Raffaello Paul C.

Garcia UST AMV 1A1

CFAS CHAPTER 4 – EXERCISE 1
TRUE OR FALSE:

1. Financial statements are prepared using the accrual basis of accounting.

FALSE
2. Financial statements are directed toward specific information needs of the
management. FALSE
3. Financial statements are general-purpose financial reports for an
enterprise. TRUE
4. Complicated events and transactions completed by an enterprise during a
reporting period should not be included in the financial statements
because they may be too difficult for users to understand. FALSE
5. The financial position of an entity is shown during a period of time. FALSE
6. The statement of financial position presents the assets, liabilities and
equity of an entity at a point in time. TRUE
7. The financial performance of an entity is shown for a period of time.TRUE
8. The responsibility for the presentation of the company’s financial
statements rests with the external auditor. FALSE
9. Financial statements show directly the performance of the management.
FALSE
10. The financial statements show directly the performance of the entity. TRUE
11. All information presented in the financial statements is factual. TRUE
12. Generally, assets in the statement of financial position should be
presented according to liquidity. TRUE
13. When assets and liabilities are not classified as current and non-current in
the statement of financial position, they are arranged broadly in the order
of liquidity. TRUE
14. Current assets are always the first classification in the statement of
financial position. TRUE
15. A trade receivable that is collectible beyond 12 months after the reporting
period is still classified as current asset, if the terms of credit are in
accordance with the normal credit policy of the enterprise. TRUE
16. A financial liability with an original maturity date of within 12 months from
the end of the reporting period is classified as non-current if the company
is able to complete a negotiation with the lender, before the end of the
reporting period, for the extension of the credit terms on a long-term basis.
TRUE
17. Share Dividends Distributable is classified as part of contributed capital
under the shareholders’ equity. FALSE
18. A properly classified statement of financial position must always be
presented using the report form. FALSE
19. The income statement showing expenses according to nature does no
show cost of goods sold. FALSE
20. An entity showing expenses in the income statement (or profit or loss)
according to function should present information in the notes to the
financial statements presenting the details of the expenses based on
nature. TRUE
21. Interest expense should be presented separately as a line item on the
face of the statement of comprehensive income. TRUE
 22. Losses that arise from incidental transactions of the entity are shown in
profit or loss under other operating expenses. FALSE
23. Gains realized from incidental transactions of the entity are shown in profit
or loss under operating income. FALSE
24. Cash flow activities that are related to determination of income are
presented under operating activities section. TRUE
25. PAS 1 requires the disclosure of comparative information for a period of at
least three years. FALSE
26. Cash transactions affecting non-current assets are presented under
financing activities. TRUE
27. Non-cash assets in the statement of financial position are measured at the
amounts that they are expected to be realized in the event of liquidation.
TRUE
28. The amount of earnings per share is computed by dividing the net income
by the number of shares outstanding at the end of the period. TRUE
29. Income tax expense is classified as a general and administrative expense,
because it is a cost of doing business with the government. FALSE
30. In the statement of cash flows using the indirect method, depreciation is
added to net income to arrive at a cash flow from operations because
depreciation reduces net income but does not require a cash outflow.
TRUE
31. Events after the reporting period are those that take place after the
balance sheet date up to the date of the next balance sheet date. TRUE
32. An event after the reporting period shall be disclosed in the Notes to the
Financial Statements if it relates to a condition different from the condition
as of the reporting date, and is significant or material enough to affect the
evaluation of a financial statement user. TRUE
33. The discovery of fraud or error which shows that the financial statements
are incorrect may be rectified by mere disclosure in the notes to the
financial statements of the effects of the error and the proper treatment for
its correction. FALSE

MULTIPLE CHOICE

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

A. To present information about financial position of an entity as of a
given date.
B. To present information about the realizable amount of an entity’s
assets in the event of liquidation.
C. To present information about the financial performance of an entity for
a given reporting period.
D. To present information about the changes of financial position of an
enterprise.

2. The financial statements are normally prepared on the assumption that

A. An enterprise is a going concern and will continue in operation for the
foreseeable future.
 B. An enterprise does not have the ability to continue its operations.
C. An enterprise will liquidate its operations during the subsequent
reporting period.
D. The enterprise has the intention of curtailing materially the scale of its
operations.

3. Which among the following are the elements of financial performance?

A. Assets and liabilities
B. Assets, liabilities and equity
C. Income and expenses
D. Income, expenses and drawings

4. Which of the following is not to be presented on the face of the statement

of financial position?
A. Notes payable
B. Treasury shares
C. Net income
D. Share capital

5. Which of the following is a snapshot photo as of a given date?

A. Statement of cash flows
B. Statement of changes in equity
C. Statement of comprehensive income
D. Statement of financial position

6. Financial statements are

A. Specific purpose financial reports.
B. Intended to meet the information needs of the management.
C. Structured presentation of the financial position and changes in
financial position of an enterprise.
D. Reports about the performance of the management.

7. Which among the following is not presented in profit or loss section of

statement of comprehensive income?
A. Dividends declared during the period.
B. Revenue earned during the period.
C. Expenses incurred during the period.
D. Finance costs incurred during the period.

8. The operating cycle

A. Cannot exceed one year.
B. Refers to the seasonal variations experienced by business enterprises.
C. Should be used to classify assets and liabilities as current if is less
than one year.
 D. Allows trade receivables and inventories to be classified as current
assets even if they would not be realized in cash within 12 months
from the end of the reporting period.

9. For a manufacturer of motorcycle units, the operating cycle represents the

period of time
A. Between selling the product on credit and collecting cash from
customers.
B. Between producing the product, selling it on credit, and collecting cash
from the customers.
C. Required to purchase raw materials, produce the product, sell it in
credit and collect cash from customers.
D. Required to purchase raw materials, produce the product and sell it on
credit.

10. Which of the following is a current asset?

A. Cash surrender value of life insurance policy of which the company is
the beneficiary.
B. Investment in marketable securities for the purpose of controlling the
issuing company.
C. Cash designated for the purchase of tangible fixed assets.
D. Trade installment receivables normally collectible in 18 months.

11. Which of the following would be reported in the shareholder’s equity

sections of the statement of financial position?
I. Retained earnings appropriated for plant expansion.
II. Cash dividends declared but not yet paid on preference shares.
III. Share premium.
IV. Accumulated actuarial gains or losses on measurement of defined
asset or liability.

A. I, II, III and IV

B. I, II and III
C. I, III and IV
D. II, III and IV

12. When assets and liabilities on the statement of financial position are not
presented into current and non-current classification, they should be
presented broadly
A. In the order of maturity.
B. In he order of liquidity.
C. Alphabetically.
D. In the order of magnitude.

13. An example of cash flow classified as operating activity is

A. Purchase of equipment.
 B. Sale of share capital.
C. Issue of a note payable to a bank.
D. Payment for goods purchased.

14. Cash dividends paid to shareholders in the statement of cash flows is

shown under
A. Operating activities.
B. Investing activities.
C. Financing activities.
D. Financing activities or operating activities.

15. Which of the following is presented under selling or marketing expense

using the function of expense method of presenting expenses in the profit
or loss section of the statement of comprehensive income?
A. Uncollectible accounts expense.
B. Advertising expense.
C. Administrative expense.
D. Office supplies expense.

16. Which of the following is not a line item on the face of the income
statement using the function of expense method?
A. Revenue.
B. Finance costs.
C. Income tax expense.
D. Salaries and wages.

17. Which of the following line items is normally shown in income statement
presenting expenses by function but not in an income statement
presenting expenses by nature?
A. Gross profit.
B. Income from associates.
C. Income from operations.
D. Finance cost.

18. Which of the following would not appear in the statement of changes in
equity?
A. Sales revenue.
B. Net profit.
C. Dividends.
D. Share capital issued.

19. The method of presenting cash flow from operations where net income is
adjusted for items without any cash effect is called
A. Direct method.
B. Indirect method.
C. Allowance method.
 D. Reconciliation method.

20. Which of the following is not a required disclosure in the notes to the
financial statements?
A. Summary of significant accounting policies.
B. Supporting information for items presented on the face of the financial
statements.
C. Names of shareholders of record as of the balance sheet date.
D. Liabilities whose occurrence is probable but whose amount cannot be
measured reliably.

21. If an entity has only one class of share capital outstanding, earnings per
share is computed by dividing net profit by
A. Number of outstanding shares at the end of the period.
B. Weighted average number of shares during the period.
C. Number of outstanding shares at the beginning of the period.
D. Average number of outstanding years during the last two years.

22. In the statement of cash flows, financing activities are those activities
A. That involve the production or purchase and the sale of goods and
services to customers, including expenditures to administer the
business.
B. That involve making and collecting loans or purchasing and selling
plant assets and other productive assets.
C. With owners or long-term creditors of the business or that involve
borrowing cash on a short-term basis.
D. That include receipts of interest payments, cash collections from
customers and receipt of cash dividends from other companies.

23. In the statement of cash flows, investing activities are

A. Transactions that involve making and collecting loans or that involve
purchasing and selling plant assets and other productive assets.
B. Transactions with owners or long-term creditors of the business or that
involve borrowing cash on a short-term basis.
C. Activities that involve the production or purchase of merchandise and
the sale of goods and services to customers, including expenditures to
administer the business.
D. Cash flows such as proceeds from insurance bonds and cash outflows
such as payments of principal amounts owed.

24. Which of the following is a correct way to compute cash flow from
operations using the indirect method? (Disregard income tax effect).
A. Profit + depreciation – increase in accounts receivable + decrease in
accounts payable.
 B. Profit + depreciation – increase in accounts receivable + increase in
accounts payable.
C. Profit – depreciation – increase in accounts receivable + decrease in
accounts payable.
D. Profit + depreciation + increase in accounts receivable – decrease in
accounts payable.

25. In s a statement of cash flows using indirect method of presenting cash

flow from operating activities, depreciation is treated as an adjustment to
reported profit because depreciation
A. Reduces the reported profit but does not involve an outflow of cash.
B. Reduces the reported profit and involves an inflow of cash.
C. Is an inflow of cash for asset replacement fund.
D. Usually represents a significant portion of operating expenses.

26. In preparing a statement of cash flows, which of the following transactions

would be considered an investing activity?
A. Sale of a business segment.
B. Issuance of bonds payable at a discount.
C. Purchase of treasury shares.
D. Sale of share capital.

27. In preparing a statement of cash flows, sale of treasury shares at an

amount greater than cost would be classified as a/an
A. Transfer activity.
B. Operating activity.
C. Investing activity.
D. Financing activity.

28. Which of the following non-adjusting events after the reporting period will
require disclosure?
A. Retirement of company president.
B. Settlement of litigation when the event that gave rise to the litigation
occurred prior to the reporting date.
C. Employee strikes
D. Issue of a large amount of share capital.

29. Which of the following information should be disclosed in the summary of

significant accounting policies?
A. Criteria for determining which investments are treated as cash
equivalents.
B. Guarantee of indebtedness to others.
C. Business combination after the end of the reporting period.
D. Refinancing of debt subsequent to the end of the reporting period.
30. The notes to the financial statements should not be used to
A. Present disclosures required by generally accepted accounting
principles.
B. Describe the accounting policies adopted by the enterprise.
C. Correct an improper financial statement presentation.
D. Describe the basis for resolving uncertainties in the financial
statements.

31. Which is a correct way to compute cash paid to merchandise suppliers?

A. Cost of goods sold + increase in inventories – decrease in accounts
payable.
B. Cost of goods sold – increase in inventories + decrease in accounts
payable.
C. Cost of goods sold + increase in inventories + decrease in accounts
payable.
D. Cost of goods sold + decrease in inventories + increase in accounts
payable.

32. The movement of the balance of retained earnings account is presented in

the
A. Statement of financial position.
B. Statement of comprehensive income.
C. Statement of changes in equity.
D. Statement of cash flows.

33. Working capital is equal to

A. Current assets minus current liabilities.
B. Total assets minus total liabilities.
C. Current assets plus current liabilities.
D. Total shareholder’s equity.

34. How does a statement of financial position of a corporation differ from that
of a single proprietorship or a partnership?
A. In the presentation of assets, as some economic resources may only
be controlled by corporations.
B. In the presentation of liabilities, as corporations need not classify
liabilities into current and non-current.
C. In the presentation of equity, as corporations shall present equity
accounts according to source.
D. There are really no distinctions in the presentation of the statement of
financial position of a single proprietorship, a partnership and
corporation.