Accounting for Income Taxation (2 theory)

1. It is the deferred tax consequence attributable to a taxable temporary difference.

a. Deferred tax liability
b.Deferred tax asset
c.Current tax liability
d. Current tax asset

2. It is the deferred tax consequence attributable to a deductible temporary difference and

operating loss carryforward.
a.Deferred tax liability
b.Deferred tax asset
C.Current tax liability
d. Current tax asset

3. It is the amount of income tax payable in respect of taxable income.

a. Current tax expense
b.Total income tax expense
C.Deferred tax expense
d. Deferred tax benefit

4. It is the aggregate amount included in the determination of net income for the period in
respect of current tax and deferred tax.
a. Tax expense
b. Current tax expense
c. Deferred tax expense
d. Deferred tax benefit

5. The deferred tax expense is equal to

a. Increase in deferred tax asset less increase in deferred tax liability.
b. Increase in deferred tax liability less increase in deferred tax asset.
C.Increase in deferred tax asset.
d. Increase in deferred tax liability.

QUESTION 51-15 Multiple choice (IFRS)

An entity shall offset a deferred tax asset and liability

a. When the taxes are levied by different taxing authority.
b. When the entity has no legal eright to offset.
c. When the taxes are levied by the same taxing authority and the entity has a legal enforceable
right to offset a current tax asset against a current tax liability
d. Under all circumstances.
2. Which is correct about deferred tax assets and liabilities?
a. Current deferred tax assets are netted against current deferred tax liabilities.
b. All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities.
C.Deferred tax assets and liabilities are never netted.
d.Deferred tax assets are netted against deferred tax liabilities if they relate to the same tax
authority.

3. Which is incorrect concerning tax asset and liabilities?

a. Deferred tax asset and liability shall discounted
b. Tax asset and liability shall presented separately from other assets and other liabilities
c. Deferred tax asset and liability shall be distinguished from current tax asset and liability
d. Deferred tax asset and liability are non current

4. All of the following must be disclosed separately, except

a. The tax bases of major items on which deferred tax has been calculated.
b. The amount of deductible temporary differences for which no deferred tax asset is
recognized.
c. The amount of taxable temporary differences associated with investment in subsidiary and
associate for which no deferred tax liability is recognized.
d. The amount of income tax relating to each component of other comprehensive income.

QUESTION 51-16 Multiple choice (AICPA Adapted)

1. Justification for the method of determining periodic deferred tax expense is based on the
concept of
a. Matching of periodic expense to periodic revenue.
b. Objectivity in the calculation of periodic expenses.
C. Recognition of asset and liability.
d. Consistency of tax expense measurement with actual tax planning strategies.

2. Which of the following differences would result in future taxable amount?

a. Expenses and losses that are deductible after they are recognized in accounting income.
b. Revenues and gains that are taxable before they are recognized in accounting income.
C. Expenses and losses that are deductible before they are recognized in accounting income.
d. Revenues and gains that are recognized in accounting income but are never included in
taxable income.

3. A temporary difference which would result in a deferred tax liability is

a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess of tax depreciation over accounting depreciation
d. Subscription received in advance

4. A temporary difference which would result in a deferred tax asset is

a. b.
C. Tax, penalty or surcharge.
Dividend received on share investment.
Excess tax depreciation over accounting depreciation.
d. Rent received in advance included in taxable income at the time of receipt but deferred for
accounting purposes.

5. A cash basis taxpayer prepared accrual basis financial statements. At year-end, the deferred
tax liability increased.
Which would cause the increase in deferred tax liability?
a. An increase in prepaid insurance
b. A decrease in rent receivable
c. An increase in warranty obligation
d. An increase in prepaid insurance

6. An entity reported deferred tax asset and deferred tax liability at beginning and end of the
current year. The entity should report deferred tax expense or benefit equal to the
a. Decrease in the deferred tax asset
b. Increase in the deferred tax liability
c. Amount of the current liability plus the sum of the net changes in deferred tax asset and
deferred tax liability
d. Sum of the net changes in deferred tax asset and deferred tax liability

7. Because an entity used different methods of depreciation for accounting and tax purposes,
the entity had temporary differences that will reverse next year and add to taxable income.
Deferred taxes based on these temporary differences should be classified as
a. • Current asset
b. Noncurrent asset
c. Current liability
d. Noncurrent liability

8. A deferred tax liability is computed using

a. Current tax law regardless of enacted future tax law
b. Expected future tax law whether enacted or not
c. Current tax law unless a future enacted tax law is different
d. Either current or expected future tax law

9. Which statement is true regarding reporting deferred income taxes in the financial
statements?
a. Deferred tax asset is always netted against deferred tax liability.
b. Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting
process.*
c. Deferred tax asset and deferred tax liability may only be classified as noncurrent.
d. Deferred tax asset and liability are classified as current and noncurrent based on expiration
date.

10. At the current year-end, an entity had a deferred tax liability that exceeded a deferred tax
asset which is expected to reverse in the next year. Which of the following should be reported in
the current year-end statement of financial position?
a. The excess of the deferred tax liability over the deferred tax asset as a noncurrent liability.
The excess of the deferred tax liability over the deferred tax asset as a current liability.
c. The deferred tax liability as a noncurrent liability.
d. The deferred tax liability as a current liability.

1. The purpose of interperiod tax allocation is to

a. Allow entities to utilize carryforward loss. -
b. Allow entities whose tax liabilities vary significantly from year to year to smooth tax payments.
c. Recognize an asset or liability for the tax consequences of temporary differences that exist at
year-end
d. Amortize the deferred tax liability.

2. Intraperiod tax allocation

a. Involves the allocation of income taxes between current and future periods.
b.Associates tax effect with different items in the income statement.
c. Is not generally acceptable.
Arises because different income statement items are taxed at different rates.

3. Which is true about intraperiod tax allocation?

a. Intraperiod tax allocation arises because certain items are recognized for accounting and tax
purposes.
b. Intraperiod tax allocation is required for the effect of accounting policy.
c. The purpose is to allocate income tax expense evenly over a number of accounting periods.
d. The purpose is to relate the income tax expense to the items which affect the amount of tax.

4. All would require intraperiod tax allocation, except

a.Discontinued operation
b. Prior period error
C. Change in accounting estimate
d. Income from continuing operations

5. Tax expense should be allocated to all, except

a. Discontinued operation
b. Prior period error
c. Gross income
d. Other comprehensive income
Book Value Earnings Per Share
Basic Earnings Per Share
Diluted Earnings Per Share
NO THEORY FOR THIS IN EXAM

Single Entry
Cash VS Accrual Basis

Cash basis and Accrual Basis - Theory of Accounting

1. Under IFRS
a. The cash basis of accounting is accepted.
b. Events are recorded in the period events occur
c. Net income is lower under the cash basis than accrual
d. All of the choices are correct.

2. Accrual accounting adheres to which of the following?

a. Matching principle
b. Historical cost principle
c. Matching principle and historical cost principle
d. Neither matching principle nor historical cost

3. Which statement does not describe a deferral?

a. Deferral of revenue occurs when cash is received and recognized in financial income.
b. Deferral typically results in the recognition of a liability or prepaid expense.
c. Cash collected in advance of services being rendered.
d. Cash paid up front for a one-year insurance policy.

4. Under accrual, a deferral is a transaction that impacts

a. Cash and the income statement at the same time
b. The income statement before impacting cash
c. Cash before impacting the income statement
d. The statement of financial position before impacting cash

5. Which statement is true about accrual and cash basis?

a. Under accrual, if the earning process is not complete, revenue is nevertheless recorded.
b. Under cash basis, if cash has been collected, revenue is recorded regardless of earning
process.
c. Under cash basis, revenue is recognized when the receivable is initially recorded.
d. All of these statements are true.
6. Under ementerual basis of accounting, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses are
recognized.
b. Precede or coincide with but never follow the period in which revenue and expenses are
recognized.
c. Coincide with or follow but never precede the period in which revenue and expenses are
recognized.
d. Only coincide with the period in which revenue and expenses are recognized.

7. Which statement regarding accrual versus cash basis of accounting is true?

a. The cash basis is appropriaté for some smaller entities.
b. The cash basis is less useful in predicting the timing and amounts of future cash flows.
c. Application of the cash basis results in an income statement reporting revenue and
expenses.
d. The cash basis requires a complete set of records.

8. Under cash basis of accounting

a. Revenue is recorded when earned.
b. Accounts receivable.should be recognized.
c. Depreciation of an asset having an economic life of more than one year is not
recognized.
d. The matching principle is ignored.

9. Total net income over the life of an entity is

a. Higher under cash basis than under accrual basis
b. Lower under cash basis than under accrual basis
c. The same under the cash basis and accrual basis
d. Not susceptible to measurement

10. Under cash basis, revenue is recorded

a. When earned and realized.
b. When earned and realizable.
c. When earned.
d. When realized.

1. Compared to cash basis net income for the current year, Accrual basis net income increased
when the entity
a. Declared a cash dividend in the prior year that it paid in the current year
b. Wrote off more accounts receivable than it reported as uncollectible accounts expense
in the current year.
c. Had lower accrued expenses at the end of the current year than at the beginning of year.
d. Sold used equipment for cash at a gain in the current year.
2. Prior to the current year, an entity used the cash basis of accounting. At the current year-end,
the entity changed to the accrual basis. The entity cannot determine the beginning balance of
supplies inventory.
What is the effect of the inability to determine beginning supplies inventory on the accrual basis
net income and year-end accrual basis owners' equity?

Net income Owner’s equity

a. No effect No effect

b. No effect Overstated

c. Overstated No effect

d. Overstated Overstated

3. An entity wants to convert the financial statements from accrual basis to cash basis. Both
supplies inventory and office salaries payable increased.
To obtain cash basis net income, how should these increases be added to or deducted from
accrual basis net income?

Supplies Inventory Office Salaries Payable

a. Deducted Deducted

b. Deducted Added

c, Added Deducted

d. Added Added

1. Compared to the accrual basis of accounting, the cash basis accounting understates income
by net decrease during the accounting period of
a. Both accounts receivable and accrued expenses
b. Accrued expenses but not of accounts receivable
c. Neither accounts receivable nor of accrued expenses
d. Accounts receivable but not of accrued expenses

5. The inventory and accounts payable balances increased. Should these increases be added
to or deducted from cash payments to suppliers to arrive at the cost of goods sold for the
current year?
 Increase in Inventory Increase in Accounts Payable

a. Added Deducted

b. Added Added

c. Deducted Deducted

d. Deducted Added

1. The premium on a three year insurance policy expiring on December 31, 2024 was paid in
total on January 1, 2022. If the entity has six month operating Cycle, the prepaid insurance
reported as a current asset on December 31, 2022 would be for
a. 6 months
b. 12 month
c. 18 months
d. 24 months

2. The premium on a three-year insurance policy expiring on December 31, 2024 was paid in
total on January 1, 2022.
The original payment was initially debited to a prepaid asset account. The appropriate adjusting
entry had been recorded on December 31, 2022. The balance in the prepaid asset account on
December 31, 2022 should be
a. Zero
b. The same as it would have been if the original payment had been debited initially to an
expense account
c. The same as the original payment
d. Higher than if the original payment had been debited initially to an expense account

3. The premium on a three-year insurance policy expiring on December 31, 2024 was paid in
total on January 1, 2022. If the original payment was recorded as a prepaid asset, how would
total assets and shareholders' equity be affected during 2022?
a. Total assets would decrease and shareholders' equity would increase
b. Both total assets and shareholders' equity would decrease
c. Both total assets and shareholders' equity would increase
d. Neither total assets nor shareholders' equity would change

4. The premium if four-year insurance policy expiring on December 31, 2025 was paid in total
on January 1, 2022. If the the original payment was recorded as a prepaid asset, the balance in
prepaid asset on December 31, 2023 would be
a. Lower than the balance on December 31, 2022
b. Lower than the balance on December 31, 2024
c. The same as the balance on December 31, 2024
d. The same as the original payment
5. At the beginning of the current year, an entity signed a 5-year contract enabling it to use a
patented manufacturing process beginning in the current year. A royalty is payable for each
product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will
be paid annually. On the contract date, the entity prepaid a sum equal to two years' minimum
annual fees. In the current year, only minimum fees were incurred. The royalty prepayment shall
be reported in the current year-end financial statement as
a. An expense only
b. A current asset and an expense
c. A current asset and noncurrent asset
d. A noncurrent asset

Accounting Changes & Prior Period Erros

QUESTION 17-15 Multiple choice (ATCPA Adapted)

1. How should the effect of a change in accounting estimate be accounted for?

a. By restating amounts reported in prior periods
b. By reporting proforma amounts for prior periods
c. As a prior period adjustment of retained earnings
d. In the period of change and future periods if the change affects both

2. Which is characteristic of a change in accounting estimate?

a. It usually need not be disclosed
b. It does not effect the financial statements of prior period
c. It should be reported through the restatement of the financial statements
d. It makes necessary the reporting of proforma amounts

3. A change in the periods benefited by a deferred cost because additional information has been
obtained is
a. An accounting change 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

4. A change in the residual value of an asset arising because additional information has been
obtained is
 a. An accounting change 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

5. Why is retrospective treatment of change in accounting estimate prohibited?

a. A change in accounting estimate is a normal recurring correction or adjustment.
b. The retrospective treatment is not allowed.
c. Retrospective treatment of a change in accounting estimate is required by IFRS.
d. IFRS is silent on the issue.

6. The change in accounting policy inseparable from a change in accounting estimate should be
reported
a. As a correction of an error.
b. By restating the financial statements of all prior periods.
c. In the period of change and future periods if the change affects both.
d. As a disclosure after income from continuing operations.

7. Which should be reported when an entity changed from straight line depreciation to double
declining?
A. Cumulative effect of change in accounting policy
B. Proforma effect of retroactive application
C. Prior period error
D. An accounting change that should be reported currently and prospectively

8. Which is not a justification for a change in depreciation method?

a. A change in the estimated useful life
b. A change in the pattern of the estimated future benefit
c. To conform with the depreciation method prevalent in a particular industry
d. A change in the estimated future benefit

9. Which of the following should be reported when an entity changed the expected service life of
an asset?
A. Cumulative effect of change in accounting policy
B. Proforma effect of retroactive applicatio
C. Prior period error
D. An accounting change that should be reported in the period of change and future periods

10. Which is the best explanation why accounting changes are classified into accounting policy
and accounting estimate?
a. The materiality of the change
b. Each change involves different method of recognition in the financial statements
 c. The fact that some treatments are considered GAAP
d. The need to provide a favorable profit picture

QUESTION 17-16
1. Which is the first step is police hierarchy of guidance when selecting accounting policies?
A. Apply a standard from IFRS if it specfically relates to the transaction
B. Apply the requirements in IFRS dealing with similar and related issue:
C. Consider the applicability ente definitions, recognition criteria and measurement
concepts in the Conceptual Framework.
D. Consider the most recent pronouncements of other standard setting bodies.

2. In the absence of an accounting standard that applies specifically to a transaction, what is the
most authoritative 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 other standard-setting body.
d. Accounting literature and accepted industry practice.

3. A change in accounting policy shall be made when

I. Required by law.
II. Required by an accounting standard or an interpretation
of the standard.
III. The change will result in more relevant or reliable information about the financial position,
financial performance and cash flows of the entity.
A. I and Ill only
B. II and III only
C. I and II only
D. I, II and III

4. Why is an entity permitted to change an accounting

The change would allow the entity to present a more
a. 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 the internal auditor.
d. The change is made by the CPA.

5. 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
6. A change in accounting policy requires that the cumulative effect of the change for prior
periods 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.

7. Which of the following is accounted for as a change in accounting policy?

a. A change in the estimated useful life of property, plant and equipment
b. A change from cash basis to accrual basis of accounting
c. A change from expensing immaterial expenditures to deferring and amortizing them
when material
d. A change in inventory valuation from FIFO to average method

8. A change in accounting policy includes all of the following, except

a. The initial adoption of an accounting policy to carry asset at revalued amount.
b. The change from cost model to revaluation model in measuring property, plant and
equipment.
c. A change to a new accounting policy as required by a new standard.
d. A change from one method of depreciation to a different method of depreciation.

9. Which of the following should be treated as change in accounting policy?

a. A change is made in the method of calculating the provision for doubtful accounts
b. A change from cost model to fair value model in measuring investment property
c. An entity engaging in construction contract for the first time needs on accounting policy
to deal with this
d. All of these qualify as change in accounting policy

10. When it is difficult to distinguish between a change in accounting estimate and a change in
accounting policy, the change is treated as
a. Change in accounting estimate with appropriate disclosure
b. Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no appropriate disclosure

QUESTION 17-17

1. An entity that changed an accounting policy voluntarily

a. Inform shareholders prior to taking the decision.
b. Account for the change retrospectively
c. Treau the effect of the change as a component of OCI
d. Treat the change prospectively.
2. Which statement 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 the policy is
changed.
d. Applying a new accounting policy to transactions as if that policy had always been
applied.

3. Which describes applying 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

4. 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

5. If it is impracticable to determine the cumulative effect of an accounting change to any of the

prior periods, the accounting change should be accounted for
a. As a prior period error
b. On a prospective basis.
c. As a cumulative effect change in the income statement.
d. As an adjustment of retained earnings.

QUESTION 17- 19 Multiple Choice

1. Prior period errors

a. Do not include the chect ot a mistake in the application of accounting policy.
b. Do not affect the presentation of prior period comparative financial statements.
c. Do not require further disclosure.
d. Are reflected as adjustment of the opening balance of retained earnings of the earliest
period presented.

2. An example of a correction of an error in previously issued financial statements is a change

a. From FIFO method of inventory valuation to the average method.
b. In the service life of property, plant and equipment.
c. From cash basis to accrual basis of accounting.
d. In the tax assessment related to a prior period.
3. An entity that changed from cash basis to accrual basis of accounting during the current year
should report
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting policy.
c. Component of income from continuing operations.
d. Component of income from discontinued operations.

4. A change from an accounting principle that is not generally accepted to one that is generally
accepted should be reported as
a. Component of income from continuing operations
b. Component of discontinued operations
c. An adjustment of retained earnings
d. Component of other comprehensive income

QUESTION 17-19
1. A change in reporting entity is actually a change in
a. Accounting policy
b. Accounting estimate
c. Accounting method
d. Accounting concept

2. Which is not a change in reporting entity?

a. Changing the entities in combined financial statements
b. Disposition of a subsidiary or other business unit
c. Presenting consolidated statements in place of the separate financial statements of
individual entities
d. Changing specific subsidiaries that constitute the group for which consolidated financial
statements are presented.

3. What is the proper accounting treatment for a change in reporting entity?

a. Restatement of financial statements of all prior periods presented
b. Restatement of current period financial statements
c. Note disclosure and supplementary schedule
d. Adjustment of retained earnings and note disclosure

4. An entity has included in the consolidated financial statements this year a subsidiary acquired
several years ago that was appropriately excluded from consolidation last year. How should this
change be reported?
a. An accounting change that should be reported prospectively
b. An accounting change that should be reported retrospectively
c. A correction of an error
d. Neither an accounting change nor a correction of an error
QUESTION 17-20

1. During the current yea the finaty discovered that ending inventory reported in the financial
statements for the prior year was understated. How should the entity account for this
understatement?
a. Adjust the beginning inventory in the prior year.
b. Restate the financial statements with corrected balances for all periods presented.
c. Adjust the ending balance in retained earnings at current year-end
d. Make no entry because the error will self-correct

2. On March 15, 2023, the entity discovered that depreciation expense for 2022 was overstated.
The 2022 financial statements were authorized for issue on April 1, 2023. What must the entity
do?
a. Correct the 2022 financial statements before issuing them.
b. Reduce depreciation for 2023.
c. Restate the depreciation expense reported for 2022 in the comparative figures of the
2023 financial statements.
d. Do nothing.

3. On April 1, 2023, the entity discovered that depreciation expense for 2022 was overstated.
The 2022 financial statements were authorized for issue on March 15, 2023. What must the
entity do?
a. Reissue the 2022 financial statements with the correct depreciation expense.
b. Reduce depreciation for 2023.
c. Restate the depreciation expense reported for 2022 in the comparative figures of the
2023 financial statements.
d. Do nothing.

Error Correction

QUESTION 59-5 Multiple choice (IAA)

1. If ending inventory is understated, the effect is to
a. Overstate the net purchases Overstate the gross margin
c. Overstate the cost of goods available for sale
d. Overstate the cost of goods sold

2. If beginning inventory is overstated, the effect is to

a. Overstate net purchases
b. Overstate gross margin
C. Overstate cost of goods available for sale
d. Understate cost of goods sold

3. The overstatement of ending inventory in the current year will cause

a. Retained earnings to be understated in the current year-end statement of financial position
b. Cost of goods sold to be understated in the income statement of next year.
c. Cost of goods sold to be overstated in the income statement of the current year.
D. Statement of financial position not to be misstated in the next year-end.

4. At the middle of the year, an entity paid for insurance premium for the current year and
debited the amount to prepaid insurance. At year-end, the bookkeeper forgot to record the
amount that had expired. In the financial statements prepared at year-end, the omission
a. Overstates owners' equity
b. Understates assets
c. Understates net income
d. Overstates liabilities

5. If at end of current reporting period, an entity erroneously excluded some goods from ending
inventory and also these errors would cause erroneously did not record the purchase of these
goods,
a. The ending inventory to be overstated
b. The retained earnings to be understated
C. No effect on net income, working capital and retained earnings
d. Net income to be understated

6. When the current year's ending inventory is overstated

A. The current year's cost of goods sold is overstated.
B. The current year's total assets are understated.
C. The current year's net income is overstated.
D. The next year's net income is overstated.

7. An overstatement of ending inventory in the current period would result in income of the next
period being
a. Overstated
b.Understated
C. Correctly stated
d. The answer cannot be determined from the information

8. Which would result if the current year's ending inventory is understated in the cost of goods
sold calculation?
a. Cost of goods sold would be overstated
b. Total assets would be overstated
c. Net income would be overstated
d. Retained earnings would be overstated

9. If the beginning inventory in the current year was overstated, the income for the current year
would be
a. Understated and assets are correctly stated.
b. Understated and assets are overstated.
c. Overstated and assets are overstated.
d. Understated and assets are understated.

10, Which of the following would cause income to be overstated in the period of occurrence?
a. Overestimating bad debt expense
b. Understating beginning inventory
c. Overstated purchases
d. Understated ending inventory

QUESTION 59-6 Multiple choice (IAA)

1. Failure to record the expired amount of prepaid rent expense would not
a. Understate expense
b. Overstate net income
C. Overstate owners' equity
d. Understate liabilities

2. Failure to record accrued salaries at year-end results in .

a. Overstated retained earnings
b. Overstated assets
c. Overstated liabilities
d. Understated retained earnings

3. Failure to record depreciation at year-end results in

a. Understated income
b. Understated assets
c. Overstated expenses
d. Overstated assets

4. Which of the following is a counterbalancing error?

a. Understated depletion expense
b. Bond premium under-amortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expense

5. Which error will not self-correct next year?

a. Accrued expense not recognized at year-end
b. Accrued revenue not recognized at year-end
c. Depreciation expense overstated for the year
d. Prepaid expense not recognized at year-end

QUESTION 59-7 Multiple choice (AICPA Adapted)

1. At year-end, avas ship ordered merchandise for resale. The merchandise was shipped fo.b.
shipping point at year-end and the goods arrived early next year. The entity did not record the
purchase in the current year and did not include statements for the current year were
the goods in ending inventory. The effects on the financial
a. Income and owners' equity were correct, liabilities were incorrect, assets were correct.
b. Income and owners' equity were correct, assets and liabilities were incorrect.
C. Income, assets, liabilities and owners' equity were correct.
d. Income, assets, liabilities and owners' equity were
Incorrect.

2. Which of the following should not be reported retroactively?

a. Use of an unacceptable accounting principle and changing to an acceptable accounting
principle.
b. Correction of an overstatement of ending inventory made in prior year.
c. Use of an unrealistic accounting estimate and changing to a realistic estimate
d. Change from a good faith but erroneous estimate to a new estimate

3. At the end of the current year, special insurance costs, incurred but unpaid, were not
recorded. If these insurance costs were related to work in process, what is the effect of the
omission on accrued liabilities and retained eärnings, respectively in the current year-end
statement of financial position?
a. No effect and No effect
b. No effect and Overstated
c. Understated and No effect
d. Understated and Overstated

4. Which of the following emors creholder in an overstatement of both current assets and
shareholders' equity?
a. An understatement of accrued sales commissions
B. Noncurrent note receivable principal is misclassified as current asset
c. Annual depreciation on manufacturing machinery is understated
d. Holiday pay expense for administrative employees is misclassified as manufacturing
overhead

5. At the end of the current year, an entity failed to accrue sales commissions during the current
year but paid in the next year. The error was not repeated in the next year. What was the effect
of the error on current year-end working capital and retained earnings, respectively?
a. Overstated and Overstated
b. No effect and Overstated
c. No effect and No effect
d. Overstated and No effect

Hyperinflation
Current Cost Accounting

1. Hyperinflation is indicated by all of the following, except

a. The general population prefers to keep its wealth in nonmonetary assets.
b. Interest rates, wages and prices are linked to a price index.
c. The cumulative inflation rate over three years is approaching or exceeds 100%:
d. All of these indicate hyperinflation.

2. All would indicate that hyperinflation exists, except

a. The general population regards monetary amounts in terms of relatively stable foreign
currency.
b. The cumulative inflation rate over three years is approaching or exceeds 100%.
c. Inflation rates have exceeded interest rates in three successive years.
d. The general population prefers to keep its wealth in nonmonetary assets.

3. Which would indicate that hyperinflation exists?

a. Sales on credit are at lower prices than cash sales.
b. Inflation is approaching or exceeds 20% per year.
c. Monetary items do not increase in value.
d. People prefer to keep their wealth in nonmonetary assets or a stable foreign currency.

4. An entity that wishes to present information about the eftect of changing prices in a
hyperinflationary economy should report this information in
a. The body of the financial statements
b. The notes to financial statements
c. Supplementary schedule
d. Management report to shareholders

5. In a hyperinflationary economy, monetary items

a. Are not restated because they are already expressed in terms of the measuring unit current
at year-end.
b. Are measured at fair value.
c. Are restated applying the general price index.
d. Are restated applying the specific price index.

6. Monetary items consist of

a. Assets and liabilities toms on amounts are fixed by contract or otherwise in terms of pesos:
b. Assets and liabilities classified as current.
c. Cash and cash equivalents plus all receivables.
d. Cash, accounts receivable and current liabilities.

7. All of the following are monetary, except

a. Accounts payable
b. Accounts receivable
c. Administration cost paid in cash
d. Loan repayment at face value

8. The financial statements in a hyperinflationary economy shall be stated in terms of

a. Historical cost
b. Current cost
C. Fair value
d. Measuring unit current at the end of reporting period

9. The gain or loss on the net monetary position in a hyperinflationary economy shall be
included in
a. Profit or loss and separately disclosed
b. Retained earnings
C. Equity
d. Other comprehensive income

10. In a hyperinflationary economy, nonmonetary items are restated by applying

a. General price index
b. Specific price index
c. Both general price index and specific price index
d. Either general price index or specific price index

ANSWER KEY: DCDAAACDAA

QUESTION 62-11 Multiple choice (AICP Adapted)

1. During a period of inflation, an account balance remains constant. With respect to this
account, a purchasing power loss will be recognized if the account is a
a. Monetary asset
b.Monetary liability
c. Nonmonetary asset
d. Nonmonetary liability

2. During a period of inflation, an acçount balance remains constant. With respect to this
account, a purchasing power gain will be recognized if the account is a
a. Monetary liability
b. Monetary asset
c. Nonmonetary liability
d. Nonmonetary asset
3. During a period of deflation in which a liability account balance remains constant, which of the
following occurs?
a. A purchasing power loss if the item is a nonmonetary liability.
b. A purchasing power gain if the item is a nonmonetary liability.
C. A purchasing power loss if the item is a monetary liability.
d. A purchasing power gain if the item is a monetary liability.

4. During a period of inflation in which a liability account balance remains constant, which of the
following occurs?
a. A purchasing power loss if the item is a nonmonetary liability.
b. A purchasing power gain if the item is a nonmonetary liability.
c. A purchasing power loss if the item is a monetary liability.
d. A purchasing power gain if the item is a monetary liability.

5. During a period of deflation, an entity would have the greatest gain in general purchasing
power by holding
a. Cash
b. Property, plant, and equipment
c. Finance lease liability
d. Mortgage payable

6. Which of the following is classified as nonmonetary?

Allowance for doubtful accounts
b. Accumulated depreciation
c. Premium on bonds payable
d. Advances to unconsolidated subsidiaries

7. Which of the following is classified as nonmonetary?

a. Warranty liability
b. Accrued expense
C. Unamortized discount on bonds payable
d. Refundable deposit

8. Which of the following is classified as nonmonetary?

a. Cash surrender value
b. Long-term receivable
c. Accrued liability on firm purchase commitment
d. Inventory

9. Which of the following is classified as monetary?

a. Goodwill
b. Equipment
c. Patent
d. Allowance for doubtful accounts
10. Purchasing power gain or loss results from
a. Monetary asset only
b. Monetary liability only
c. Both monetary asset and monetary liability
d. Nonmonetary asset and nonmonetary liability

ANSWER KEY: A A C D A B A D D C

QUESTION 61-12 (AICPA Adapted)

1. Financial statements that are expressed under a stable monetary unit are
a.Constant peso financial statements
b. Nominal peso financial statements
c. Current cost financial statements
d. Fair value financial statements

2. A general price level statement of financial position is prepared and presented in terms of
a. The general purchasing power at the latest year-end.
b. The general purchasing power in the base period.
c. The average general purchasing power of the peso.
d. The general purchasing power at the date of issue.

3. Which method of reporting attempts to eliminate the effect of the changing value of the peso?
a. Discounted net present value of future cash flows
b. Historical cost restated for change in the price level
c. Replacement cost
d. Exit value

4. The restatement of historical peso financial statements to reflect the general price level
change results in presenting assets at
a. Lower of cost or net realizable value
b. Fair value
c. Cost adjusted for purchasing power change
d. Current replacement cost

5. Which argument in favor of price level adjusted financial statements is not valid?
a. Price level statements use historical cost.
b. Price level statements compare uniform purchasing power among various periods.
c. Price level statements measure current value.
d. Price level statements measure earnings in terms of a common peso.

ANSWER KEY: B A B C C

QUESTION 61-13 Multiple choice (AICPA Adapted)

1. In current cost financial statements
a. General price level gains or losses are recognized.
b. Amounts are stated in common purchasing power.
c. All items are different from historical cost.
d. Holding gains are recognized.

2. When an entity adjusted the historical cost income statement by applying specific price index
to depreciation, the income statement is prepared according to
a. Fair value accounting
b. Purchasing power accounting
c. Current cost accounting
d. Nominal peso accounting

3. When an entity prepares financial statements on a current cost basis, how is the cost of
goods sold computed?
a. Number of units sold times average current cost
b. Number of units sold times current cost at year-end
C. Number of units sold times beginning current cost
d. Beginning inventory at current cost plus cost of goods purchased less ending inventory at
current cost

4. Compared to historical cost income, which condition increases the current cost income during
inflation?
a. Current cost is the same as historical cost.
b. Current cost of land is less than historical cost.
c. Current cost of goods sold is less than historical cost.
d. Ending net monetary assets are less than beginning.

5. Could current cost financial statements report holding gains during the period for which of the
following?
a. Goods sold
b. Inventory
c. Goods sold and inventory
d. Neither goods sold nor inventory

ANSWER KEY: D C A C C