[THEORY] Notes to Financial Statements

Question 1

What is the purpose of notes to financial statements?

a. To present information about the basis of preparation of the statements and accounting policies used.
b. To disclose the information required by PFRS not presented elsewhere in the financial statements
c. To provide additional information not presented but necessary for a fair presentation
d. All of these can be considered a purpose of the notes

Answer 1

ANSWER: d. All of these can be considered a purpose of the notes

Question 2

What is the first item in presenting the notes?

a. Statement of compliance with PFRS
b. Other disclosures, such as contingent liabilities and unrecognized contractual commitments
c. Supporting information for items presented on the face of the financial statements
d. Summary of significant accounting policies

Answer 2

a. Statement of compliance with PFRS

Question 3

An entity whose financial statements comply with PFRS shall:

a. Make an explicit statement of compliance in the notes
b. Make an unreserved statement of compliance in the notes
c. Make an explicit and unreserved statement of compliance in the notes
d. Not describe financial statements as complying with PFRS

Answer 3

ANSWER: c. Make an explicit and unreserved statement of compliance in the notes

Question 4

An entity is required to disclose all of the following non-financial information, except:

a. A description of the nature of the entity’s operations
b. The name of the parent entity and the ultimate parent
c. Domicile and legal form of the entity, the country of incorporation, and address of the registered office
d. Names and addresses of directors and officers

Answer 4

ANSWER: d. Names and addresses of directors and officers

Question 5

Notes to financial statements:

a. Are relatively unimportant facts
b. Document the source of financial statement facts
c. Are an integral part of financial statements
d. Are irrelevant and immaterial facts

Answer 5

ANSWER: c. Are an integral part of financial statements

Question 6

The presentation of the notes to financial statements in a systematic manner

a. Is voluntary
b. Is mandatory
c. Is mandatory, as far as practicable
d. Depends on the industry

Answer 6

c. Is mandatory, as far as practicable

Question 7

The cross-reference between each line item in the financial statements and any related information disclosed in the notes to financial statements

a. Is voluntary
b. Is mandatory
c. Depends on the industry
d. Is either voluntary or mandatory

Answer 7

ANSWER: b. Is mandatory

Question 8

Disclosure of information about key sources of estimation uncertainty

a. Is voluntary
b. Is mandatory
c. Is either voluntary or mandatory
d. Depends on the industry

Answer 8

ANSWER: b. Is mandatory

Question 9

Disclosure of information about judgments

a. Is voluntary
b. Is mandatory
c. Is either voluntary or mandatory
d. Depends on the industry

Answer 9

ANSWER: b. Is mandatory

Question 10

Which best demonstrates the standard of adequate disclosure?

a. The separate income statement
b. The auditor’s report
c. The tax return
d. The notes to financial statements

Answer 10

ANSWER: d. The notes to financial statements

Question 11

Which statement is incorrect regarding notes to financial statements?

a. IFRS requires specific note disclosures including disaggregation of inventories.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes should be clear, simple to understand, and nontechnical in nature.
d. All of the choices are correct.

Answer 11

c. IFRS requires that all notes should be clear, simple to understand, and nontechnical in nature.

Question 12

Which is a method of disclosing pertinent information?

a. Supporting schedule
b. Parenthetical explanation
c. Cross-reference and contra item
d. All of these are methods of disclosing pertinent information

Answer 12

ANSWER: d. All of these are methods of disclosing pertinent information

Question 13

The standard of full disclosure is best described by which of the following?

a. All information related to operating objectives must be disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is included in the notes.
c. Enough information should be disclosed in order that a prospective investor can make a wise decision.
d. Disclosure of any financial facts significant enough to influence the judgment of a primary user.

Answer 13

d. Disclosure of any financial facts significant enough to influence the judgment of a primary user.

Question 14

Application of the full disclosure principle

a. Is theoretically desirable but not practical because the cost of complete disclosure exceeds the benefit.
b. Is violated when important financial information is buried in the notes to financial statements.
c. Is demonstrated by the use of supplementary information presenting the effects of changing prices.
d. Requires that the financial statements should be consistent and comparable.

Answer 14

c. Is demonstrated by the use of supplementary information presenting the effects of changing prices.

Question 15

An inventory accounting policy that should be disclosed in a summary of significant accounting policies is

a. Composition of inventory into raw materials, goods in process, and finished goods.
b. Major backlog of inventory orders.
c. Method used for pricing inventory.
d. All of these should be disclosed in the summary of significant accounting policies.

Answer 15

c. Method used for pricing inventory.

Question 16

What is the purpose of information presented in the notes?

a. To provide disclosures required by GAAP
b. To correct improper presentation in the statements
c. To provide recognition of amounts not included in the financial statements
d. To present management response to auditor comments

Answer 16

ANSWER: a. To provide disclosures required by GAAP

Question 17

The notes to financial statements should not be used to

a. Describe significant accounting policies
b. Describe depreciation method employed
c. Describe the principles and methods peculiar to the industry in which the entity operates
d. Correct an improper presentation in the statements

Answer 17

ANSWER: d. Correct an improper presentation in the statements

Question 18

An entity shall disclose in the summary of significant accounting policies

a. The measurement basis used
b. All the measurement bases whether used or not
c. The measurement basis used in preparing the financial statements and the accounting policies used
d. All of the measurement bases and the accounting policy choices available to the entity

Answer 18

ANSWER: c. The measurement basis used in preparing the financial statements and the accounting policies used

Question 19

Which of the following information should be disclosed in the summary of significant accounting policies?

a. Refinancing of debt subsequent to the reporting period
b. Guarantee of indebtedness of others
c. Criteria for determining which investments are treated as cash equivalents
d. Adequacy of pension plan assets relative to vested benefits

Answer 19

ANSWER: c. Criteria for determining which investments are treated as cash equivalents

Question 20

The summary of significant accounting policies should disclose

a. Effect of retroactive application of an accounting change
b. Income recognition on long-term construction contracts
c. Adequacy of pension plan assets
d. Future lease payments

Answer 20

b. Income recognition on long-term construction contracts

Question 21

The summary of significant accounting policies should disclose

a. The composition of property, plant and equipment and the depreciation method used
b. The composition of property, plant and equipment only
c. The depreciation method used only
d. Neither the composition of property, plant and equipment nor the depreciation method used

Answer 21

c. The depreciation method used only

Question 22

Which of the following should be included in the summary of significant accounting policies?

a. Property, plant and equipment recorded at cost with the depreciation computed principally by straight-line
b. A business component was sold during the current year
c. Breakdown of sales attributable to business components
d. Future ordinary share dividends

Answer 22

ANSWER: a. Property, plant and equipment recorded at cost with the depreciation computed principally by straight-line

Question 23

Which is not a required disclosure of accounting policies?

a. The measurement basis used
b. Key management personnel involved in drafting the summary of significant accounting policies
c. Disclosures required by Standards
d. The nature of operations and the policies applied

Answer 23

ANSWER: b. Key management personnel involved in drafting the summary of significant accounting policies

Question 24

The disclosure of accounting policies is important to financial statement users in determining

a. Net income for the year
b. Whether accounting policies are consistently applied from year to year
c. The measurement of obsolete inventory
d. Whether the working capital position is adequate

Answer 24

b. Whether accounting policies are consistently applied from year to year

Question 25

Significant accounting policies may not be

a. Selected on the basis of judgment
b. Selected from existing acceptable alternatives
c. Unusual or innovative in application
d. Omitted from financial statement disclosure

Answer 25

ANSWER: d. Omitted from financial statement disclosure

Question 26

Related parties include all of the following, except

a. Parent, subsidiary and fellow subsidiaries
b. Associates
c. Key management personnel and close family members of such key management personnel
d. Two venturers simply because they share joint control over a joint venture

Answer 26

ANSWER: d. Two venturers simply because they share joint control over a joint venture

Question 27

A related party transaction is a transfer

a. Between related parties when a price is charged
b. Between related parties, regardless of whether a price is charged
c. Between unrelated parties when a price is charged
d. Between unrelated parties, regardless of whether a price is charged

Answer 27

ANSWER: b. Between related parties, regardless of whether a price is charged

Question 28

Unrelated parties include which of the following?

a. Providers of finance in the course of their normal dealings with an entity by virtue only of those dealings
b. Government agencies
c. Single customer with whom an entity transacts a significant volume of business merely by virtue of the resulting economic dependence
d. All of these are unrelated parties

Answer 28

ANSWER: d. All of these are unrelated parties

Question 29

Close family members of an individual include all, except

a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or individual’s spouse
d. Brothers and sisters of the individual

Answer 29

ANSWER: d. Brothers and sisters of the individual

Question 30

The minimum disclosures about related party transactions include all of the following, except

a. The amount of the transaction
b. Amount of outstanding balance
c. Allowance for doubtful accounts related to the outstanding balance
d. Nature of the relationship

Answer 30

d. Nature of the relationship

Question 31

Which is not included in key management personnel compensation?

a. Short-term benefit
b. Share-based payment
c. Termination benefit
d. Reimbursement of out-of-pocket expenses

Answer 31

ANSWER: d. Reimbursement of out-of-pocket expenses

Question 32

Which of the following is not a mandated disclosure about related party transactions?

a. Relationship between parent and subsidiaries
b. Names of all the associates that an entity has dealt with during the year
c. Name of the entity’s parent and, if different, the ultimate controlling party
d. If neither the entity’s parent nor the ultimate controlling entity produces financial statements available for public use, then the name of the next most senior parent that does so

Answer 32

b. Names of all the associates that an entity has dealt with during the year

Question 33

Which of the following is not a required minimum disclosure about related party transactions?

a. The amount of related party transaction
b. The amount of the outstanding balance
c. The amount of similar transaction with unrelated parties to establish that comparable related party transaction has been entered at arm’s length
d. Doubtful debt related to the outstanding balance

Answer 33

ANSWER: c. The amount of similar transaction with unrelated parties to establish that comparable related party transaction has been entered at arm’s length

Question 34

Related party transactions include all, except

a. A venturer sold goods to the joint venture
b. Sold a car to the uncle of the entity’s finance director
c. Sold goods to another entity owned by the daughter of the managing director
d. All of these are related party transactions

Answer 34

b. Sold a car to the uncle of the entity’s finance director

Question 35

All of the following are related party transactions, except

a. Transferred goods from inventory to a subsidiary
b. Sold an entity car to the wife of the managing director
c. Sold an asset to an associate
d. Took out a huge bank loan

Answer 35

ANSWER: d. Took out a huge bank loan

Question 36

An entity that entered into a related party transaction would be required to disclose all of the following information, except

a. Nature of the relationship between the parties
b. Nature of any future transactions planned between the parties and the terms involved
c. Peso amount of the transaction
d. Amount due from or to related parties at the end of the reporting period

Answer 36

ANSWER: b. Nature of any future transactions planned between the parties and the terms involved

Question 37

Which is not a required related party disclosure?

a. The son of the chief executive officer of the entity
b. The parent of the entity
c. An entity that has a common director with the entity
d. Joint venture in which the entity is a venturer

Answer 37

c. An entity that has a common director with the entity

Question 38

All of the following are related parties, except

a. Joint venture in which the entity is a venturer
b. A postemployment benefit plan for the employees
c. An executive director of the entity
d. The partner of a key manager is a major supplier of the entity

Answer 38

ANSWER: d. The partner of a key manager is a major supplier of the entity

Question 39

Which of the following is not a related party of an entity?

a. A shareholder of the entity owning twenty percent
b. An entity providing banking facilities to the entity
c. An associate of the entity
d. Key management personnel of the entity

Answer 39

ANSWER: b. An entity providing banking facilities to the entity

Question 40

Which of the following should be included in key management personnel compensation?

a. Social security contributions
b. Postemployment benefits
c. Social security contributions and postemployment benefits
d. Social security contributions, postemployment benefits, and dividends to shareholders

Answer 40

ANSWER: c. Social security contributions and postemployment benefits

Question 41

At the end of the current reporting period, an entity carried a receivable from a major customer who declared bankruptcy after the end of the reporting period and before the issuance of financial statements. What should be reported at the current year-end?

a. Disclose the fact that the customer has declared bankruptcy.
b. Make a provision for the event after reporting period in the financial statements.
c. Ignore the event and wait for the outcome of the bankruptcy.
d. Reverse the sale pertaining to the receivable in the comparative statement for the prior period.

Answer 41

b. Make a provision for the event after reporting period in the financial statements.

Question 42

An entity decided to build and operate an amusement park next year. The entity applied for a letter of guarantee which was issued before the issuance of the financial statements of the current year. What is the adjustment required at the current year-end?

a. Book a long-term payable for the amount of guarantee.
b. Disclose the guarantee as a contingent liability.
c. Increase the contingency reserve.
d. Do nothing..

Answer 42

d. Do nothing.

Question 43

An entity built a new factory building during the current year. Subsequent to the current year-end and before issuance of financial statements, the building was destroyed by fire and the claim against the insurance entity proved futile because the cause of the fire was negligence on the part of the caretaker of the building. What should be reported at the current year-end?

a. Write off the carrying amount of the building.
b. Make a provision for one-half of the carrying amount of the building.
c. Make a provision for three-fourths of the carrying amount of the building.
d. Disclose the nonadjusting event in the notes to financial statements.

Answer 43

ANSWER: d. Disclose the nonadjusting event in the notes to financial statements.

Question 44

An entity deals extensively with foreign currency transactions. Subsequent to the end of the reporting period and before the date of authorization of the financial statements, there were abnormal fluctuations in foreign currency rates. What should be reported at the current year-end?

a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations.
b. Adjust the foreign exchange year-end balances to reflect all abnormal fluctuations and not just adverse movements.
c. Disclose the post-reporting period event.
d. Ignore the post-reporting period event.

Answer 44

ANSWER: c. Disclose the post-reporting period event.

Question 45

Which statement is true in relation to events after the reporting period?

a. Notes to the financial statements should give details of material adjusting events included in those financial statements.
b. Notes to the financial statements should give details of material nonadjusting events which could influence the economic decisions of users.
c. A decline in the market value of investments would normally be classified as an adjusting event.
d. The settlement of a long-running court case would normally be classified as a nonadjusting event.

Answer 45

ANSWER: b. Notes to the financial statements should give details of material nonadjusting events which could influence the economic decisions of users.

Question 46

Which event after the reporting period would require adjustment?

a. Loss of plant as a result of fire
b. Change in the market price of investment
c. Loss on inventory resulting from flood loss
d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end

Answer 46

d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end

Question 47

Events that occur after the current year-end but before the financial statements are issued and affect the realizability of accounts receivable should be:

a. Discussed only in the management annual report.
b. Disclosed only in the notes to financial statements.
c. Used to record an adjustment to bad debt expense.
d. An adjustment directly to retained earnings.

Answer 47

ANSWER: c. Used to record an adjustment to bad debt expense.

Question 48

Nonadjusting events include all of the following, except:

a. A major business combination after the reporting period
b. Announcing a plan to discontinue an operation
c. Expropriation of a major asset after the reporting period
d. Destruction of a major production plant by a fire before the end of the reporting period

Answer 48

ANSWER: d. Destruction of a major production plant by a fire before the end of the reporting period

Question 49

Nonadjusting events include all of the following, except:

a. The entity announced the discontinuation of an operation.
b. The entity entered into an agreement to purchase the leased building.
c. Destruction of a building by earthquake after the end of reporting period.
d. A mistake in the calculation of allowance for uncollectible accounts receivable.

Answer 49

ANSWER: d. A mistake in the calculation of allowance for uncollectible accounts receivable.

Question 50

Which event after the end of the reporting period would generally require disclosure?

a. Retirement of key management personnel
b. Settlement of litigation when the event that gave rise to the litigation occurred in a prior period.
c. Strike of employees
d. Issue of a large amount of ordinary shares

Answer 50

d. Issue of a large amount of ordinary shares

Question 51

Financial statements shall include disclosure of material transactions between related parties, except:

a. Nonmonetary exchange by affiliates
b. Sales of inventory by a subsidiary to the parent when the consolidated financial statements are prepared
c. Expense allowance for executives which exceed normal business practice
d. An entity’s agreement to act as surety for a loan to the chief executive officer

Answer 51

b. Sales of inventory by a subsidiary to the parent when the consolidated financial statements are prepared

Question 52

Which should be disclosed as a related party transaction in the entity’s separate financial statements?

a. Key management personnel compensation
b. Sales to affiliated entities
c. Key management personnel compensation and sales to affiliated entities
d. Neither key management personnel compensation nor sales to affiliated entities

Answer 52

ANSWER: c. Key management personnel compensation and sales to affiliated entities

Question 53

An entity has cosigned the mortgage note on the home of its president guaranteeing the indebtedness in the event that the president should default. The entity considers the likelihood of default to be remote. How should the guarantee be treated in the financial statements?

a. Disclosed only
b. Accrued only
c. Accrued and disclosed
d. Neither accrued nor disclosed

Answer 53

a. Disclosed only

Question 54

Which of the following transactions most likely would be a related party transaction requiring disclosure?

a. The entity borrowed P1,000,000 from Southwest Bank issuing a noninterest-bearing note.
b. The entity borrowed P2,000,000 from Northwest Bank at a rate significantly above the prevailing market rate.
c. The entity borrowed P500,000 from Eastwest Bank with no scheduled terms for how or when funds will be repaid.
d. All of these would be disclosed as related party transactions.

Answer 54

c. The entity borrowed P500,000 from Eastwest Bank with no scheduled terms for how or when funds will be repaid.