Theory of Accounts

Which of the following statements regarding reversing entries is incorrect?

• Deferrals are generally entered in statement of financial position accounts, thus making reversing entries unnecessary.

• All accruals should be reversed.

• Adjusting entries for depreciation and bad debts are never reversed.

• Reversing entries change amounts reported in the statement of financial position for the previous period.

As part of the objective of financial reporting, “assessing cash flow prospects” is interpreted to mean

• Cash basis accounting is preferred over accrual basis accounting.

• Information about the financial effects of cash receipts and cash payments is generally considered the best indicator of an entity’s present and continuing ability to generate favorable cash flows.

• Over the long run, trends in revenue and expenses are generally more meaningful than trends in cash receipts and disbursements.

• All of the choices are correct regarding “assessing cash flow prospects”.

Financial accounting standard-setting

• Can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic.

• Is based solely on research and empirical findings.

• Is a legalistic process based on rules promulgated by governmental agencies.

• Is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.

Which of the following is not a benefit associated with the Conceptual Framework?

• A conceptual framework should increase financial statement users' understanding and confidence in financial reporting.

• Practical problems should be more quickly solvable by reference to an existing conceptual framework.

• A coherent set of accounting standards and rules should result.

• Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

When classifying assets as current and noncurrent

• The amount at which current assets are carried and reported must reflect realizable cash value.

• Prepayments for items such as insurance are included in “other assets” rather than as current assets as they will ultimately be expensed.

• The time period by which current assets are distinguished from noncurrent assets is determined by the seasonal nature of the business.

• Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the normal operating cycle.

PFRS requires all of the following when classifying receivables, except

• Indicate the receivables classified as current and noncurrent.

• Disclose any receivables pledged as collateral.

• Disclose all significant concentrations of credit risk arising from receivables.

• All of the choices are required by PFRS when classifying receivables.

When the cost of goods sold method is used to record inventory at net realizable value

• There is a direct reduction in the selling price of the product that results in a loss being recorded in the income statement prior to the sale.

• A loss is recorded by debiting loss on inventory decline and crediting directly the inventory account

• Only the portion of the loss attributable to inventory sold during the period is recorded.

• The net realizable value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

Which of the following statements is true regarding inventory writedown and recovery of writedown?

• Recovery of inventory writedown is prohibited under PFRS.

• PFRS requires separate reporting of reversal of inventory writedown.

• PFRS requires entities to record writedown in a separate loss account.

• All of the choices are correct.

An entity had a plantation forest that is likely to be harvested and sold in 30 years. How should income be accounted for?

• No income should reported annually until first harvest and sale in 30 years.

• Income should be measured annually and reported using a fair value approach that recognizes and measures biological growth.

• The eventual sale proceeds should be estimated over the 30-year period.

• The plantation forest should be valued every five years and the increase in value should be reported as component of other comprehensive income.

Which of the following information should be disclosed in relation to biological asset and agricultural produce?

• Separate disclosure of the gain or loss relating to biological asset and agricultural produce.

• The aggregate gain or loss arising on the initial recognition of biological assets and agricultural produce and from the change in fair value less estimated cost of disposal of

• The total gain or loss from biological asset, agricultural produce, and from change in fair value less estimated costs of disposal of biological asset.

• There is no requirement to disclose separately any gain or losses.