expense as an asset unintentionally
---

Part 6: Retrospective Restatement for Errors

19. How should prior period errors be corrected?

a) By adjusting the current period’s financial statements
b) By retrospective restatement
c) By making a note in the financial statements without adjustments
d) By recognizing an expense in the current period

20. Retrospective restatement requires:

a) Restating comparative amounts for prior periods
b) Adjusting the opening balances of assets, liabilities, and equity for the earliest period
presented
c) Both a and b
d) Prospective application of the correction

21. If retrospective restatement is impracticable, the entity should:

a) Ignore the error and continue with current financial reporting
b) Correct the error prospectively from the earliest practicable date
c) Apply the change only to future transactions
d) Recognize the error in retained earnings without adjustments

22. Which of the following is NOT a type of accounting error?

a) Errors of omission
b) Errors of commission
c) Errors due to fraud
d) Errors due to economic conditions

Answer Key
1. b | 2. b | 3. b | 4. d | 5. c | 6. b | 7. b | 8. c | 9. d | 10. b
11. b | 12. c | 13. b | 14. a | 15. b | 16. c | 17. a | 18. c | 19. b | 20. c
21. b | 22. d
PAS 10: EVENTS AFTER THE REPORTING
PERIOD
Part 1: Introduction and Scope of PAS 10

1. What is the primary purpose of PAS 10?

a) To prescribe how companies should account for revenue transactions
b) To regulate tax treatments for financial transactions
c) To define the accounting treatment and disclosures for events occurring after the reporting
period
d) To determine how assets should be measured at fair value

2. Events after the reporting period refer to:

a) Any event occurring within the financial year
b) Events that occur after the reporting period but before the financial statements are
authorized for issue
c) Transactions that occur within the reporting period
d) Adjustments made to past financial statements

3. If an entity’s reporting period ends on December 31 and its financial statements are
authorized for issue on March 31, the events after the reporting period occur between:
a) December 1 to December 31
b) January 1 to March 31
c) April 1 to December 31
d) February 1 to June 30

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Part 2: Date of Authorization of Financial Statements

4. What is the date of authorization of financial statements?

a) The last day of the financial reporting period
b) The date when management authorizes the financial statements for issue
c) The date when financial statements are submitted to tax authorities
d) The date when the board of directors approves the financial statements

5. Which of the following statements is true regarding the authorization of financial statements?
a) Once the financial statements are authorized, no changes can be made
b) The date of authorization is always the same as the date of approval by shareholders
c) Management’s authorization can be subject to further approval but is still considered the
date of authorization
d) Financial statements are not required to disclose the date of authorization
---

Part 3: Types of Events After the Reporting Period

6. Which of the following best defines an adjusting event?

a) An event that provides additional evidence of conditions that existed at the end of the
reporting period
b) An event that changes the accounting policies of a company
c) An event that occurs after the reporting period and does not require adjustments
d) An event that requires financial statements to be entirely reissued

7. Which of the following best defines a non-adjusting event?

a) An event that requires immediate adjustments to the financial statements
b) An event that provides further evidence about an asset’s valuation at year-end
c) An event that occurs after the reporting period and does not affect conditions that existed at
year-end
d) An event that necessitates changes to the statement of financial position

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Part 4: Adjusting Events

8. Which of the following is an example of an adjusting event?

a) A major fire destroys a company’s warehouse after year-end
b) A customer declares bankruptcy after the reporting period, affecting a receivable that
existed at year-end
c) A company acquires another business after the reporting period
d) The entity announces a major restructuring plan

9. Which of the following adjusting events requires changes to the financial statements?
a) Changes in market values of investments
b) The discovery of a fraud that affects prior-year transactions
c) The issuance of new shares after the reporting period
d) The signing of a significant contract with a new supplier

10. Why does the settlement of a lawsuit after the reporting period qualify as an adjusting
event?
a) Because it indicates that a liability existed at year-end
b) Because the lawsuit was initiated in the current year
c) Because the payment was made after the reporting period
d) Because legal proceedings do not affect financial reporting

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Part 5: Non-Adjusting Events

11. Which of the following is an example of a non-adjusting event?

a) The discovery of an inventory misstatement affecting prior-year financial statements
b) The announcement of a major business combination after the reporting period
c) A court decision that confirms a company’s liability for damages incurred in the past
d) The impairment of an asset due to evidence obtained after year-end

12. Why are non-adjusting events not recognized in the financial statements?
a) Because they provide evidence of conditions that arose after the reporting period
b) Because they are irrelevant to investors and other stakeholders
c) Because they do not involve financial transactions
d) Because they are illegal under IFRS

13. How should material non-adjusting events be treated in financial statements?

a) They should be ignored
b) They should be disclosed in the notes to financial statements
c) They should be recorded as contingent liabilities
d) They should be recognized as an expense in the current period

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Part 6: Specific Non-Adjusting Events

14. Which of the following non-adjusting events must be disclosed if material?

a) The declaration of dividends after the reporting period
b) The discovery of a misstatement in the financial statements
c) A supplier going bankrupt before the reporting period ends
d) A change in depreciation method

15. Why are dividends declared after the reporting period not recognized as liabilities at
year-end?
a) Because they are not included in cash flow statements
b) Because they do not meet the definition of a present obligation at the reporting date
c) Because they are considered part of financing activities
d) Because they are disclosed under retained earnings only

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Part 7: Going Concern Considerations

16. PAS 10 prohibits the preparation of financial statements on a going concern basis if:
a) A company reports a net loss for the period
b) A company intends to liquidate or cease operations after the reporting period
 c) A company changes its financial reporting framework
d) A company experiences a temporary decline in sales

17. If management determines after the reporting period that an entity is no longer a going
concern, how should financial statements be prepared?
a) They should be prepared on a liquidation basis
b) They should be adjusted using the historical cost model
c) They should remain unchanged, with additional disclosure
d) They should recognize all liabilities as contingent liabilities

Answer Key
1. c | 2. b | 3. b | 4. b | 5. c | 6. a | 7. c | 8. b | 9. b | 10. a
11. b | 12. a | 13. b | 14. a | 15. b | 16. b | 17. a
PAS 12: INCOME TAXES
Part 1: Introduction and Scope of PAS 12

1. What is the primary purpose of PAS 12?

a) To prescribe tax rates for different types of entities
b) To define how income taxes should be calculated and disclosed in financial statements
c) To establish guidelines for tax audits and compliance with tax authorities
d) To regulate corporate tax planning strategies

2. For the purposes of PAS 12, income tax refers to:

a) Taxes based on total revenue
b) Taxes based on taxable profits
c) Value-added tax (VAT) on sales transactions
d) Excise taxes on imported goods

3. Why may the income tax expense reported in the statement of comprehensive income differ
from the amount paid to tax authorities?
a) Because financial statements use cash-based accounting
b) Because financial reporting follows PFRS, while tax computations follow Philippine tax laws
c) Because companies can choose how much tax to pay each year
d) Because tax authorities adjust the company’s taxable income

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Part 2: Accounting Profit vs. Taxable Profit

4. Accounting profit is computed using:

a) Philippine tax laws
b) PFRS (financial reporting standards)
c) Managerial accounting estimates
d) International tax treaties

5. Taxable profit is defined as:

a) The company’s net income before tax
b) The profit calculated based on tax laws, which determines the amount of tax payable
c) The difference between net revenue and operating expenses
d) The retained earnings after dividends are paid

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Part 3: Income Tax Expense and Current Tax Expense

6. What does total income tax expense include?

 a) Only current tax expense
b) Only deferred tax expense
c) Both current tax expense and deferred tax expense or benefit
d) Interest and penalties on unpaid taxes

7. Deferred tax expense arises when:

a) The deferred tax liability is greater than the deferred tax asset
b) The deferred tax liability is lower than the deferred tax asset
c) There is no difference between accounting profit and taxable profit
d) A company has overpaid taxes in the prior year

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Part 4: Permanent and Temporary Differences

8. Which of the following describes a permanent difference?

a) A difference between accounting income and taxable income that does not reverse in the
future
b) A difference that arises due to timing and will reverse in later periods
c) A difference caused by changes in accounting policies
d) A temporary adjustment in tax rates

9. Which of the following is an example of a permanent difference?

a) Accelerated depreciation for tax purposes
b) Interest income from government bonds, which is tax-exempt
c) Recognition of unearned revenue for tax purposes
d) Inventory write-downs

10. Which of the following describes a temporary difference?

a) A difference between financial income and taxable income that will reverse in a future
period
b) A non-taxable item that is never included in taxable income
c) A difference caused by an accounting error
d) A difference in the exchange rate of foreign transactions

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Part 5: Taxable and Deductible Temporary Differences

11. A taxable temporary difference results in:

a) A future tax liability
b) A tax refund
c) No tax consequences
d) A reduction in future tax payments
12. Which of the following is an example of a taxable temporary difference?
a) Depreciation expense is lower in financial statements than in tax records
b) Interest income that is tax-exempt
c) Fines and penalties not deductible for tax purposes
d) Expenses that are recognized earlier for tax purposes than for financial reporting

13. A deductible temporary difference results in:

a) A deferred tax liability
b) A deferred tax asset
c) A future increase in tax payments
d) An immediate reduction in income tax expense

14. Which of the following is an example of a deductible temporary difference?

a) Prepaid rent that is expensed for tax purposes but capitalized for financial reporting
b) Revenue recognized in financial statements before it becomes taxable
c) Expenses that are not deductible under tax laws
d) Depreciation that is higher for tax purposes than for financial reporting

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Part 6: Deferred Tax Accounting

15. PAS 12 requires the use of which method to account for deferred tax?
a) Income statement method
b) Asset-liability method (balance sheet liability method)
c) Cash flow method
d) Equity method

16. Deferred tax liability is recognized when:

a) Future taxable amounts arise from temporary differences
b) Future tax deductions exceed future taxable amounts
c) The entity expects a tax refund in the future
d) The company has overpaid tax in the current period

17. Deferred tax assets are recognized when:

a) There is a taxable temporary difference
b) It is probable that taxable profit will be available to offset deductible temporary differences
c) The company has an increase in revenue
d) There are no temporary differences

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Part 7: Recognition and Measurement of Deferred Tax

18. A deferred tax liability is NOT recognized for which of the following?
a) Temporary differences arising from goodwill
b) Temporary differences from depreciation differences
c) Accrued revenue that is taxable in the future
d) Prepaid expenses deductible for tax purposes

19. Deferred tax assets should be recognized only when:

a) It is certain that the entity will generate future taxable profit
b) It is probable that the entity will generate sufficient taxable profit to utilize the deductible
temporary difference
c) The entity has a tax loss carryforward
d) The entity has a large deferred tax liability

20. Which of the following statements about deferred tax measurement is correct?
a) Deferred tax assets and liabilities are measured using enacted tax rates applicable to future
periods
b) Deferred tax assets are always recognized regardless of future taxable profit
c) Deferred tax liabilities are only recognized if they relate to non-current assets
d) PAS 12 allows companies to discount deferred tax liabilities

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Part 8: Presentation and Offsetting

21. How are deferred tax assets and liabilities classified in the statement of financial position?
a) As current assets and liabilities
b) As non-current assets and liabilities
c) As part of retained earnings
d) As part of revenue and expenses

22. Deferred tax assets and liabilities can be offset when:

a) They arise from the same tax authority and the entity has a legal right to offset them
b) They are related to different taxation authorities
c) The company has more deferred tax assets than liabilities
d) The company has not paid taxes for the current year

Answer Key
1. b | 2. b | 3. b | 4. b | 5. b | 6. c | 7. a | 8. a | 9. b | 10. a
11. a | 12. a | 13. b | 14. b | 15. b | 16. a | 17. b | 18. a | 19. b | 20. a
21. b | 22. a