Ochon_TOA

Theory of Accounts 1. It is an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption of an asset that results from the assessment of the present status and expected future benefit and obligation associated with the asset and liability. a. Change in accounting estimate b. Change in accounting p[olicy c. Correction of a prior period error d. Change in reporting entity 2. The effect of a change in accounting estimate shall be recognized propectively by including it in profit or loss of a. Current perior only b. Future period only c. Prior period only d. Curent period and future period if the change affects both 3. The effect of a change in the expected pattern of consumption of economic benefits of a depreciable asset shall be a. Included in the determination of income or loss in the period of change only b. Included in the determination of income or loss in the period of change and future periods c. Included in the statement of retained earnings as an adjustment of the beginning balance d. Included as component of other comprehensive income 4. A change in measurement basis is a. A change in accounting estimate b. A change in accounting policy c. A correction of an error d. Not an accounting change 5. Which of the following statements is incorrect concerning accounting estimate? a. As a result of the uncertainties inherent in business activities, many items in the financial statements cannot be measured with precision but can only be estimated b. The use of reasonable estimate is an essential part of the preparation of financial statements and does not undermine their reliability c. An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience d. By its very nature, the revision of an estimate relates to a prior period and is a correction of an error. 6. Prospective recognition of the effect of a change in accounting estimate means that the change is applied to transactions from the a. Date of the change in estimate b. End of the current reporting period c. Beginning of the year of change d. Date of issuance of financial statements

7. When it is difficult to distinguish between a change in estimate and a change in accounting policy, an entity shall a. Treat the entire change as a change in estimate with appropriate disclosure b. Apportion on a reasonable basis the relative amounts of change in estimate and the change in accounting policy and treat each one accordingly c. Treat the entire change as a change in accounting policy d. Ignore it in the year of the change and then wait for the following year to see how the change develops and then treat it accordingly 8. Prior period errors are omissions from and misstatements in the financial statements or one or more periods arising from a failure to use or misuse of reliable information that I. Was available when financial statements for those period were authorized for issue II. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. a. I only b. II only c. Either I or II d. Both I and II 9. An entity shall correct material prior period errors retrospectively in the first set of financial statements after their discovery by I. Restating the comparative amounts for the prior period presented in which the error occurred II. Restating the opening balances of asset, liability and equity for the earliest prior period presented if the error occurred before the earlist prior period presented a. I only b. II only c. Either I or II d. Neither I nor II 10.Prior period errors include all of the following except a. Effects of mathematical mistakes b. Mistakes in applying accounting policies c. Oversights or misinterpretation of facts and fraud d. Effects of a change in the estimated useful life of an asset Answers: 1. 2. 3. 4. 5.

A D B B D

6. A 7. A 8. D 9. C 10. D

1. These are the specific principles, bases, conventions, rules and practices applied in the preparation and presentation of financial statements e. Accounting policies f. Accounting principles g. Accounting standards h. Accounting concepts 2. A change in accounting policy includes I. Adoption of an accounting policy for events or transactions that differ in substance from previously occuring events or transactions II. The adoption of a new accounting poicy for events or transactions which did not occur previously or that were immaterial a. I only b. II only c. Both I and II d. Neither I nor II 3. A change in accounting policy includes all of the following except a. The initial adoption of a policy to carry assets at revalued amount b. The change from cost model to revaluation model in measuring property, plant and equipment c. The change in inventory valuation from FIFO to weighted average method d. The change in depreciation method from sum or years digits to straight line 4. A change in accounting policy shall be made when I. Required by an accounting standard or an interpretation of the standard II. The change will result in more relevant or reliable information about the financial position, financial performance and cash flows of the entity a. I only b. II only c. Either I or II d. Neither I nor II 5. In the absence of an accounting standard that applies specifically to a transaction, what is the most authoritatitve source in developing and applying an accounting policy? a. The requirement and guidance in the standard or interpretation dealing with similar and related issue b. The definition, recognition criteria and measurement of asset, liability, income and expense in the Conceptual Framework c. Most recent pronouncement of oehter standard-setting body d. Accounting literature and accepted industry practice 6. The initial application of a policy to revalue assets is a. A change in accounting policy b. A change in accounting estimate c. Correction of a prior period error d. Not an accounting change

7. Which of the following statements is correct concerning application of a change in accounting policy? I. An entity shall account for a change in accounting policy resulting from the initial application of a standard or an interpretation in accordance with the transitional provision, if any. II. When an entity changes an accounting policy upon initial application of a standard or an interpretation that does not include specific transitional provision applying to that change, the change shall be applied retrospectively. a. I only b. II only c. Both I and II d. Neither I nor II 8. This means “applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied”. a. Retrospective application b. Retrospective restatement c. Prospective application d. Prospective restatement 9. This means “correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occurred”. a. Retrospective application b. Retrospective restatement c. Prospective application d. Prospective restatement 10.This means “applying a new accounting policy to transactions and events occurring after the date at which policy is changed”. a. Retrospective application b. Prospective application c. Retrospective restatement d. Retrospective restatement Answers: 1. A

6. A

2. D

7. C

3. D

8. A

4. C

9. B

5. A

10. B

1. A public entity that changed an accounting policy voluntarily should a. Inform shareholders prior to taking the decision b. Account for the change retrospectively

2.

3.

4.

5.

6.

7.

c. Treat the effect of the change as a component of other comprehensive income d. Treat the change propectively and adjust the effect of the change in the current period and future period. An entity that changed the method of inventory valuation from weighted average to FIFO shall account for the change as a. A change in estimate and account for it prospectively b. A change in accounting policy and account for it prospectively c. A change in accounting policy and account for it retrospectively d. A correction of an error and account for it retrospectively When an independent valuation expert advised an entity that the residual value of the plant and machinery had drastically changed and the change is material, the entity should a. Retrospectively change the depreciation charge based on the revised residual value b. Change the depreciation charge and treat it as a correction of an error c. Change the annual depreciation for the current year and future years d. Ignore the effect of the change on annual depreciation because change in residual value would normally affect the future only since this is expected to be recovered in the future Which of the following statements in relation to a change in accounting estimate is true? I.Changes in accounting estimate are accounted for restrospectively II Changes in accounting estimate result from new information or new development a. I only b. II only c. Both I and II d. Neither I nor II Which of the following statements best describes “prospective application”? a. Recognizing a change in accounting policy in the current and future periods affected by the change b. Correcting the financial statements as if a prior period error had never occurred c. Applying a new accounting policy to transactions occurring after the date at which the policy is changed d. Applying new accounting policy to transactions as if that policy had always been applied Which of the following terms best describes applyign a new accounting policy to transactions as if that policy had always been applied? a. Retrospective application b. Retrospective restatement c. Prospective application d. Prospective restatement Which of the following changes should be treated restrospectively? I. A change is made in the method of calculating the provision for uncollectible accounts receivable

II. Investment properties are now measured at fair value, having previously been measured at cost a. I only b. II only c. Both I and II d. Neither I nor II 8. Which of the following should be treated as a change in accounting policy? I. A new accounting policy of capitalizing development costs as a project has become eligible for capitalization for the first time II. A new policy resulting from the requirements of a new PFRS III. To provide more relevant information. Items of property, plant and equipment are now being measured at fair value, whereas they had previously been measured at cost IV. An entity engaging in construction contracts for the first time needs an accounting policy to deal with this a. I, II, III and IV b. I and II only c. II and III only d. I and IV only 9. The draft financial statements of an entity for the current year have been prepared. A final review of the draft revealed that closing inventory at the end of the prior year included items which had been sold in the later part of the prior year. What is the effect of the adjustment to be made to the profit for the current year and to the profit for the prior year presented as the comparative figure in the financial statements of the current year? Profit for current year a.

Increase

b.

Increase

c.

Decrease

d.

Decrease

10.An entity changes an accounting policy if

Profit for prior year Decrease Increase Increase Decrease

I. it is required by law II. The change wil result in providing reliable and more relevant information a. I only b. II only c. Both I and II d. Neither I nor II Answers: 1. B

6. A

2. C

7. B

3. C

8. C

4. B

9. A

5. C

10. B

1. How should the effect of a change in accounting estimate be accounted for? a. By restating amounts reported in financial statements of prior periods b. By reporting proforma amounts for prior periods c. As a prior period adjustment to beginning retained earnings d. In the period of change and future periods if the change affects both 2. Which of the following is charateristic of a change in an accounting estimate? a. It usually need not to be disclosed b. It does not effect the financial statements of prior period c. It should be reported through the restatement of the financial statement d. It makes necessary the rporting of proforma amounts for prior periods 3. The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. What is the treatment of the accounting change? a. Continue to depreciate the building over the original 50-year life

b. Depreciate the remaining carrying amount over the remaining life of the asset c. Adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life and then depreciate the adjusted carrying amount as though the estimated life had always been 40 years d. Adjust accumulated depreciation to its appropriate balance, through retained earnings, based on a 40-year life and then depreciate the adjusted carrying amount as though estimated life had always been 40 years 4. A change in the periods benefited by a deferred cost because additional information has been obtained is a. An accounting change that should be reported in the period of change and future period if the change affects both b. An accounting change that should be reported by restating the financial statements of all prior periods presented c. A correction of an error d. Not an accounting change 5. A change in the residual value of an asset arising because additional information has been obtained is a. An accounting change that should be reported in the period of change and future periods if the change affects both b. An accounting change that should be reported by restating the financial statements of all prior periods presented c. A correction of an error d. Not an accounting change 6. During the current year, an entity increased the estimated quantity of copper recoverable from its mine. The entity used the units of production depletion method. As a result of the change, which of the following should be reported in the entity’s financial statements? I. Cumulative effect of change in accounting policy II. Retroactive application of new depletion base. a. I only

b. II only c. Both I and II d. Neither I nor II 7. The effect of a change in accounting policy that is inseparable from the effect of a change in acounting estimate shall be reported a. By restating the financial statements of all prior periods presented b. As a correction of an error c. As a component of income from continuing operations, in the period of change and future periods if the change affects both d. As a separate disclosure after income from continuing operations,in the period of change and future periods if the change affects both 8. When an entity changed from straight line method of depreciation for previously recorded assets to the double declining balance method, which of the following should be reported? a. Cumuative effect of change in accounting policy b. Proforma effect of retroactive application c. Prior period error d. An accounting prospectively

change

that

should

be

reported

currently

and

9. When an entity changed the expected service life of an asset because additional information has been obtained, which of the following should be reported? a. Cumuative effect of change in accounting policy b. Proforma effect of retroactive application c. Prior period error d. An accounting change that should be reported in the period of change and future periods if the change affects both 10.A change in the estimated warranty liability requires a. Correcting prior period retained earnings

b. Presenting the effect of proforma data on income and earnings per share for all prior periods presented c. Restating the financial statements of all prior periods presented d. Reporting current and future financial statements on the new basis Answers: 1. D

6. D

2. B

7. C

3. B

8. D

4. A

9. D

5. A.

10. D

1. Accounting changes are often made and the monetary impact is reflected in the financial statements of an entity even though, in theory, this may be a violation of accounting concept of a. Materiality b. Consistency c. Prudence d. Objectivity 2. Which of the following is not classified as an accounting change? a. Change in accounting policy b. Change in accounting estimate c. Error in the financial statements d. All of these are classified as an accounting change 3. Which of the following is the best explanation why accounting changes are classified into change in accounting policy and change in accounting estimate? a. The materiality of the change involved b. Each change involves different method of reconition in the financial statements c. The fact that some treatments are considered GAAP and some are not

d. The need of managers to provide a favorable profit picture 4. Which of the following is the proper time period to record the effect of a change in accounting estimate? a. Current period and prospectively b. Current period and retrospectively c. Retrospectively d. Current period 5. Why is retrospective treatment of changes in accounting estimate prohibited? a. Changes in accounting estimate are normal recurring corrections and adjustments which are the natural result of the accounting process b. The retrospective treatment for any type of presentation is not allowed c. Retrospective treatment of changes prohibited because PFRS requires it

in

accounting

estimate

is

d. PFRS does not prohibit retrospective treatment of changes in accounting estimate but is silent on this issue 6. Which of the following would be a reason why an entity is permitted to change accounting policy? a. The change would allow the entity to present a more favorable profit picture b. The change would result in the financial statements providing more reliable and relevant information about financial position, financial performance and cash flows. c. The change is made by th internal auditor d. The change is long-term 7. A change in accounting policy requires what kind of adjustment to the financial statements? a. Current period adjustment b. Prospective adjustment c. Retrospective adjustment d. Current and prospective adjustment

8. A change in accouning policy requires that the cumulative effect of the change for prior period should be reported as an adjustment to a. Beginning retained earnings for the earliest period presented b. Net income for the period in which the change occurred c. Comprehensive income for the earliest period presented d. Shareholders’ equity for the period in which the change occurred 9. Which of the following is not treated as a change in accounting policy/ a. A change from average cost to FIFO for inventory valuation b. A change to a different method of depreciation for plant assets c. A change from full cost to successful effort method in the extractive industry d. A change from cost recorvery to percentage of completion 10.Which of the following is accounted for as a change in accounting policy? a. A change in the estimated useful life of plant assets b. A change from the cash basis of accounting to the accrual basis of accounting c. A change from expensing immaterial expenditures to deferring and amortizing them when material d. A change in inventory valuatiion from average cost to FIFO Answers: 1. B

6. B

2. C

7. C

3. B

8. A

4. A

9. B

5. A

10. D