Accounting Principles and Standards Quiz

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Questions and Answers

What is the primary objective of accounting, according to the American Accounting Association (AAA)?

To facilitate informed decision-making by users of financial information. (correct)

To provide financial information for internal use only.

To record every business transaction in a chronological manner.

To ensure the accuracy of financial records.

Which of the following is NOT a phase in the accounting cycle?

Summarizing

Recording

Classifying

Auditing (correct)

What is the process of transferring entries from the journal to the ledger known as?

Summarizing

Journalizing

Interpreting

Posting (correct)

What is the primary function of accounting, according to the Accounting Standard Council?

To provide financial information useful for making economic decisions. (A) Signup and view all the answers

Which of the following best describes the summarizing phase of accounting?

Preparing financial statements and other reports. (D) Signup and view all the answers

Which organization is responsible for establishing and improving Generally Accepted Accounting Principles (GAAP) in the Philippines?

Philippine Standards Council (ASC) (B) Signup and view all the answers

What is the purpose of the interpreting phase of accounting?

To help decision-makers understand and analyze financial information. (D) Signup and view all the answers

What is the name of the accounting standards used in the Philippines, following the implementation of the Philippine Accountancy Act of 2004?

Philippine Accounting Standards (PAS) (A) Signup and view all the answers

What is the main purpose of Generally Accepted Accounting Principles (GAAP)?

To standardize accounting rules and ensure consistent financial reporting. (C) Signup and view all the answers

Which of the following is NOT a member of the Philippine Financial Reporting Standards Council (PFRSC)?

Philippine Institute of Certified Public Accountants (PICPA) (D) Signup and view all the answers

Which of the following is NOT a requirement for an accounting principle to be considered generally accepted?

It must be approved by the Securities and Exchange Commission. (C) Signup and view all the answers

What was the name of the book published by Luca Pacioli in 1494 that included basic accounting procedures?

Summa de Arithmetica, Geometria, Proportioni et Proportionalita (D) Signup and view all the answers

The process of recording transactions in the books of accounts is called

Journalizing (D) Signup and view all the answers

What is the main purpose of the International Accounting Standards Board (IASB)?

To establish and improve accounting standards for use worldwide. (C) Signup and view all the answers

What is the difference between International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)?

IAS were developed by the IASC while IFRS are developed by the IASB. (C) Signup and view all the answers

What is the term used for the approved statements and interpretations of the Accounting Standards Council (ASC)?

Statement of Financial Accounting Standards (SFAS) (A) Signup and view all the answers

Which of the following would NOT be considered a non-current asset?

A prepaid insurance policy for one year (B) Signup and view all the answers

What is the primary difference between current liabilities and non-current liabilities?

Current liabilities are obligations to be settled within one year, while non-current liabilities are due in more than one year (A) Signup and view all the answers

According to the provided content, what is the primary factor increasing owner's equity?

The generation of profit (A) Signup and view all the answers

Which of the following would be categorized as an expense in the accounting process?

The payment of salaries to employees (A) Signup and view all the answers

In the process of journalizing, which of the following is TRUE?

Journalizing is the first step in the accounting process, involving recording transactions in a journal (C) Signup and view all the answers

Which of the following BEST describes the purpose of the Trial Balance?

To summarize balances from the ledger and verify debits equal credits (D) Signup and view all the answers

What is the primary difference between a Journal and a Ledger?

The journal is used for all transactions, while the ledger is used to track individual accounts (D) Signup and view all the answers

What is the correct sequence of the steps in the accounting process?

Journalizing, Posting, Trial Balance (B) Signup and view all the answers

What is the primary purpose of adjusting entries?

To update account balances and split mixed accounts into their real and nominal components. (C) Signup and view all the answers

Which of the following is NOT a step in the accounting process?

Trial Balance of Totals (C) Signup and view all the answers

What is the purpose of a worksheet?

To record adjusting entries and other adjustments that are necessary to prepare financial statements. (D) Signup and view all the answers

What is the main difference between Trial Balance of Balance and Trial Balance of Totals?

Trial Balance of Balance includes only balance sheet accounts, while Trial Balance of Totals includes both balance sheet and income statement accounts. (A) Signup and view all the answers

What is the purpose of closing entries?

To close temporary accounts and transfer their balances to permanent accounts. (D) Signup and view all the answers

Which of the following is NOT a type of adjusting entry?

Post-Closing Trial Balance Adjustment (A) Signup and view all the answers

What is the purpose of the Post-Closing Trail Balance?

To ensure that all real or balance sheet accounts are correctly reflected in the trial balance. (D) Signup and view all the answers

Which characteristic of financial statements ensures that the information is presented in a way that helps users make informed economic decisions?

Relevance (C) Signup and view all the answers

Which of the following characteristics is NOT directly related to the reliability of financial statements?

Materiality (D) Signup and view all the answers

What is the primary purpose of the 'Substance over Form' principle in financial reporting?

To prioritize the economic reality of transactions over their legal form (B) Signup and view all the answers

Which of the following is considered a key user of financial statements?

Investors (A) Signup and view all the answers

Which of the following characteristics of financial statements is most closely related to the concept of consistency?

Comparability (D) Signup and view all the answers

Which of the following best describes the concept of 'completeness' in financial reporting?

Ensuring that financial statements include all relevant details about the business (A) Signup and view all the answers

Which of the following best illustrates the principle of 'conservatism' in accounting?

Recognizing potential losses as soon as they are probable, even if their amount is uncertain (A) Signup and view all the answers

Which of the following is a major advantage of the sole proprietorship form of business organization?

Ease of formation and management (B) Signup and view all the answers

Which of the following is NOT a characteristic of an asset?

The asset is expected to be sold within the next fiscal year (D) Signup and view all the answers

According to the content, what does the term 'liquidity' refer to, in the context of a balance sheet?

The company's ability to meet short-term financial obligations (A) Signup and view all the answers

The content highlights the accrual basis of accounting. According to this basis, when is income considered to be earned?

When the goods or services are delivered to the customer. (C) Signup and view all the answers

What is the primary function of the Income Statement?

To report on the company's financial performance over a period of time. (C) Signup and view all the answers

According to the content, when does the normal operating cycle of a business become twelve months?

When the business is unable to determine its operating cycle accurately. (B) Signup and view all the answers

Which financial document reflects a company's financial flexibility to utilize cash for unforeseen needs and investment opportunities?

Balance Sheet (C) Signup and view all the answers

What does the Peso unit of measure assumption assume about the peso?

That the purchasing power of the peso will remain stable. (B) Signup and view all the answers

Which of these statements is TRUE about current assets?

Current assets are expected to be realized, sold, or consumed within the enterprise's normal operating cycle. (C) Signup and view all the answers

Study Notes

Brief History of Accounting

Luca Pacioli, a Franciscan monk, introduced accounting practices.
In 1494, in Venice, Luca Pacioli published a book titled Summa de Arithmetica, Geometria, Proportioni et Proportionalita.
This book contained primary mathematics principles and accounting procedures.

Philippine Standards Council (ASC)

The Accounting Standards Council (ASC) was created by the PICPA on November 18, 1981.
The ASC is a standard-setting body responsible for establishing and improving Generally Accepted Accounting Principles (GAAP).
Approved statements and interpretations issued by the ASC are known as Statements of Financial Accounting Standards (SFAS).
SFAS are effective upon approval by the PRC and are not retroactive.

ASC Composition

The ASC consists of eight members with a two-year term.
PICPA has 4 members.
SEC has 1 member.
BSP has 1 member.
PRC/BOA has 1 member.
FINEX has 1 member.

ASC Replacement

The ASC was replaced by the Philippine Financial Reporting Standards Council (PFRSC) in 2004, under the Philippine Accountancy Act.
The PFRSC was created by the PRC upon recommendation from the Board of Accountancy.
The accounting statements are now known as Philippine Accounting Standards (PAS).

PFRSC Composition

The PFRSC is composed of 15 members.
Composition details include: 1 Chairman, 1 BOA, 1 SEC, 1 BSP, 1 BIR, 1 COA, 2 major organizations of preparers and users of Financial Statements, 2 Accredited National Organizations (CPAs: Public Practice), 2 Commerce & Industry, 2 Academe, and 2 Government

International Accounting Standards Council (IASC)

The IASC was founded in 1973 as a standard-setting body to achieve uniformity in accounting principles.
Approved IASC statements were known as International Accounting Standards (IAS).
The IASC was later replaced by the IASB, whose reporting standards are called International Financial Reporting Standards (IFRS).
The IASB does not have legal authority to impose standards, but many countries support them.

Definition of Accounting

Accounting Standard Council (ASC) defined accounting as a service activity that provides primarily financial information about economic entities to aid in economic decision-making.
American Accounting Association (AAA) defined accounting as the process of identifying, measuring, and communicating economic information to enable informed judgments and decisions by users of the information.
The American Institute of Certified Public Accountants (AICPA) defined accounting as the art of recording, classifying, summarizing, in a significant manner, and in monetary terms, transactions and events of a financial nature and interpreting the results thereof.

Accounting Cycle

The accounting cycle refers to the various steps in the accounting process that are performed repeatedly in a systematic manner in each accounting period.

Phases of Accounting

The accounting process consists of recording, classifying, summarizing, and interpreting phases.
Recording: This includes identifying transactions and events, documenting them in source documents, and recording them in the journal.
Classifying: This involves sorting similar and related transactions into specific categories. This step involves posting transactions to the ledger.
Summarizing: This involves preparing the financial statements and other accounting requirements.
Interpreting: This involves analyzing and communicating the financial information to stakeholders for decision-making purposes. Further analysis of accounting information to help business management in sound decision making

Generally Accepted Accounting Principles (GAAP)

GAAP are a set of accounting rules, procedures, practices, and standards used to prepare financial statements.
GAAP ensures uniformity in financial statements preparation.

Requirements for GAAP Acceptance

Accounting principles must be established by a standard-setting body and gain universal acceptance among practitioners.
These principles must have substantial authoritative support from accounting bodies.

Cost, Objectivity, Materiality Principles

Cost Principle: Assets are recorded at their original cost.
Objectivity Principle: Accounting records must be based on verifiable data as evidence of transactions.
Materiality Principle: Accounting principles should rule over practice when determining valuation

Matching, Consistency, Adequate Disclosure Principles

Matching Principle: A combined concept of revenue and expense recognition.
Consistency Principle: Accounting methods and procedures must be uniform.
Adequate Disclosure Principle: Financial statements must be free from any material misstatement.

Basic Accounting Assumptions

Accounting Entity: A business is treated as separate from its owners.
Going Concern: A business is assumed to continue in operation indefinitely.
Time-Period: The life of a business is divided into periods for financial statement reporting.
- Calendar Year: Begins January 1 and ends December 31.
- Fiscal Year: Starts on any day of the year except January and ends in the 12th month of that year.
- Natural Business Year: Ends in the month when the business is at its lowest or slack season.
Unit of Measurement: The peso is used as the unit of measurement and its purchasing power is assumed constant.
Accrual Basis: Income is recognized when earned and expenses are recognized when incurred, regardless of when cash is received or paid.

Basic Financial Statements

Balance Sheet: Shows the financial position of an enterprise at a specific point in time.
Income Statement: Shows the performance of an enterprise over a period of time.
Statement of Changes in Owner's Equity: Shows the changes in equity during a period.

Elements of Financial Statements

Assets: Resources controlled by an enterprise that are expected to provide future economic benefits.
Liabilities: Present obligations of an enterprise from past transactions or events that are expected to result in an outflow of resources embodying economic benefits.
Owner's Equity: The residual interest in the assets of an enterprise after deducting liabilities.
Income/Revenue: The gross inflow of economic benefits from ordinary activities.
Expenses: The gross outflow of economic benefits during a period arising from ordinary activities.

Steps of the Accounting Process

Journalizing: Recording transactions in the journal.
Posting: Transferring journal entries to the ledger.
Trial Balance: A list of balances in the ledger accounts.
Adjusting Entries: Making necessary adjustments for accruals, deferrals, etc.
Worksheet (Optional): A working paper that facilitates financial statement preparation.
Financial Statements: Preparing the basic financial statements (Balance Sheet, Income Statement, Statement of Changes in Equity, Statement of Cash Flows).
Closing Entries: Closing nominal accounts.
Post-Closing Trial Balance: Trial balance showing only real accounts.
Reversing Entries: Used to reverse some adjusting entries at the beginning of the next accounting period.

Qualities of Financial Statements

Understandability: Financial statements should be easily understood by users.
Reliability: Information should be dependable and free from material error.
Relevance: Useful for decision-making (predictive and feedback value, timeliness).
Comparability: Comparable across companies.
Consistency: Methods or practices should be uniform.

Users of Financial Statements

Investors
Employees
Lenders
Suppliers
Customers
Government
Public

Forms of Business Organizations

Sole Proprietorship
Partnership
Corporation
Cooperatives

Classification of Businesses

Service Concern
Merchandising
Manufacturing
Agriculture
Hybrid Companies

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Description

Test your knowledge on accounting principles and standards, including the accounting cycle and the roles of various organizations in establishing accounting guidelines. This quiz covers key concepts defined by the American Accounting Association and the Philippine standards. See how well you understand important accounting practices!